<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1997
REGISTRATION STATEMENT NO. 333-24409
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
MONARCH DENTAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C> <C>
DELAWARE 8099 51-0363560
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
---------------------
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TEXAS 75244
(972) 702-7446
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
---------------------
WARREN F. MELAMED, D.D.S.
Chairman
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TEXAS 75244
(972) 702-7446
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<C> <C> <C>
JOHN R. LECLAIRE, P.C. KENNETH K. BEZOZO, ESQ. CARMELO M. GORDIAN, P.C.
ANDREW F. VILES, ESQ. HAYNES AND BOONE, L.L.P. S. MICHAEL DUNN, P.C.
GOODWIN, PROCTER & HOAR LLP 901 MAIN STREET, SUITE 3100 BROBECK, PHLEGER & HARRISON LLP
EXCHANGE PLACE DALLAS, TEXAS 75202 301 CONGRESS AVENUE, SUITE 1200
BOSTON, MASSACHUSETTS 02109-2881 (214) 651-5000 AUSTIN, TEXAS 78701
(617) 570-1000 (512) 477-5495
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ] 333-
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] 333-
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8( a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 23, 1997
PROSPECTUS
- ----------
2,750,000 SHARES
[MONARCH DENTAL CORPORATION LOGO]
COMMON STOCK
All of the 2,750,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $10.00 and $12.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol MDDS, subject to official notice of
issuance.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=============================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 412,500 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
SALOMON BROTHERS INC
, 1997
<PAGE> 3
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered by the Company has been filed with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. 20549.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document referred to herein are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules thereto. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C. and copies of all or any part thereof may
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, the New York Regional Office located at
Seven World Trade Center, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, upon payment of certain fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's World Wide Web site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by its independent auditors.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto of
Monarch Dental Corporation ("Monarch" or the "Company") appearing elsewhere in
this Prospectus. Monarch is a dental group practice management company. It
manages dental facilities (each, a "Dental Office" and collectively, the "Dental
Offices") at which it provides office space, support personnel, information
systems and management services to general dentists and specialists. Monarch
owns all of the operating assets of the Dental Offices, including leasehold
interests. Except where permitted by law, Monarch does not employ dentists to
practice dentistry nor does it otherwise control the practice of dentistry. The
Company has entered into Management Agreements (the "Management Agreements")
with dental professional corporations (the "P.C.s") pursuant to which dentists
employed by (or who contract with) the P.C.s practice dentistry at the Company's
Dental Offices, other than those in Wisconsin where ownership of dental
practices by the Company is permitted. Under this structure, other than in
Wisconsin, all revenues derived from the practice of dentistry are the revenues
of the P.C.s and the compensation, benefits and other payments to the dentists
and hygienists employed by or contracting with the P.C.s are expenses of the
P.C.s. The Company's net revenues under this structure constitute the revenues
of the P.C.s less these expenses. Prior to February 1996, the Company generally
did not operate its business pursuant to this structure because its sole owner
until that time was a licensed dentist and, as such, the practice of dentistry
by the Company was permitted.
THE COMPANY
The Company manages dental group practices in selected markets, presently
including Dallas-Fort Worth, Houston, Wisconsin and Arkansas. The Company seeks
to build geographically dense networks of dental providers by expanding within
its existing markets and entering new markets through acquisition. At May 31,
1997, the Company owned and managed 67 Dental Offices, of which 16 were
internally developed and 51 were acquired by the Company. Dentists practicing at
the Dental Offices provide general dentistry services and increasingly offer
specialty dental services such as orthodontics, oral surgery, endodontics,
periodontics and pediatric dentistry. At May 31, 1997, 123 full-time general
dentists and 13 full-time specialists practiced at the Company's Dental Offices.
The dental services industry is undergoing rapid change throughout the
United States. The industry historically has been highly fragmented, with
approximately 153,300 active dentists in the United States in 1995, of which
nearly 88% practiced either alone or with one other dentist. Services generally
have not been covered by third-party payment arrangements and consequently have
been paid for by individuals on an out-of-pocket basis. More recently, factors
such as increased consumer demand for dental services and the desire of
employers to provide enhanced benefits for their employees have resulted in an
increase in third-party payment arrangements to finance the purchase of dental
services. These third-party payment arrangements include indemnity insurance,
preferred provider plans and capitated managed dental care plans. In response to
current market trends, general and specialty dental practices increasingly have
formed larger group practices. In these practices a separate professional
management team handles practice management functions such as staffing, billing,
information systems, managed care contracting, leasing, purchasing and
marketing, enabling dentists to focus on providing high-quality dental services.
The Company seeks to capitalize on emerging trends in the dental services
industry. The Company's objective is to be a leading dental practice management
company in each of its markets. The Company's business strategy emphasizes (i)
expanding operations within its existing markets, (ii) entering selected new
markets by acquiring group practices which have a significant market presence or
which the Company believes can achieve such a presence in the near term, and
seeking to use these practices as a "pedestal" from which to expand, (iii)
increasing patient volume principally through television, radio and print
advertising, (iv) optimizing the revenue mix of its associated dental practices
by focusing on fee-for-service general and specialty dentistry and supplementing
this
3
<PAGE> 5
business with revenue from contracts with capitated managed dental care plans
and (v) adapting and implementing the best practices identified in its
affiliated groups throughout its provider networks.
The Company has generated growth within existing markets principally by
increasing the overall physical space, patient volume and fees at existing
Dental Offices and by opening Dental Offices on a de novo basis (i.e., opening
Dental Offices at new locations). Revenue from the Company's Dallas-Fort Worth
operations increased $3.6 million, or 38.3%, to $13.2 million in 1995, and
increased $5.1 million, or 38.1%, to $18.3 million in 1996. Operating income for
the Company's Dallas-Fort Worth operations increased $694,000, or 52.7%, to $2.0
million in 1995 and increased $805,000, or 40.0%, to $2.8 million in 1996.
Operating income consists of dental group practices revenue, net from the Dental
Offices less amounts retained by dental group practices and operating expenses,
which include salaries and benefits of personnel other than dentists and
hygienists, dental supplies, dental laboratory fees, occupancy costs,
advertising expense, depreciation and amortization and general and
administrative expenses but excluding interest expense and income tax expense.
There can be no assurance that the Company's revenue and operating income in
this market will continue to grow at these historic rates or that the Company's
operations in other markets will grow at rates comparable to those experienced
in Dallas-Fort Worth.
Since January 1, 1996, the Company has entered three new markets through
the acquisitions of MacGregor Dental Centers in Houston in February 1996,
Midwest Dental Care in Wisconsin in August 1996 and Convenient Dental Care,
Arkansas Dental Health Associates and United Dental Care Tom Harris D.D.S. &
Associates in Arkansas in November 1996, January 1997 and April 1997,
respectively. The collective pro forma revenue of these acquired companies was
$38.3 million for the year ended December 31, 1996. In June 1997, the Company
entered into a definitive agreement to acquire Dental Centers of Indiana, Inc.,
an Indiana-based dental practice, which operates 11 dental offices with 14
dentists and which had $3.6 million in revenue for the year ended December 31,
1996. The Company anticipates that the closing of the acquisition of Dental
Centers of Indiana, Inc. will occur on or about the commencement of this
offering. See "Business -- Expansion -- Pending Acquisition."
4
<PAGE> 6
THE OFFERING
Common Stock offered by the Company..... 2,750,000 shares
Common Stock to be outstanding after the
offering................................ 9,458,723 shares(1)
Use of proceeds......................... To repay a portion of existing
indebtedness, to redeem all
outstanding shares of redeemable
preferred stock and for general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.................................. MDDS
- ------------------------------
(1) Excludes (i) 1,031,042 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Option and Incentive Plan, as amended (the "1996
Stock Plan"), of which at May 31, 1997 435,750 shares were issuable upon the
exercise of outstanding stock options at a weighted average exercise price
of $10.41 per share (assuming an initial public offering price of $11.00 per
share), (ii) 500,000 shares of Common Stock reserved for issuance under the
Company's 1996 Equity Acquisition Option Plan (the "Acquisition Plan"), of
which at May 31, 1997 up to 185,000 shares were reserved for issuance under
options to be granted at an exercise price equal to the fair market value of
the Common Stock at the time of grant if certain acquired dental practices
achieve specified financial performance goals, (iii) 250,000 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan") and (iv) approximately 163,600 shares of
Common Stock issuable in connection with the closing of the acquisition of
Dental Centers of Indiana, Inc. at an assumed initial public offering price
of $11.00 per share. See "Business -- Expansion -- Pending Acquisition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management -- Employee Stock and Other Benefit
Plans -- 1996 Stock Option and Incentive Plan" and "-- 1997 Employee Stock
Purchase Plan."
------------------------------
Except as otherwise noted, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
reflect (i) a 1-for-2 reverse stock split of the Company's Common Stock and
non-voting Class A Common Stock effected on June 19, 1997, (ii) the conversion
of all outstanding shares of non-voting Class A Common Stock into an equal
number of shares of Common Stock upon completion of this offering and (iii) the
conversion of each outstanding share of Convertible Participating Preferred
Stock and Series A Convertible Junior Preferred Stock into one-half of one share
of Common Stock upon completion of this offering. Unless the context otherwise
requires, all references to the "Company" mean Monarch Dental Corporation, its
predecessors and all of its direct and indirect subsidiaries. All references to
"dentists" providing services at the Dental Offices refer to dentists employed
by (or who contract with) the P.C.s or by (or with) the Company in states in
which such employment or contracting is permissible. All references herein to
industry financial and statistical information are based on trade articles and
industry reports that the Company believes to be reliable and representative of
the dental services industry at the date of this Prospectus, although there can
be no assurance to that effect.
5
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED
YEAR ENDED DECEMBER 31, 1996 MARCH 31, MARCH 31, 1997
-------------------------- PRO FORMA ---------------- PRO FORMA
1994 1995 1996 AS ADJUSTED(1)(2) 1996 1997 AS ADJUSTED(2)(3)
------ ------- ------- ----------------- ------ ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
DATA:
Dental group practices
revenue, net............... $9,559 $13,223 $35,980 $59,998 $6,316 $14,476 $16,620
Less: amounts retained by
dental group practices..... 3,070 4,301 11,802 19,175 2,060 5,029 5,610
Net revenue.................. 6,489 8,922 24,178 40,823 4,256 9,447 11,010
Operating expenses........... 5,401 7,253 21,391 36,034 3,544 8,485 9,723
Operating income............. 1,088 1,669 2,787 4,789 712 962 1,287
Interest expense, net........ 81 87 1,687 1,135 259 579 283
Income before income taxes... 1,007 1,582 1,100 3,601 453 383 973
Income taxes(4).............. -- -- 425 1,394 174 150 379
Net income................... $1,007 $ 1,582 $ 675 $ 2,207 $ 279 $ 233 $ 594
Pro forma net income(4)...... $ 617 $ 970 $ 675 $ 2,207 $ 279 $ 233 $ 594
Net income per common
share(5)................... $ 0.10 $ 0.23 $ 0.04 $ 0.03 $ 0.06
Weighted average common
shares outstanding......... 6,896 9,646 6,896 6,896 9,646
OTHER OPERATING DATA:
Number of Dental Offices (end
of period)................. 10 12 53 76 28 57 78
Number of dentists (end of
period)(6)................. 25 33 133 160 75 125 152
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(7)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 446 $ 1,529
Working capital (deficit)............................... (3,878) (3,002)
Total assets............................................ 36,353 44,666
Long-term debt, less current maturities................. 19,424 5,931
Redeemable equity securities............................ 9,751 --
Total stockholders' equity (deficit).................... (3,309) 27,719
</TABLE>
- ------------------------------
The unaudited pro forma consolidated financial information presented does
not purport to (i) represent what the consolidated results of operations or
financial condition of the Company would actually have been if the transactions
reflected therein had in fact occurred on the assumed dates or (ii) project the
future consolidated results of operations or financial condition of the Company.
(1) Gives effect to the acquisitions of MacGregor Dental Centers, Midwest Dental
Care, Convenient Dental Associates, Arkansas Dental Health Associates,
United Dental Care Tom Harris D.D.S. & Associates and Dental Centers of
Indiana, Inc. as if they had been completed on January 1, 1996. See "The
Company," "Pro Forma Consolidated Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Gives effect to the sale of 2,750,000 shares of Common Stock offered hereby
as if it had been completed at January 1, 1996 at an assumed initial public
offering price of $11.00 per share and the receipt and application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(3) Gives effect to the acquisitions of United Dental Care Tom Harris D.D.S. &
Associates and Dental Centers of Indiana, Inc. as if they had been completed
on January 1, 1997. See "The Company," "Pro Forma Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) The Company was an S corporation prior to February 6, 1996, and accordingly,
the consolidated statements of income for all periods ending prior to such
date did not include income tax expense. Pro forma net income includes an
adjustment to reflect estimated income tax effects on net income for the
years ended December 31, 1994 and 1995 at an assumed effective tax rate of
38.7%.
(5) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements of the Company. Due to the effect on the Company's capital
structure of transactions completed in February 1996, per share data for the
periods ended prior to January 1, 1996 are not comparable to subsequent
periods and, therefore, have not been presented. See "Certain Transactions."
(6) Includes full-time general dentists employed by the Company or the P.C.s, as
applicable, and full-time specialists, most of whom are independent
contractors.
(7) Gives effect to the acquisitions of United Dental Care Tom Harris D.D.S. &
Associates and Dental Centers of Indiana, Inc. and to the completion of this
offering at an assumed initial public offering price of $11.00 per share and
the receipt and application of the estimated net proceeds therefrom as if
such transactions had been completed on March 31, 1997. See "The Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Consolidated Financial Information," "Use of
Proceeds" and "Capitalization."
6
<PAGE> 8
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information contained in this Prospectus,
before purchasing the securities offered hereby. This Prospectus contains
forward-looking statements. Discussions containing such forward-looking
statements may be found in the material set forth below and under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as in the Prospectus generally. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth below and the matters set forth in this Prospectus generally.
Risks Associated with Acquisition Strategy. The Company has grown
substantially in a relatively short period of time, principally through
acquisitions. The Company has completed six acquisitions resulting in the
addition of 51 Dental Offices since January 1, 1996 and the acquisition of
Dental Centers of Indiana, Inc. is pending. The Company has incurred substantial
indebtedness to finance these acquisitions, which in turn has contributed to a
working capital deficit of $3.9 million at March 31, 1997. The Company incurred
an additional $2.8 million of indebtedness to finance the acquisition of United
Dental Care Tom Harris D.D.S. & Associates and expects to incur additional
indebtedness of approximately $1.8 million to finance the acquisition of Dental
Centers of Indiana, Inc. Failure of the Company's management to manage and
integrate the Company's newly acquired operations and to improve the operating
performance of these acquired companies could have a material adverse effect on
the Company's business, financial condition and operating results.
The Company's growth strategy emphasizes entering selected new markets by
acquiring group practices which have a significant market presence or which the
Company believes can achieve such a presence in the near term, and seeking to
use the acquired practices as a "pedestal" from which to expand. The Company's
"pedestal" expansion strategy for new markets entered through acquisition is
untested and there can be no assurance that the Company will be able to
implement it successfully.
The Company devotes substantial time and resources to acquisition-related
activities. Identifying appropriate acquisition candidates and negotiating and
consummating acquisitions can be a lengthy and costly process. There can be no
assurance that suitable acquisition candidates will be identified or that
acquisitions will be consummated on terms favorable to the Company, on a timely
basis or at all. In the event the closing of a planned acquisition fails to
occur or is delayed, the Company's quarterly financial results may be materially
lower than analysts' expectations, which likely would cause a decline, perhaps
substantial, in the market price of the Common Stock. In addition, increasing
consolidation in the dental services industry may result in an increase in
purchase prices required to be paid by the Company to acquire dental practices.
In the event the Company is able to identify and consummate acquisitions,
the integration of such acquisitions may be a difficult, costly and
time-consuming process. The Company may encounter substantial unanticipated
costs or other problems associated with such integration. During the period
immediately following an acquisition, the Company's expenditures related to the
integration of the acquired dental practices may exceed the operating cash flow
of such dental practices. Moreover, the Company's operating results in fiscal
quarters immediately following an acquisition may be adversely affected while
the Company attempts to integrate the acquired practices. As a result, there can
be no assurance that future acquisitions will not have a material adverse effect
on the Company's business, financial condition and operating results. See
"Business -- Expansion."
Risks Associated with Expansion within Existing Markets. The Company seeks
to increase revenue and profitability in existing markets by physically
expanding its existing Dental Offices to add more general dentists, specialists
and hygienists, by establishing Dental Offices on a de novo basis and by
improving the efficiency of the Dental Offices. The Company's success will be
dependent, in part, upon increasing the revenue from existing Dental Offices and
successfully establishing de novo Dental
7
<PAGE> 9
Offices. The Company is subject to risks associated with this growth strategy,
including the risk that the Company will be unable to successfully expand
existing Dental Offices or establish de novo Dental Offices, or increase
efficiency through its management of the existing Dental Offices. Revenue from
the Company's Dallas-Fort Worth operations increased $3.6 million, or 38.3%,
from $9.6 million in 1994 to $13.2 million in 1995, and increased $5.1 million,
or 38.1%, to $18.3 million in 1996 as a result of the addition of new offices
and the increase in patient volume in existing offices. Operating income
consists of dental group practices revenue, net from the Dental Offices less
amounts retained by dental group practices and operating expenses, which include
salaries and benefits of personnel other than dentists and hygienists, dental
supplies, dental laboratory fees, occupancy costs, advertising expense,
depreciation and amortization and general and administrative expenses but
excluding interest expense and income tax expense. There can be no assurance
that the Company's revenue in this market will continue to grow at these
historic rates or at all or that the Company's operations in other markets will
grow at rates comparable to those experienced in Dallas-Fort Worth. See
"Business -- Expansion -- Expansion Within Existing Markets."
Prior to February 1996, the Company was an S corporation the sole
stockholder of which was the Company's founder, Chairman and Chief Dental
Officer, Dr. Warren F. Melamed. During this period, the Company generally did
not operate its business pursuant to management agreements with the P.C.s
because the Company was wholly-owned by a licensed dentist. The current
Management Agreements between the Company and the P.C. with respect to Dental
Offices located in Texas became effective in February 1996 and the current
Management Agreements with respect to the Company's operations in other states
became effective upon the Company's entry into those states (other than
Wisconsin where the practice of dentistry by the Company is permitted). In
states in which the ownership of dental practices by non-dentists is prohibited,
the Company derives all of its revenue from its Management Agreements with the
P.C.s. Under the Management Agreements, the Company assumes responsibility for
the management of all aspects of the dental group practices' business other than
the provision of dental services. The Company receives a management fee equal to
the Company's costs plus the lower of (i) 30% of the P.C.'s net revenues or (ii)
the P.C.'s net pre-tax income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Components of Revenue and
Expenses."
Management of Growth. The Company recently has experienced a period of
rapid growth with a substantial increase in the number of its Dental Offices,
resulting in part from expansion into three new markets. The number of Dental
Offices owned and managed by the Company increased from 12 at January 1, 1996 to
67 at May 31, 1997. This growth has placed, and will continue to place, strains
on the Company's management, operations and systems. The Company's ability to
compete effectively will depend upon its ability to hire, train and assimilate
additional management and other employees and its ability to expand, improve and
effectively utilize its operating, management, marketing and financial systems
to accommodate its expanded operations. Any failure by the Company's management
to effectively anticipate, implement and manage the changes required to sustain
the Company's growth may have a material adverse effect on the Company's
business, financial condition and operating results.
Limited Capital; Need for Additional Financing. Implementation of the
Company's growth strategy has required and is expected to continue to require
significant capital resources. Such resources will be needed to acquire or
establish additional Dental Offices and for the effective integration, operation
and expansion of the Dental Offices. The Company historically has used a
combination of cash, promissory notes, stock and the assumption of certain
liabilities (including indebtedness) as consideration in acquisitions of dental
practices and intends to continue to do so. The Company expects that its capital
requirements over the next several years will substantially exceed cash flow
generated from operations and borrowings available under the Company's existing
credit facility or any successor credit facility. Therefore, to finance capital
requirements, the Company anticipates that it will from time to time issue
additional equity securities and incur additional debt. Additional debt or
non-Common Stock equity financings could be required to the extent that the
Company's Common Stock fails to maintain a
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market value sufficient to warrant its use for future financing needs. The
Company may not be able to obtain additional required capital on satisfactory
terms, if at all. In particular, the Company's existing credit facility contains
certain restrictions on the Company's ability to acquire additional dental
practices. The failure to raise the funds necessary to finance the expansion of
the Company's operations or the Company's other capital requirements could
materially and adversely affect the Company's ability to pursue its strategy and
its operating results in future periods. If additional funds are raised through
the issuance of equity securities, dilution to the Company's existing
stockholders may result. If additional funds are raised through the incurrence
of debt, such debt instruments will likely contain restrictive financial,
maintenance and security covenants.
At March 31, 1997, the Company had a working capital deficit of $3.9
million, resulting principally from the incurrence of indebtedness in connection
with its acquisitions, and a net deficit of stockholders' equity of $3.3
million. The repayment of $18.2 million of indebtedness under the Company's
existing senior credit facility with a portion of the net proceeds from this
offering and the retention of a portion of the net proceeds for general
corporate purposes will reduce the Company's working capital deficit. There can
be no assurance the Company will not have working capital deficits in the
future, particularly if future indebtedness requires current amortization of
principal. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Availability of Dentists. All dentists practicing at the Dental Offices
have entered into employment agreements individually or through their
professional corporations or independent contractor agreements through their
professional corporations. Such agreements typically contain a non-competition
agreement for up to three years following termination of the agreement within a
specified geographic area, usually a specified number of miles from the relevant
Dental Office. The agreements with dentists who have sold their practices to the
Company generally are for a specified initial term of up to five years. Although
the Company will endeavor to renew agreements with affiliated dentists or their
professional corporations, in the event that many of the Company's affiliated
dentists terminate or do not renew their agreements or in the event the
non-competition agreements are determined to be unenforceable or more limited in
scope than their terms, the Company's business, financial condition and
operating results could be materially and adversely affected. See
"Business -- Affiliation Structure." In addition, the Company's expansion
strategy is dependent on the availability and successful recruitment of
dentists. The Company may not be able to successfully recruit new dentists for
its existing and newly established Dental Offices, which may have a material
adverse effect on the Company's expansion strategy and its business, financial
condition and operating results.
Risks Associated with Cost Containment Initiatives. The health care
industry, including the dental services market, is experiencing a trend toward
cost containment, as third-party and government payors seek to impose lower
reimbursement rates upon providers. The Company believes that this trend will
continue and will increasingly affect dental services. This may result in a
reduction in per-patient and per-procedure revenue from historic levels.
Significant reductions in payments to dentists or other changes in reimbursement
by third-party payors for dental services may have a material adverse effect on
the Company's business, financial condition and operating results.
Risks Associated with Capitated Payment Arrangements. Part of the Company's
growth strategy involves obtaining capitated managed dental care contracts.
Capitated managed dental care contracts are between dental benefits
organizations, the Company and the P.C.s (except in Wisconsin). The Company
negotiates and administers these contracts on behalf of the P.C.s pursuant to
the Management Agreements. Under a capitated managed dental care contract, the
dental group practice provides dental services to the members of the dental
benefits organization and receives a fixed monthly capitation payment for each
plan member covered for a specific schedule of services regardless of the
quantity or cost of services to the participating dental group practice which is
obligated to provide them. This arrangement shifts the risk of utilization of
such services to the dental group practice that provides the dental services.
Because the Company assumes responsibility under the Management Agreements for
all aspects of the operation of the dental practices (other than the practice of
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dentistry) and thus bears all costs of the P.C.s associated with the provision
of dental services at the Dental Offices (other than compensation and benefits
of dentists and hygienists), the risk of over-utilization of dental services at
the Dental Offices under capitated managed dental care plans is effectively
shifted to the Company. In contrast, under traditional indemnity insurance
arrangements, the insurance company pays whatever reasonable charges are billed
by the dental group practice for the dental services provided.
Risks to the Company associated with capitated managed dental care
contracts include principally (i) the risk that either the Company or one or
more of the P.C.s, as applicable, may be terminated as a provider by one or more
managed dental care plans with which they contract and, to a lesser extent, (ii)
the risk that large subscriber groups will terminate their relationship with
such managed dental care plans which would reduce patient volume and capitation
and co-payment revenue in a particular area. There can be no assurance that the
Company will be able to negotiate future capitation arrangements on behalf of
itself or the P.C.s, as applicable, on satisfactory terms or at all, or that the
fees offered in current capitation arrangements will not be reduced to levels
unsatisfactory to the Company. Moreover, to the extent that costs incurred by
the Company's affiliated dental practices in providing services to patients
covered by capitated managed dental care contracts exceed the revenue under such
contracts, the Company's business, financial condition and operating results may
be materially and adversely affected.
Approximately 16.4% of the Company's revenue for the year ended December
31, 1996 in the Dallas-Fort Worth and Houston markets, and approximately 29.1%
of the Company's pro forma revenue for the year ended December 31, 1996 in the
Wisconsin market, were derived from contracts with Prudential Dental Maintenance
Organization, Inc. ("Prudential Dental") and Compcare Health Services Insurance
Corporation ("Compcare"), respectively. The Prudential Dental contract is for an
initial two-year term expiring April 1, 1999 and renews automatically for
successive one-year terms thereafter unless either party gives the other nine
months' prior written notice. The Compcare contract continues until terminated
by either party upon 90 days' prior written notice. The material economic terms
of these contracts can therefore be renegotiated periodically. Failure to
negotiate future capitation arrangements on satisfactory terms with Prudential
Dental or Compcare or the termination of the Company's contracts with Prudential
Dental or Compcare may have a material adverse effect on the Company's business,
financial condition and operating results.
Geographic Concentration. The current geographic concentration of the
Company's operations in the Dallas-Fort Worth, Houston, Wisconsin and Arkansas
markets increases the risk to the Company of adverse economic or regulatory
developments or action within these markets. In addition, the Company's growth
strategy is dependent, in part, upon acquiring larger group practices in
selected markets. The Company's strategy of focused expansion within selected
markets increases the risk to the Company that adverse economic or regulatory
developments in one or more of these markets may have a material adverse effect
on the Company's business, financial condition and operating results.
Government Regulation. The practice of dentistry is regulated at both the
state and federal levels. There can be no assurance that the regulatory
environment in which the Company or P.C.s operate will not change significantly
in the future. In addition, state and federal laws regulate health maintenance
organizations and other managed care organizations for which dentists may be
providers. In general, regulation of health care-related companies is
increasing. In connection with its operations in existing markets and expansion
into new markets, the Company may become subject to additional laws, regulations
and interpretations or enforcement actions. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
The laws of many states, including Arkansas, Indiana and Texas but
excluding Wisconsin, typically permit a dentist to conduct a dental practice
only as an individual, a member of a partnership or an employee of a
professional corporation, limited liability company or limited liability
partnership. These laws typically prohibit, either by specific provision or as a
matter of general policy, non-dental entities,
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such as the Company, from practicing dentistry, from employing dentists and, in
certain circumstances, hygienists or dental assistants, or from otherwise
exercising control over the provision of dental services. As a result of these
laws, the Company provides practice management services to the P.C.s but does
not employ dentists or control the practice of dentistry in each of its states
of operation other than Wisconsin. Because under the Management Agreements the
Company bears all costs associated with the provision of dental services by the
P.C.s at the Dental Offices (other than compensation and benefits of dentists
and hygienists) and determines annual budgets for the P.C.s, the Company is
effectively able to manage the profitability of the Dental Offices. Under the
Management Agreements, however, the P.C.s control all clinical aspects of the
practice of dentistry and the provision of dental services at the Dental
Offices, including the exercise of independent professional judgment regarding
the diagnosis or treatment of any dental disease, disorder or physical
condition. Under the Management Agreements, persons to whom dental services are
provided at the Dental Offices are patients of the P.C.s and not of the Company
and the Company does not have or exercise any control or direction over the
manner or methods in which dental services are performed nor does the Company
interfere in any way with the exercise of professional judgment by the dentists
who are employees or independent contractors of the P.C.s.
Each of the states in which the Company's Dental Offices presently are
located have fraud and abuse laws which in many cases apply to referrals for
items or services reimbursable by any insurer, not just by Medicare and
Medicaid. A number of states, including all of the states in which Dental
Offices are currently located, also impose significant penalties for submitting
false claims for dental services. Many states, including all of the states in
which the Dental Offices are currently located, either prohibit or require
disclosure of self-referral arrangements and impose penalties for the violation
of these laws. Many states also prohibit dentists from splitting fees with
non-dentists.
Many states, including Indiana and Texas but excluding Wisconsin, limit the
ability of a person other than a licensed dentist to own or control equipment or
offices used in a dental practice. Some of these states allow leasing of
equipment and office space to a dental practice under a bona fide lease, if the
equipment and office remain under the control of the dentist. Some states (none
in which the Company currently operates) prohibit the advertising of dental
services under a trade or corporate name. Some states, including Arkansas,
require all advertisements to be in the name of the dentist. A number of states
also regulate the content of advertisements of dental services and the use of
promotional gift items. In addition, many states impose limits on the tasks that
may be delegated by dentists to hygienists and dental assistants. Some states
(none in which the Company currently operates) require entities designated as
"clinics" to be licensed, and may define clinics to include dental practices
that are owned or controlled in whole or in part by non-dentists. These laws and
their interpretations vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. As the Company or the P.C.s contract with third-party
payors, on a capitation or other basis under which the Company or the relevant
P.C. assumes financial risk, the Company or the P.C.s may become subject to
state insurance laws. Specifically, in some states, regulators may determine
that the Company or the P.C.s are engaged in the business of insurance,
particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. To the extent that the Company or the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's revenue may be materially and adversely affected.
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs and prohibit fraud or abuse in connection with
such practices. Because very little dental care is currently provided under
Medicare and Medicaid, the Company receives very little revenue from these
programs and the impact of these laws on the Company to date has been
negligible. There
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can be no assurance, however, that the scope of these laws will not be expanded
in the future, and if expanded, such laws could have a larger impact on the
Company's operations and could have a material adverse effect on the Company's
business, financial condition and operating results.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
Risks Arising From Health Care Reform. There can be no assurance that the
laws and regulations of the states in which the Company operates will not change
or be interpreted in the future either to restrict or adversely affect the
Company's relationships with dentists or the operation of Dental Offices.
Federal and state governments are currently considering various types of health
care initiatives and comprehensive revisions to the health care and health
insurance systems. Some of the proposals under consideration, or others that may
be introduced, could, if adopted, have a material adverse effect on the
Company's business, financial condition and operating results. It is uncertain
what legislative programs, if any, will be adopted in the future, or what
actions Congress or state legislatures may take regarding health care reform
proposals or legislation. In addition, changes in the health care industry, such
as the growth of managed care organizations and provider networks, may result in
lower payments for the services of the Company's affiliated dental practices.
Possible Exposure to Professional Liability. In recent years, dentists have
become subject to an increasing number of lawsuits alleging malpractice and
related legal theories. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Dental Offices, if successful, could result in substantial damage awards that
may exceed the limits of the Company's insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the P.C.s or the dentists or their
compliance with regulatory requirements directly applicable to providers (except
in Wisconsin where the ownership of dental practices by the Company is
permitted). Nevertheless, dentists at the Dental Offices have been in the past
involved in malpractice suits and there can be no assurance that the Company
will not become subject to litigation in the future as a result of the dental
services provided at the Dental Offices. The Company maintains professional
malpractice and general liability insurance for itself and maintains
professional liability insurance covering dentists, hygienists and dental
assistants at the Dental Offices. The Company generally is a named insured under
such policies and is named as an additional insured on each individual dentist's
policy, wherever possible. Certain types of risks and liabilities are not
covered by insurance, however, and there can be no assurance that coverage will
continue to be available upon terms satisfactory to the Company or that the
coverage will be adequate to cover losses. Malpractice insurance, moreover, can
be expensive and varies from state to state. Successful malpractice claims
asserted against the dentists, the P.C.s or the Company may have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business -- Insurance."
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Competition. The dental practice management segment of the dental services
industry, currently in its formative stage, is highly competitive and is
expected to become increasingly more competitive. In this regard, the Company
expects that the provision of multi-specialty dental services at convenient
locations will become increasingly more common. The Company is aware of several
dental practice management companies that are currently operating in its
existing markets. There are also a number of companies with dental practice
management businesses similar to that of the Company currently operating in
other parts of the country which may enter the Company's existing markets in the
future. Such competitors may be better capitalized or otherwise enjoy
competitive advantages which may make it difficult for the Company to compete
against them or to acquire additional Dental Offices on terms acceptable to the
Company. As the Company seeks to expand its operations into new markets, it is
likely to face competition from dental practice management companies which
already have established a strong business presence in such locations.
The business of providing general dental and specialty dental services is
highly competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the retention and recruitment of general dentists, specialists and hygienists to
staff the Dental Offices and to accommodate the growth of such sites. If the
availability of dentists begins to decline in the Company's markets, it may
become more difficult to attract qualified dentists to staff the Dental Offices.
The Dental Offices may not be able to compete effectively against other existing
practices or against new single or multi-specialty dental practices that enter
its markets, or to compete against such practices in the recruitment of
qualified dentists. See "Business -- Competition."
Reliance on Certain Personnel. The success of the Company, including its
ability to complete and integrate acquisitions, depends on the continued
services of a relatively limited number of members of the Company's senior
management. Implementation of the Company's business strategy will require the
addition of qualified management personnel. The loss of the services of one or
more members of the Company's senior management or the failure to add qualified
management personnel could have a material adverse effect on the Company's
business, financial condition and operating results. See "Management."
Risks Associated with Intangible Assets. The acquisitions of MacGregor
Dental Centers, Midwest Dental Care, Convenient Dental Care, Arkansas Dental
Health Associates and United Dental Care Tom Harris D.D.S. & Associates resulted
in significant increases in the Company's intangible assets relating to the
Management Agreements and goodwill. At March 31, 1997, intangible assets on the
Company's balance sheet were $25.5 million, representing 70.2% of the Company's
total assets at that date and an additional $3.4 million of intangible assets
were added in April 1997 as a result of the acquisition of United Dental Care
Tom Harris D.D.S. & Associates. The Company estimates an additional $2.9 million
of intangible assets will be added as a result of the acquisition of Dental
Centers of Indiana, Inc. The Company expects the amount allocable to intangible
assets on its balance sheet to increase in the future in connection with
additional acquisitions, which will increase the Company's amortization expense.
In the event of any sale or liquidation of the Company or a portion of its
assets, there can be no assurance that the value of the Company's intangible
assets will be realized. In addition, the Company continually evaluates whether
events and circumstances have occurred indicating that any portion of the
remaining balance of the amount allocable to the Company's intangible assets may
not be recoverable. When factors indicate that the amount allocable to the
Company's intangible assets should be evaluated for possible impairment, the
Company may be required to reduce the carrying value of such assets. Any future
determination requiring the write off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and operating results.
Dependence on Management Agreements, the P.C.s and Affiliated
Dentists. Except with respect to its Wisconsin operations, the Company receives
fees for services provided to the P.C.s under a Management Agreement. The
Company owns all of the operating assets of the Dental Offices but, except in
Wisconsin, does not employ or contract with dentists, employ hygienists or
control the provision of
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dental care at the Dental Offices. The Company's revenue is dependent on the
revenue generated by the P.C.s at the Dental Offices. Therefore, effective and
continued performance of dentists providing services for the P.C.s is essential
to the Company's long-term success. Under each Management Agreement, the Company
pays substantially all of the operating and nonoperating expenses associated
with the provision of dental services except for the salaries and benefits of
the dentists and hygienists. Any material loss of revenue by the P.C.s would
have a material adverse effect on the Company's business, financial condition
and operating results, and any termination of a Management Agreement (which is
permitted in the event of a bankruptcy or dissolution or material breach by
either the P.C. or the Company, or upon 90 days' notice by the Company) could
have such an effect. In the event of a breach of a Management Agreement by a
P.C., there can be no assurance that the legal remedies available to the Company
will be adequate to compensate the Company for its damages resulting from such
breach. The P.C.s are owned by employees of the Company who are licensed to
practice dentistry in the relevant state. The Company has entered into a
succession agreement with the respective stockholders of the P.C.s whereby upon
termination of such stockholder's affiliation with the Company by the Company or
such stockholder for any reason, the stockholder is required to sell his or her
ownership in the P.C. for a nominal amount and the Company is entitled to
designate a successor. See "Business -- Affiliation Structure" and
"-- Government Regulation -- State Regulation."
Potential Conflicts of Interest. The Company's founder, Chairman and Chief
Dental Officer, Dr. Warren F. Melamed, is the sole owner of the P.C. for all of
the Company's Dental Offices in Texas (the "Texas P.C."). As a result of Dr.
Melamed's ownership of the Texas P.C., potential conflicts of interest may arise
in certain matters, including but not limited to matters relating to the
Management Agreement between the Company and the Texas P.C. Although Dr. Melamed
has a fiduciary duty to the Company and its stockholders, there can be no
assurance that the Company will not be adversely affected by matters in which
Dr. Melamed has a potential conflict of interest. In addition, the Company and
Dr. Melamed have entered into a succession agreement whereby upon any
termination of Dr. Melamed's affiliation with the Company, Dr. Melamed is
required to sell his ownership interest in the Texas P.C. for a nominal amount.
The Audit Committee of the Company's Board of Directors will review and approve
all transactions between the Company and Dr. Melamed, including any amendments
or modifications to the Management Agreement with the Texas P.C. or the related
succession agreement. See "Business -- Affiliation Structure" and "Management."
Material Benefit to Insiders. In February 1996, the Company completed a
series of transactions principally including the repurchase of shares of Common
Stock from Dr. Melamed and the concurrent acquisition of MacGregor Dental
Centers from an entity controlled by Dr. Charles G. Shears, an executive officer
and director of the Company. In connection with these transactions, the Company
incurred $17.4 million of indebtedness under a senior secured credit facility
from a bank; investors principally including investment funds associated with TA
Associates, Inc. purchased from the Company an aggregate of $10.0 million of
Convertible Participating Preferred Stock; the Company redeemed Common Stock
from Dr. Melamed for $6.7 million; Dr. Melamed contributed interests in two
corporations holding ownership interests in the Company's Dallas-Fort Worth
Dental Offices in exchange for an aggregate of 356,240 shares of Common Stock
and a cash payment of $425,000 and the Company repaid outstanding indebtedness
to Dr. Melamed of $446,000; and the Company acquired MacGregor Dental Centers
for consideration consisting of cash in the amount of $14.9 million, the
assumption of indebtedness of approximately $662,000 and other ordinary course
obligations and 700,000 shares of Common Stock. Upon the completion of this
offering, the Convertible Participating Preferred Stock will convert into
2,400,000 shares of Common Stock and 3,840,000 shares of Redeemable Preferred
Stock. As required by the terms of the Redeemable Preferred Stock, the Company
will immediately redeem all of the Redeemable Preferred Stock upon its issuance
for $8.0 million in cash with a portion of the net proceeds from this offering.
See "Certain Transactions."
Effective Control by Principal Stockholders. After giving effect to the
sale of the shares of Common Stock offered hereby, investors principally
including investment funds associated with TA Associates, Inc., Dr. Melamed,
members of his family and trusts for the benefit of members of his family, Dr.
Shears and trusts for the benefit of members of his family and Dr. David L.
Hehli, President of
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Midwest Dental Care, will beneficially own in the aggregate approximately 29.4%,
24.4%, 8.6% and 3.7%, respectively, of the outstanding Common Stock. As a
result, these stockholders will have the ability to control or exert significant
influence over the outcome of fundamental corporate transactions requiring
stockholder approval, including mergers and sales of assets and the election of
the members of the Company's Board of Directors. Sales of shares by such
stockholders could reduce the level of such influence. See "Certain
Transactions," "Principal Stockholders" and "Shares Eligible for Future Sale."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect the market
price of the Common Stock. In addition to the 2,750,000 shares of Common Stock
offered hereby, up to 5,448,541 shares of Common Stock owned by current
stockholders of the Company will be eligible for sale in accordance with Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"),
beginning 90 days after the date of this Prospectus and an additional 1,013,515
shares will become eligible for sale in the public market under Rule 144 at
various dates thereafter through April 1, 1998, at which date all of such shares
will be eligible for sale. The remaining 246,667 shares of Common Stock are
subject to vesting provisions and will become eligible for sale in the public
market under Rule 144 at various times as they become vested. However, holders
of 6,708,473 of such shares have agreed not to offer, sell or otherwise dispose
of any shares of Common Stock owned by them (other than transfers pursuant to
bona fide gifts) for 180 days from the date of this Prospectus without the prior
written consent of Hambrecht & Quist LLC. The holders of 2,782,328 shares of
Common Stock have the right in certain circumstances to require the Company to
register their shares under the Securities Act for resale to the public and
holders of 6,377,265 shares have the right to include their shares in a
registration statement filed by the Company. Sales of substantial amounts of the
Common Stock (including shares issued in connection with prior or future
acquisitions, which may be issued with registration rights), or the availability
of such shares for sale, may adversely affect the prevailing market price for
the Common Stock and could impair the Company's ability to obtain additional
capital through an offering of its equity securities. See "Shares Eligible for
Future Sale."
Absence of a Public Trading Market; Offering Price; Possible Volatility of
Stock Price. Prior to this offering, there has been no public market for the
Common Stock and there can be no assurance that an active market will develop or
be sustained following the consummation of this offering. Consequently, the
offering price of the Common Stock will be determined by negotiation between the
Company and the representatives of the several Underwriters. See "Underwriting"
for a description of the factors to be considered in determining the initial
public offering price. Following the completion of this offering, the trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
material announcements by the Company or its competitors, governmental
regulatory action, conditions in the health care industry generally or in the
dental services industry specifically, or other events or factors, many of which
are beyond the Company's control. In addition, the stock market has experienced
extreme price and volume fluctuations which have particularly affected the
market prices of many health care services companies and which often have been
unrelated to the operating performance of such companies. The Company's
operating results in future quarters may be below the expectations of securities
analysts and investors. In such event, the price of the Common Stock would
likely decline, perhaps substantially.
Dividend Policy. The Company has not declared or paid cash dividends on its
Common Stock since it became a C corporation in February 1996 and the Company
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The payment of dividends is prohibited under the terms of the Company's
existing senior credit facility and may be prohibited under any future credit
facility which the Company may obtain. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
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Anti-takeover Provisions. Certain provisions of the Company's Restated
Certificate of Incorporation (the "Certificate") and Amended and Restated
By-laws (the "By-laws"), certain sections of the Delaware General Corporation
Law, and the ability of the Board of Directors to issue shares of preferred
stock and to establish the voting rights, preferences and other terms thereof,
may be deemed to have an anti-takeover effect and may discourage takeover
attempts not first approved by the Board of Directors (including takeovers which
stockholders may deem to be in their best interests). Such provisions include,
among other things, a classified Board of Directors serving staggered three-year
terms, the elimination of stockholder voting by written consent, the removal of
directors only for cause, the vesting of exclusive authority in the Board of
Directors to determine the size of the Board of Directors and (subject to
certain limited exceptions) to fill vacancies thereon, the vesting of exclusive
authority in the Board of Directors (except as otherwise required by law) to
call special meetings of stockholders, and certain advance notice requirements
for stockholder proposals and nominations for election to the Board of
Directors. These provisions, and the ability of the Board of Directors to issue
preferred stock without further action by stockholders, could delay or frustrate
the removal of incumbent directors or the assumption of control by stockholders,
even if such removal or assumption of control would be beneficial to
stockholders, and also could discourage or make more difficult a merger, tender
offer or proxy contest, even if such events would be beneficial, in the short
term, to the interests of stockholders. The Company will be subject to Section
203 of the Delaware General Corporation Law which, in general, imposes
restrictions upon certain acquirors (including their affiliates and associates)
of 15% or more of the Company's Common Stock. See "Description of Capital
Stock -- Certain Provisions of Certificate and By-laws" and "-- Statutory
Business Combination Provision."
Immediate and Substantial Dilution. Purchasers of the Common Stock in this
offering will incur immediate and substantial dilution in the net tangible book
value per share of Common Stock. At the assumed initial public offering price of
$11.00 per share, investors in this offering will incur dilution of $11.30 per
share. See "Dilution."
16
<PAGE> 18
THE COMPANY
The Company was founded by Dr. Warren F. Melamed in 1983, commencing
operations as a single location dental practice in Dallas. From its founding in
1983 through the end of 1995, the Company expanded its operations in the
Dallas-Fort Worth area to include a total of 12 Dental Offices staffed by 33
dentists.
In February 1996, the Company completed a series of transactions
principally including the repurchase of shares of Common Stock from Dr. Melamed,
the Company's founder and Chairman, and the concurrent acquisition of the
MacGregor Dental Centers business ("MacGregor") in Houston from an entity
controlled by Dr. Charles G. Shears, an executive officer and director of the
Company (the "1996 Transactions"). In connection with the 1996 Transactions, the
Company incurred $17.4 million of indebtedness under a senior secured credit
facility from a bank (the "Credit Facility"), and investors principally
including investment funds associated with TA Associates, Inc., a private equity
firm based in Boston, Massachusetts (the "TA Investors"), invested $10.0 million
to acquire shares of Convertible Participating Preferred Stock. Upon completion
of this offering, the Convertible Participating Preferred Stock will convert
into 2,400,000 shares of Common Stock and 3,840,000 shares of Redeemable
Preferred Stock which the Company will immediately redeem from the TA Investors
for $8.0 million using a portion of the net proceeds from the sale of the Common
Stock offered hereby. See "Use of Proceeds" and "Certain Transactions."
The Company's entry into the Houston market through the acquisition of
MacGregor represented the Company's initial expansion beyond the Dallas-Fort
Worth market. This acquisition resulted in the addition of 15 Dental Offices and
42 dentists and approximately doubled the size of the Company's operations.
Since completing the 1996 Transactions, the Company has expanded into two
additional markets, Wisconsin and Arkansas, through acquisitions. In August
1996, the Company acquired Midwest Dental Care ("Midwest") resulting in the
addition of 22 Dental Offices and 35 dentists located throughout Wisconsin. The
Company acquired Convenient Dental Care, Inc. ("Convenient") of Fort Smith,
Arkansas, in November 1996, Arkansas Dental Health Associates, Inc. ("Arkansas
Dental Health") of Little Rock, Arkansas, in January 1997 and United Dental Care
Tom Harris D.D.S. & Associates ("United") of Little Rock, Arkansas, in April
1997, resulting in the addition of an aggregate of 13 Dental Offices and 20
dentists. The collective pro forma revenue of MacGregor, Midwest, Convenient,
Arkansas Dental Health and United was $38.3 million for the year ended December
31, 1996.
In June 1997, the Company entered into a definitive agreement to acquire
Dental Centers of Indiana, Inc., an Indiana-based dental practice ("Indiana
Dental"), which operates 11 dental offices with 14 dentists. Indiana Dental had
$3.6 million in revenue for the year ended December 31, 1996. The Company
anticipates that the closing of the Indiana Dental acquisition will occur on or
about the commencement of this offering, however, there can be no assurance that
the Indiana Dental acquisition will be completed. See
"Business -- Expansion -- Pending Acquisition."
The Company was incorporated under the laws of Delaware on December 28,
1994. The Company's principal executive offices are located at 4201 Spring
Valley Road, Suite 320, Dallas, Texas 75244, and its telephone number is (972)
702-7446.
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,750,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share are estimated to be $27,233,000 ($31,452,000 if the
Underwriters' over-allotment option is exercised in full). The Company will use
the net proceeds as follows: (i) approximately $18.2 million will be used to
repay a portion of the Company's outstanding indebtedness under the Credit
Facility, including accrued and unpaid interest; (ii) $8.0 million will be used
to redeem all of the outstanding Redeemable Preferred Stock; and (iii) the
balance of approximately $1.0 million will be used for working capital and other
general corporate purposes. Pending such use, the balance of the net proceeds
will be invested in short-term, investment grade, interest-bearing obligations.
The Credit Facility expires on August 29, 1999. Amounts outstanding under
the Credit Facility bear interest at variable rates which are based upon either
the lender's base rate or LIBOR, plus in either case a margin which varies
according to the ratio of the Company's funded debt to Adjusted EBITDA, each as
defined in the Credit Facility. The interest rate on such indebtedness at March
31, 1997 was 8.9% per annum. At May 31, 1997, the Company had outstanding
borrowings of $24.8 million under the Credit Facility. The Company incurred
$17.4 million, $5.0 million, $495,000, $1.6 million and $2.8 million of
indebtedness under the Credit Facility to finance the 1996 Transactions and the
acquisitions of Midwest, Convenient, Arkansas Dental Health and United,
respectively. The Company expects to incur additional indebtedness of
approximately $1.8 million to finance the acquisition of Indiana Dental. All
outstanding indebtedness under the Credit Facility was used to finance such
acquisitions. See "The Company," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since it became a C corporation in February 1996. The Company currently intends
to retain its earnings for future growth and, therefore, does not anticipate
paying cash dividends in the foreseeable future. Payment of future dividends, if
any, will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's financial condition,
operating results and current and anticipated cash needs. In addition, under the
terms of the Credit Facility, the payment of cash dividends is currently
prohibited without the consent of the lender.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the
sale by the Company of the 2,750,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share and the application of
the estimated net proceeds therefrom as described in "Use of Proceeds." This
table should be read in conjunction with the Consolidated Financial Statements
and Notes thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1)..................... $ 3,592 $ 3,857
======= =======
Long-term debt, net of current maturities(1)................ $19,424 $ 4,220
Convertible Participating Preferred Stock, $.01 par value,
4,800,000 shares authorized, 4,800,000 shares issued and
outstanding; no shares authorized, issued or outstanding
as adjusted............................................... 9,313 --
Redeemable Preferred Stock, $.01 par value, 3,840,000 shares
authorized; no shares issued or outstanding; no shares
authorized, issued or outstanding as adjusted(2).......... -- --
Redeemable Common Stock, $.01 par value, 175,000 shares
issued and outstanding; no shares issued or outstanding as
adjusted(3)............................................... 438 --
Stockholders' equity (deficit):
Series A Convertible Junior Preferred Stock, $.01 par
value, 1,704,550 shares authorized, 1,704,550 shares
issued and outstanding; no shares authorized, issued
or outstanding as adjusted............................ 17 --
Preferred Stock, $.01 par value, no shares authorized,
issued or outstanding; 2,000,000 shares authorized, no
shares issued or outstanding as adjusted.............. -- --
Common Stock, $.01 par value, 9,900,000 shares
authorized; 3,387,708 shares issued and outstanding;
50,000,000 shares authorized, 9,389,973 shares issued
and outstanding as adjusted(4)........................ 32 104
Additional paid-in capital............................. 3,964 33,262
Retained deficit....................................... (7,323) (7,323)
------- -------
Total stockholders' equity (deficit).............. (3,310) 26,043(5)
------- -------
Total capitalization............................ $25,865 $30,263
======= =======
</TABLE>
- ------------------------------
(1) See Notes 6 and 8 of Notes to Consolidated Financial Statements of the
Company for information concerning long-term debt and capital lease
obligations.
(2) Upon completion of this offering, the Convertible Participating Preferred
Stock will convert into 2,400,000 shares of Common Stock and 3,840,000
shares of Redeemable Preferred Stock and all shares of Redeemable Preferred
Stock will be redeemed for $8.0 million in cash.
(3) Reflects 175,000 shares of Common Stock subject to put rights which
terminate upon completion of this offering.
(4) Excludes (i) 1,031,042 shares of Common Stock reserved for issuance under
the 1996 Stock Plan, of which 57,500 shares were issuable at March 31, 1997
upon the exercise of outstanding stock options at a weighted average
exercise price of $6.55 per share, (ii) 500,000 shares of Common Stock
reserved for issuance under the Acquisition Plan, of which at March 31, 1997
up to 92,500 shares were reserved for issuance under options to be granted
at an exercise price equal to the fair market value of the Common Stock at
the time of grant if certain acquired dental practices achieve specified
financial performance goals, (iii) 250,000 shares of Common Stock reserved
for issuance under the Purchase Plan and (iv) approximately 163,600 shares
of Common Stock issuable in connection with the closing of the acquisition
of Indiana Dental at an assumed initial public offering price of $11.00 per
share. See "Business -- Expansion -- Pending Acquisition,"
"Management -- Employee Stock and Other Benefit Plans -- 1996 Stock Option
and Incentive Plan" and "-- 1997 Employee Stock Purchase Plan." Includes
non-voting Class A Common Stock to be converted into Common Stock on a
share-for-share basis upon completion of this offering.
(5) Reflects the anticipated write off of unamortized loan fees of $284,000, net
of the related tax effect.
19
<PAGE> 21
DILUTION
As of March 31, 1997, the Company had a net tangible book value of
approximately $(28,841,000) or $(8.98) per share of Common Stock. Net tangible
book value represents the amount of total tangible assets less total liabilities
and redeemable equity securities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in the net tangible
book value after March 31, 1997, other than to give effect to the receipt by the
Company of the net proceeds from the sale of the 2,750,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00 per
share, the pro forma net tangible book value of the Company as of March 31, 1997
would have been approximately $(2,757,000), or $(0.30) per share. This
represents an immediate increase in net tangible book value of $8.68 per share
to existing stockholders and an immediate dilution of $11.30 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share before the
offering.............................................. $(8.98)
Increase per share attributable to new investors....... 8.68
------
Pro forma net tangible book value per share after the
offering.................................................. (0.30)
------
Dilution per share to new investors......................... $11.30
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences between existing stockholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
--------------------- --------------------- -------------
NUMBER PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 6,639,973 70.7% $ 6,187,193 17.0% $ 0.93
New investors............... 2,750,000 29.3 30,250,000 83.0 11.00
----------- ------ ----------- ------
Total............. 9,389,973 100.0% $36,437,193 100.0%
=========== ====== =========== ======
</TABLE>
Other than as noted above, the foregoing computations assume no exercise of
any outstanding stock options after May 31, 1997 or of the Underwriters'
over-allotment option. As of May 31, 1997, stock options to purchase 435,750
shares of Common Stock were outstanding with a weighted average exercise price
of $10.41 per share (at an assumed initial public offering price of $11.00 per
share). To the extent these options are exercised, there will be further
dilution to new investors. See "Management -- Employee Stock and Other Benefit
Plans -- 1996 Stock Option and Incentive Plan."
20
<PAGE> 22
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma as adjusted consolidated statement of income for the year
ended December 31, 1996, gives effect to (i) the 1996 acquisitions of MacGregor,
Midwest, John H. Davis, D.D.S. ("Davis"), and Convenient (collectively, the
"1996 Acquisitions") and the 1997 acquisitions of Arkansas Dental Health, United
and Indiana Dental (collectively, the "1997 Acquisitions") and (ii) the receipt
and application of the estimated net proceeds from this offering at an assumed
initial public offering price of $11.00 per share as if such transactions had
been completed on January 1, 1996. The pro forma as adjusted consolidated
statement of income for the three months ended March 31, 1997 gives effect to
(i) the 1997 acquisitions of United and Indiana Dental and (ii) the receipt and
application of the estimated net proceeds from this offering as if such
transactions had been completed on January 1, 1997. The pro forma as adjusted
condensed consolidated balance sheet reflects (i) the acquisitions of United and
Indiana Dental, (ii) the receipt and application of the estimated net proceeds
from this offering and (iii) the conversion of all outstanding Convertible
Participating Preferred Stock of the Company into Common Stock and Redeemable
Preferred Stock, the redemption of all outstanding Redeemable Preferred Stock
for cash and the conversion of all other outstanding equity securities into
Common Stock, in each case concurrently with the closing of the offering, as if
such transactions had occurred on March 31, 1997. The pro forma consolidated
financial information is based on the consolidated financial statements of the
Company, giving effect to the assumptions and adjustments in the accompanying
notes to the pro forma consolidated financial information. Although such
information is based on preliminary allocations of the purchase prices of the
acquisitions of Midwest, Davis and Convenient and the 1997 Acquisitions, the
Company does not expect that the final allocations of the purchase prices will
be materially different from such preliminary allocations.
The pro forma consolidated financial information has been prepared by
management based on the historical financial statements of the Company, Arkansas
Dental Health, United and Indiana Dental at and for the year ended December 31,
1996 and at and for the three months ended March 31, 1997, adjusted where
necessary to reflect these acquisitions and related operations as if the
Management Agreements had been in effect during the entire periods presented.
This pro forma consolidated financial information is presented for illustrative
purposes and it does not purport to represent what the consolidated results of
operations or financial condition of the Company for the periods or at the date
presented would have been had such transactions been consummated as of such
dates and is not indicative of the results that may be obtained in the future.
21
<PAGE> 23
MONARCH DENTAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 ACQUISITIONS(B)
--------------------------------
CONVENIENT ARKANSAS 1997
MONARCH(A) MACGREGOR MIDWEST & DAVIS DENTAL HEALTH(B) HISTORICAL
---------- --------- ------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $5,261 $3,485 $4,201 $711 $818 $14,476
Less: amounts retained by dental
group practices.................. 1,710 1,170 1,518 344 287 5,029
------ ------ ------ ---- ----- -------
Net revenue........................ 3,551 2,315 2,683 367 531 9,447
Operating expenses:
Clinical salaries and
benefits..................... 960 463 752 119 153 2,447
Other salaries and benefits.... 644 316 427 -- -- 1,387
Dental supplies................ 338 161 328 36 49 912
Laboratory fees................ 224 224 28 51 64 591
Occupancy...................... 271 220 242 39 28 800
Advertising.................... 239 56 11 5 14 325
Depreciation and
amortization................. 171 213 139 13 29 565
General and administrative..... 540 305 449 67 97 1,458
------ ------ ------ ---- ----- -------
3,387 1,958 2,376 330 434 8,485
------ ------ ------ ---- ----- -------
Operating income................... 164 357 307 37 97 962
Interest expense, net.............. 576 3 (3) 3 -- 579
------ ------ ------ ---- ----- -------
Income (loss) before minority
interest in combined subsidiaries
and income taxes................. (412) 354 310 34 97 383
Minority interest in combined
subsidiaries..................... -- -- -- -- -- --
------ ------ ------ ---- ----- -------
Income (loss) before income
taxes............................ (412) 354 310 34 97 383
Income taxes (benefit)............. (160) 137 121 14 38 150
------ ------ ------ ---- ----- -------
Net income (loss).................. $ (252) $ 217 $ 189 $ 20 $ 59 $ 233
====== ====== ====== ==== ===== =======
Net income per common share........ $ 0.03
=======
Weighted average common shares
outstanding...................... 6,896
=======
<CAPTION>
1997 ACQUISITIONS
------------------
INDIANA ACQUISITION PRO FORMA
UNITED DENTAL ADJUSTMENTS OFFERING AS ADJUSTED
------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $1,103 $1,041 $ -- $ -- $16,620
Less: amounts retained by dental
group practices.................. -- -- 581(c) -- 5,610
------ ------ ----- ----- -------
Net revenue........................ 1,103 1,041 (581) -- 11,010
Operating expenses:
Clinical salaries and
benefits..................... 410 536 (614)(c) -- 2,779
Other salaries and benefits.... 217 56 (9)(c) -- 1,651
Dental supplies................ 75 65 -- -- 1,052
Laboratory fees................ 30 52 -- -- 673
Occupancy...................... 63 45 (6)(c) -- 902
Advertising.................... 49 2 -- -- 376
Depreciation and
amortization................. 27 24 53(d) -- 669
General and administrative..... 80 104 (21)(c) -- 1,621
------ ------ ----- ----- -------
951 884 (597) -- 9,723
------ ------ ----- ----- -------
Operating income................... 152 157 16 -- 1,287
Interest expense, net.............. 13 1 93(f) (403)(g) 283
------ ------ ----- ----- -------
Income (loss) before minority
interest in combined subsidiaries
and income taxes................. 139 156 (77) 403 1,004
Minority interest in combined
subsidiaries..................... -- 31 -- -- 31
------ ------ ----- ----- -------
Income (loss) before income
taxes............................ 139 125 (77) 403 973
Income taxes (benefit)............. 54 48 (29) 156 379(h)
------ ------ ----- ----- -------
Net income (loss).................. $ 85 $ 77 $ (48) $ 247 $ 594
====== ====== ===== ===== =======
Net income per common share........ $ 0.06
=======
Weighted average common shares
outstanding...................... 9,646
=======
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
22
<PAGE> 24
MONARCH DENTAL CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 ACQUISITIONS(B)
--------------------------------
CONVENIENT 1996
MONARCH(A) MACGREGOR MIDWEST & DAVIS HISTORICAL
---------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dental group practices revenue, net..... $18,084 $12,129 $5,250 $517 $35,980
Less: amounts retained by dental group
practices............................. 5,809 3,829 1,942 222 11,802
------- ------- ------ ---- -------
Net revenue............................. 12,275 8,300 3,308 295 24,178
Operating expenses:
Clinical salaries and benefits...... 3,103 2,034 1,032 90 6,259
Other salaries and benefits......... 1,681 930 516 -- 3,127
Dental supplies..................... 1,062 688 442 24 2,216
Laboratory fees..................... 833 753 25 37 1,648
Occupancy........................... 801 766 346 24 1,937
Advertising......................... 872 326 8 4 1,210
Depreciation and amortization....... 517 730 178 5 1,430
General and administrative.......... 1,876 1,107 548 33 3,564
------- ------- ------ ---- -------
10,745 7,334 3,095 217 21,391
------- ------- ------ ---- -------
Operating income (loss)................. 1,530 966 213 78 2,787
Interest expense, net................... 1,707 (32) 10 2 1,687
------- ------- ------ ---- -------
Income (loss) before minority interest
in combined subsidiaries and income
taxes................................. (177) 998 203 76 1,100
Minority interest in combined
subsidiaries........................ -- -- -- -- --
------- ------- ------ ---- -------
Income (loss) before income taxes....... (177) 998 203 76 1,100
Income taxes (benefit).................. (9) 339 69 26 425
------- ------- ------ ---- -------
Net income (loss)....................... $ (168) $ 659 $ 134 $ 50 $ 675
======= ======= ====== ==== =======
Net income per common share............. $ 0.10
=======
Weighted average common shares
outstanding........................... 6,896
=======
<CAPTION>
1996 PRE-ACQUISITIONS (B) 1997 ACQUISITIONS(B)
-------------------------------- --------------------------------
CONVENIENT ARKANSAS INDIANA
MACGREGOR MIDWEST & DAVIS DENTAL HEALTH UNITED DENTAL
--------- ------- ---------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Dental group practices revenue, net..... $1,095 $10,406 $2,065 $2,718 $4,162 $3,572
Less: amounts retained by dental group
practices............................. -- -- -- -- -- --
------ ------- ------ ------ ------ ------
Net revenue............................. 1,095 10,406 2,065 2,718 4,162 3,572
Operating expenses:
Clinical salaries and benefits...... 288 5,630 1,139 998 1,366 2,054
Other salaries and benefits......... 219 1,462 128 803 815 195
Dental supplies..................... 52 881 112 240 223 252
Laboratory fees..................... 65 55 136 198 113 182
Occupancy........................... 64 723 100 112 234 233
Advertising......................... 36 61 17 47 187 6
Depreciation and amortization....... 38 339 3 57 110 80
General and administrative.......... 206 1,078 176 434 349 316
------ ------- ------ ------ ------ ------
968 10,229 1,811 2,889 3,397 3,318
------ ------- ------ ------ ------ ------
Operating income (loss)................. 127 177 254 (171) 765 254
Interest expense, net................... 5 39 20 36 32 5
------ ------- ------ ------ ------ ------
Income (loss) before minority interest
in combined subsidiaries and income
taxes................................. 122 138 234 (207) 733 249
Minority interest in combined
subsidiaries........................ -- -- -- -- -- 53
------ ------- ------ ------ ------ ------
Income (loss) before income taxes....... 122 138 234 (207) 733 196
Income taxes (benefit).................. 47 53 91 (80) 284 76
------ ------- ------ ------ ------ ------
Net income (loss)....................... $ 75 $ 85 $ 143 $ (127) $ 449 120
====== ======= ====== ====== ====== ======
Net income per common share.............
Weighted average common shares
outstanding...........................
<CAPTION>
ACQUISITION PRO FORMA
ADJUSTMENTS OFFERING AS ADJUSTED
----------- -------- -----------
<S> <C> <C> <C>
Dental group practices revenue, net..... $ -- $ -- $59,998
Less: amounts retained by dental group
practices............................. 7,373(c) -- 19,175
------- ------ -------
Net revenue............................. (7,373) -- 40,823
Operating expenses:
Clinical salaries and benefits...... (7,998)(c) -- 9,736
Other salaries and benefits......... (60)(c) -- 6,689
Dental supplies..................... -- -- 3,976
Laboratory fees..................... -- -- 2,397
Occupancy........................... (25)(c) -- 3,378
Advertising......................... (10)(c) -- 1,554
Depreciation and amortization....... 373(d) -- 2,430
General and administrative.......... (249)(c) -- 5,874
------- ------ -------
(7,969) -- 36,034
------- ------ -------
Operating income (loss)................. 596 -- 4,789
Interest expense, net................... (78)(e) (1,617)(g) 1,135
1,006(f) -- --
------- ------ -------
Income (loss) before minority interest
in combined subsidiaries and income
taxes................................. (332) 1,617 3,654
Minority interest in combined
subsidiaries........................ -- -- 53
------- ------ -------
Income (loss) before income taxes....... (332) 1,617 3,601
Income taxes (benefit).................. (128) 626 1,394(h)
------- ------ -------
Net income (loss)....................... $ (204) $ 991 $ 2,207
======= ====== =======
Net income per common share............. $ 0.23
=======
Weighted average common shares
outstanding........................... 9,646(i)
=======
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
23
<PAGE> 25
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Dental Group Practices Revenue, Net. Dental group practices revenue, net
represents the revenue of the Dental Offices reported at the estimated
realizable amounts from third-party payors and patients for services rendered.
Net Revenue. Net revenue in the accompanying pro forma consolidated
statements of income represents revenue from Dental Offices less amounts
retained by the dental group practices. The amounts retained by dental group
practices represent amounts paid by (i) the P.C.s as salary, benefits and other
payments to employed dentists and hygienists and contracted specialists and (ii)
the Company as salary, benefits and other payments to employed dentists and
hygienists and contracted specialists in states in which ownership of dental
practices by the Company is permitted. Under the Management Agreements, the
Company assumes responsibility for the management of all aspects of the dental
group practices' business other than the provision of dental services. The
Company's net revenue is dependent on the revenue of the dental group practices.
Pro Forma Consolidated Statements of Income. The adjustments reflected in
the pro forma consolidated statement of income for the year ended December 31,
1996 and the three months ended March 31, 1997 are as follows:
(a) In the pro forma consolidated statement of income for the year
ended December 31, 1996, the Monarch column includes all of the interest
expense related to indebtedness incurred in connection with the 1996
Acquisitions and all expenses related to corporate infrastructure. In the
pro forma consolidated statement of income for the three months ended March
31, 1997, the Monarch column includes all of the interest expense related
to indebtedness incurred in connection with the 1996 Acquisitions and the
Arkansas Dental Health acquisition and all expenses related to corporate
infrastructure.
(b) The 1996 Acquisitions and 1996 Pre-Acquisitions columns present
historical information without giving effect to purchase accounting. The
1996 Acquisitions column presents the historical revenue and expenses of
the 1996 Acquisitions for that portion of the year included in the
historical consolidated financial statements of the Company. The 1996
Pre-Acquisitions columns present the historical revenue and expenses of the
1996 Acquisitions for that portion of 1996 preceding the practices'
affiliation with the Company as if the acquisitions had occurred on January
1, 1996. In the pro forma consolidated statement of income for the year
ended December 31, 1996, the 1997 Acquisitions columns present the
historical revenue and expenses of Arkansas Dental Health, United and
Indiana Dental as if they had been acquired on January 1, 1996. In the pro
forma consolidated statement of income for the three months ended March 31,
1997, the Arkansas Dental Health column presents the historical revenue and
expenses of Arkansas Dental Health for the three months ended March 31,
1997.
(c) To reflect the impact of applying (i) the provisions of the
Management Agreements and (ii) adjustments in compensation expense
principally affecting the owners of the acquired dental group practices
pursuant to the provisions of employment agreements entered into at the
time of acquisition to the historical dental group revenue of each dental
practice, as if the Management Agreements and employment agreements were in
place at January 1, 1996 for the pro forma consolidated statement of income
for the year ended December 31, 1996, or January 1, 1997 for the pro forma
consolidated statement of income for the three months ended March 31, 1997.
(d) To increase amortization expense for intangible assets based upon
the Company's allocation of purchase price as if the 1996 Acquisitions and
1997 Acquisitions were all completed on January 1, 1996. The intangible
assets related to the 1996 Acquisitions and the 1997 Acquisitions total
approximately $31.2 million at March 31, 1997 and are being amortized over
a composite average period of 31 years.
(e) To eliminate interest expense related to liabilities not assumed
in connection with the 1996 Acquisitions and 1997 Acquisitions.
(f) To record interest expense on debt issued in connection with the
1996 Acquisitions and 1997 Acquisitions, assuming such acquisitions were
completed on January 1, 1996.
(g) To eliminate interest expense assuming repayment of $18.2 million
of indebtedness under the Company's Credit Facility with a portion of the
proceeds of the offering received by the Company as of January 1, 1996, net
of estimated federal and state income taxes at a combined rate of
approximately 38.7%.
(h) To reflect the estimated income tax effects at an estimated
effective rate of approximately 38.7%.
24
<PAGE> 26
MONARCH DENTAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
INDIANA ACQUISITION EQUITY AS
HISTORICAL UNITED(a) DENTAL(a) ADJUSTMENTS CONVERSION(b) OFFERING(c) ADJUSTED
---------- --------- --------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............. $ 446 $277 $319 $ (513)(d) $ -- $ 1,000 $ 1,529
Other current assets...... 4,560 126 195 -- -- -- 4,881
------- ---- ---- ------- ------- -------- --------
Total current
assets............. 5,006 403 514 (513) -- 1,000 6,410
Property and equipment, net.... 5,237 337 249 -- -- -- 5,823
Intangible assets, net......... 25,531 114 -- 6,208 (e) -- -- 31,853
Other assets................... 579 -- 1 -- -- -- 580
------- ---- ---- ------- ------- -------- --------
Total assets....... $36,353 $854 $764 $ 5,695 $ -- $ 1,000 $ 44,666
======= ==== ==== ======= ======= ======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Payable to affiliated
dental groups........... $ 1,301 $ -- $ -- $ -- $ -- $ -- $ 1,301
Current maturities of
notes payable and
capital lease
obligations............. 3,592 265 12 (12) -- -- 3,857
Other current
liabilities............. 3,991 152 111 -- -- -- 4,254
------- ---- ---- ------- ------- -------- --------
Total current
liabilities........ 8,884 417 123 (12) -- -- 9,412
Notes payable and capital lease
obligations.................. 19,424 181 41 4,510 (d) -- (18,225) 5,931
Other liabilities.............. 1,604 -- -- -- -- -- 1,604
------- ---- ---- ------- ------- -------- --------
Total
liabilities....... 29,912 598 164 4,498 -- (18,225) 16,947
Convertible Participating
Preferred Stock.............. 9,313 -- -- -- (9,313) -- --
Redeemable Preferred Stock..... -- -- -- -- 8,000 (8,000) --
Redeemable Common Stock........ 438 -- -- -- (438) -- --
Stockholders' equity (deficit):
Series A Convertible
Junior Preferred
Stock................... 17 -- -- -- (17) -- --
Common Stock.............. 32 -- -- 3 (d) 17 28 106
2
24
Additional paid-in
capital................. 3,907 -- -- 1,966 (d) 436 27,197 34,795
1,289
Minority interest in
combined subsidiaries... -- -- 84 -- -- -- 84
Retained earnings
(deficit)............... (7,266) 256 516 (772)(f) -- -- (7,266)
------- ---- ---- ------- ------- -------- --------
Total stockholders'
equity (deficit)... (3,310) 256 600 1,197 1,751 27,225 27,719
------- ---- ---- ------- ------- -------- --------
Total liabilities
and
stockholders'
equity
(deficit)....... $36,353 $854 $764 $ 5,695 $ -- $ 1,000 $ 44,666
======= ==== ==== ======= ======= ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
25
<PAGE> 27
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments reflected in the pro forma condensed consolidated balance
sheet are as follows:
(a) To record the historical basis of the assets acquired and
liabilities assumed by the Company in connection with the United and
Indiana Dental acquisitions. These acquisitions have been accounted for
using the purchase method of accounting and, accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed
based on the estimated fair values as of March 31, 1997. In addition to the
issuance of Common Stock, the Company paid or expects to pay (in the case
of Indiana Dental) approximately $2.8 and $1.8 million in cash in
connection with the United and Indiana Dental acquisitions, respectively.
The pro forma purchase accounting adjustments are recorded under the
Acquisition Adjustments column.
The following methods and assumptions were used to estimate fair
value:
Cash and cash equivalents -- The historical carrying amount
approximated fair value.
Other current assets -- Other current assets consisted primarily of
accounts receivable.
Property and equipment, net -- The Company performed an
asset-by-asset review and determined that the historical carrying amount
approximated fair value.
Intangible assets -- In connection with the allocation of the
purchase price to intangible assets, the Company analyzed the nature of
each dental group practice with which a Management Agreement was entered
into, including the number of dentists in each dental group practice,
number of dental offices and ability to recruit additional dentists, the
dental group practice's relative market position, the length of time
each dental group practice had been in existence, and the term and
enforceability of the Management Agreement. The Management Agreements
are for a term of 40 years and cannot be terminated by the relevant P.C.
without cause, consisting primarily of bankruptcy or material default.
The Company believes that there is no material value allocable to
the employment and noncompete agreements entered into between the P.C.s
and the individual dentists, since the primary economic beneficiaries of
these agreements are the P.C.s, which are entities that the Company does
not legally control. The Company believes that the dental group
practices operated by the P.C.s with which it has Management Agreements
are long-lived entities with an indeterminable life and that the
dentists, customer demographics and various contracts will be
continuously replaced. The amounts allocated to the Management
Agreements are being amortized on a straight-line method over 30 years.
The Emerging Issues Task Force of the Financial Accounting
Standards Board is currently evaluating certain matters relating to the
physician practice management industry, which the Company expects to
include a review of the consolidation of professional corporation
revenues and the accounting for business combinations. The Company is
unable to predict the impact, if any, that this review may have on the
Company's acquisition strategy, allocation of purchase price related to
acquisitions and amortization life assigned to intangible assets.
Liabilities assumed -- Given the short-term nature of the
liabilities assumed, the historical carrying amount approximated their
fair value.
(b) To reflect the conversion of the Convertible Participating
Preferred Stock into 2,400,000 shares of Common Stock and 3,840,000 shares
of Redeemable Preferred Stock. The Redeemable Preferred Stock will be
redeemed for $8.0 million in cash at the closing of the offering. To also
reflect the conversion of all other outstanding equity securities into
Common Stock upon the closing of the offering.
(c) To reflect the estimated net proceeds from the sale of 2,750,000
shares of Common Stock in the offering at an assumed initial public
offering price of $11.00 per share, estimated to be approximately $27.2
million (after deducting estimated underwriting discounts and commissions
and offering expenses), and the repayment of $18.2 million of indebtedness
under the Credit Facility.
26
<PAGE> 28
(d) To record the Common Stock issued and cash paid in exchange for
the assets acquired and liabilities assumed.
(e) To adjust to fair market value the assets acquired and liabilities
assumed and to eliminate assets not acquired and liabilities not assumed by
the Company as defined in the purchase agreement.
(f) To eliminate the owner's equity in connection with the purchase
accounting for the acquisitions.
27
<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated statement of income data for the years ended
December 31, 1994, 1995 and 1996 and the selected consolidated balance sheet
data at December 31, 1995 and 1996 have been derived from the Consolidated
Financial Statements of the Company that have been audited by Arthur Andersen
LLP, independent public accountants, which are included elsewhere in this
Prospectus. The selected consolidated statement of income data for the three
months ended March 31, 1996 and 1997 and the selected consolidated balance sheet
data at March 31, 1997 have been derived from the unaudited interim consolidated
financial statements of the Company included elsewhere in this Prospectus. The
selected consolidated balance sheet data at December 31, 1994 has been derived
from the audited consolidated statements of the Company not included in this
Prospectus. The selected consolidated statement of income data for the years
ended December 31, 1992 and 1993 and the selected consolidated balance sheet
data at December 31, 1992 and 1993 have been derived from unaudited consolidated
financial statements of the Company not included in this Prospectus. The
following selected consolidated financial information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto of the
Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Dental group practices revenue,
net................................ $6,760 $8,028 $9,559 $13,223 $35,980 $6,316 $14,476
Less: amounts retained by dental
group practices.................... 2,109 2,669 3,070 4,301 11,802 2,060 5,029
------ ------ ------ ------- ------- ------ -------
Net revenue.......................... 4,651 5,359 6,489 8,922 24,178 4,256 9,447
Operating expenses:
Clinical salaries and
benefits...................... 1,403 1,399 1,553 2,243 6,259 1,065 2,447
Other salaries and benefits..... 476 555 688 971 3,127 466 1,387
Dental supplies................. 376 436 509 833 2,216 327 912
Laboratory fees................. 334 391 430 633 1,648 322 591
Occupancy....................... 290 334 392 471 1,937 318 800
Advertising..................... 143 479 626 710 1,210 225 325
Depreciation and amortization... 192 257 252 293 1,430 248 565
General and administrative...... 782 822 951 1,099 3,564 573 1,458
------ ------ ------ ------- ------- ------ -------
3,996 4,673 5,401 7,253 21,391 3,544 8,485
------ ------ ------ ------- ------- ------ -------
Operating income..................... 655 686 1,088 1,669 2,787 712 962
Interest expense, net................ 59 56 81 87 1,687 259 579
------ ------ ------ ------- ------- ------ -------
Income before income taxes........... 596 630 1,007 1,582 1,100 453 383
Income taxes(1)...................... -- -- -- -- 425 174 150
------ ------ ------ ------- ------- ------ -------
Net income........................... $ 596 $ 630 $1,007 $ 1,582 $ 675 $ 279 $ 233
====== ====== ====== ======= ======= ====== =======
Pro forma net income(1).............. $ 365 $ 386 $ 617 $ 970 $ 675 $ 279 $ 233
Net income per common share(2)....... $ 0.10 $ 0.04 $ 0.03
Weighted average common shares
outstanding........................ 6,896 6,896 6,896
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996 MARCH 31, 1997
------ ------ ------ ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 466 $ 426 $ 413 $ 760 $ 1,059 $ 446
Working capital (deficit)................ 79 109 22 349 (3,995) (3,878)
Total assets............................. 1,821 1,929 1,952 3,182 32,906 36,353
Long-term debt, less current maturities.. 659 712 688 1,077 18,769 19,424
Redeemable equity securities............. -- -- -- -- 9,711 9,751
Total stockholders' equity (deficit)..... 276 270 146 623 (5,408) (3,310)
</TABLE>
- ------------------------------
(1) The Company was an S corporation prior to February 6, 1996, and accordingly
its consolidated statements of income for periods prior to such date did not
include income tax expense. Pro forma net income includes an adjustment to
reflect estimated income tax effects on net income for the years ended
December 31, 1992, 1993, 1994 and 1995 at an assumed effective tax rate of
38.7%.
(2) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements of the Company. Due to the effect of the 1996 Transactions on the
Company's capital structure, per share data for the periods ended prior to
January 1, 1996 are not comparable to subsequent periods and, therefore,
have not been presented. Supplemental pro forma net income per share for the
year ended December 31, 1996 and the three month period ended March 31, 1997
were $0.18 and $0.05, respectively, assuming $26.2 million of net proceeds
from the offering were used to retire the Company's outstanding indebtedness
under the Credit Facility and to redeem the Company's Redeemable Preferred
Stock.
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto of the Company included elsewhere in
this Prospectus. This Prospectus contains forward-looking statements.
Discussions containing such forward-looking statements may be found in the
material set forth below and under "Business," as well as in this Prospectus
generally. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including, without limitation, the risk factors set forth under "Risk Factors"
and the matters set forth in this Prospectus generally.
OVERVIEW
The Company manages dental group practices in selected markets, presently
including Dallas-Fort Worth, Houston, Wisconsin and Arkansas. The Dental Offices
provide general dentistry services such as examinations, cleanings, fillings,
bonding, placing crowns and fitting and placing fixed or removable prostheses.
Many of the Dental Offices also provide specialty dental services such as
orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry.
The Company focuses on fee-for-service dentistry, supplementing this business
with revenue from contracts with capitated managed dental care plans.
The Company seeks to build geographically dense networks of dental
providers by expanding within its existing markets. The Company has generated
growth within its existing markets by increasing patient volume and fees in
existing Dental Offices, either on a per-patient or per-procedure basis, by
increasing the physical space of existing Dental Offices and by opening Dental
Offices on a de novo basis. The Company has entered selected new markets by
acquiring dental group practices which have a significant market presence or
which the Company believes can achieve such a presence in the near term. The
Company then seeks to use the acquired dental group practice as a "pedestal"
from which to expand within the newly entered market.
EXISTING MARKET DEVELOPMENT AND ACQUISITION SUMMARY
Existing Market Development. Monarch commenced operations in 1983 with a
single practice in Dallas. From its founding in 1983 through May 31, 1997, the
Company opened 14 additional Dental Offices on a de novo basis in the
Dallas-Fort Worth market. In May 1997, the Company opened its first de novo
Dental Office in the Houston market. The Company recently completed its first
acquisition of a solo practice in an existing market (Dallas-Fort Worth) for an
aggregate purchase price of $182,000, consisting of 5,000 shares of Common Stock
valued at $10,000 at the date of issuance, a subordinated note in the principal
amount of $122,000 and cash of $50,000. Revenue from the Company's Dallas-Fort
Worth operations increased $3.6 million, or 38.3%, to $13.2 million in 1995, and
increased an additional $5.1 million, or 38.1%, to $18.3 million in 1996.
Operating income for the Company's Dallas-Fort Worth operations increased
$694,000, or 52.7%, to $2.0 million in 1995 and increased $805,000, or 40.0%, to
$2.8 million in 1996. However, there can be no assurance that the Company's
revenue and operating income in this market will continue to grow at these
historical rates or that the Company's operations in other markets will grow at
rates comparable to those experienced in Dallas-Fort Worth.
The average investment by the Company in the four de novo Dental Offices
opened since January 1, 1996 was approximately $235,000, which includes the cost
of equipment, leasehold improvements and working capital associated with the
initial operations. The three de novo Dental Offices opened between January 1,
1996 and March 31, 1997 began contributing operating income to the Company
within three months of opening (the fourth de novo Dental Office was opened in
May 1997 and had not yet begun contributing operating income at May 31, 1997).
Future de novo Dental Offices, however, may require a greater investment by the
Company and may not begin
29
<PAGE> 31
contributing operating income to the Company within that period of time. The
Company expenses operating costs (other than costs related to fixed assets) in
connection with the establishment of a de novo Dental Office as these costs are
incurred rather than capitalizing them.
Acquisitions. Beginning with the acquisition of MacGregor in connection
with the 1996 Transactions in February 1996, the Company has conducted an active
program to identify dental group practices outside of the Dallas-Fort Worth
market as potential acquisition candidates with a view to expanding the
Company's operations into new markets. Since December 31, 1995, the Company has
completed the following acquisitions in new markets:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS FOUNDED OF ACQUISITION
--------------------- -------------- --------- ------- ------------------
<S> <C> <C> <C> <C>
MacGregor, Houston....................... 16 36 1962 February 1, 1996
Midwest, Wisconsin....................... 22 32 1975 September 1, 1996
Convenient, Arkansas..................... 1 3 1982 November 1, 1996
Arkansas Dental Health, Arkansas......... 3 5 1984 January 1, 1997
United, Arkansas......................... 9 12 1990 April 1, 1997
</TABLE>
- ------------------------------
The data presented in this table is as of May 31, 1997.
The purchase prices paid by the Company in connection with the acquisitions
described in the table above were as follows: (i) MacGregor, $16.8 million,
consisting of 700,000 shares of Common Stock valued at $148,000 at the date of
issuance, the assumption of $662,000 of debt and cash of $15.9 million funded
out of the proceeds of equity investments made in connection with the 1996
Transactions and borrowings under the Credit Facility; (ii) Midwest, $6.2
million, consisting of 350,000 shares of Common Stock valued at $700,000 at the
date of issuance, the assumption of $246,000 of debt and cash of $5.3 million
primarily borrowed under the Credit Facility; (iii) Convenient, $575,000,
consisting of 30,000 shares of Common Stock valued at $75,000 at the date of
issuance and cash of $500,000 primarily borrowed under the Credit Facility; (iv)
Arkansas Dental Health, $2.4 million, consisting of 57,500 shares of Common
Stock valued at $173,000 at the date of issuance, the assumption of $659,000 of
debt and cash of $1.6 million primarily borrowed under the Credit Facility; and
(v) United, $3.8 million, consisting of 68,750 shares of Common Stock valued at
$529,000 at the date of issuance, the assumption of $469,000 of debt and cash of
$2.8 million primarily borrowed under the Credit Facility. Additional purchase
consideration consisting of options to purchase up to 185,000 shares of Common
Stock will be granted over five years following the effective dates of certain
of the completed acquisitions if specified financial performance goals are
achieved. Additional purchase consideration of up to $700,000 in cash will be
paid if certain completed acquisitions achieve targeted annual operating results
in the year following the effective dates of the acquisitions.
COMPONENTS OF REVENUE AND EXPENSES
Dental group practices revenue, net ("Revenue") represents the revenue of
the P.C.s or the Company (in states in which ownership of dental practices by
the Company is permitted), reported at estimated realizable amounts, received
from third-party payors and patients for dental services rendered at the Dental
Offices. Net revenue represents Revenue less amounts retained by the dental
group practices. The amounts retained by dental group practices represent
amounts paid by (i) the P.C.s as salary, benefits and other payments to employed
dentists and hygienists and contracted specialists and (ii) the Company as
salary, benefits and other payments to employed dentists and hygienists and
contracted specialists in states in which it operates and in which ownership of
dental practices by the Company is permitted (currently Wisconsin). The
Company's net revenue is dependent on the Revenue of the dental group practices.
Operating expenses consist of the expenses incurred by the Company in connection
with managing the Dental Offices, including salaries and benefits for personnel
other than dentists and hygienists, dental supplies, dental laboratory fees,
occupancy costs, equipment leases, management information systems and other
expenses related to
30
<PAGE> 32
dental practice operations. The Company also incurs personnel and administrative
expenses in connection with maintaining a corporate function that provides
management, administrative, marketing and development services to the Dental
Offices.
In states in which the ownership of dental practices by non-dentists is
prohibited, the Company derives all of its Revenue from its Management
Agreements with the P.C.s. Under the Management Agreements, the Company assumes
responsibility for the management of all aspects of the dental group practices'
business other than the provision of dental services. The Company receives a
management fee equal to the Company's costs plus the lower of (i) 30% of the
P.C.'s net revenues or (ii) the P.C.'s net pre-tax income. The Company's costs
include all direct and indirect costs, overhead and expenses relating to the
Company's provision of services to the P.C.s under the Management Agreements,
such that substantially all costs associated with the provision of dental
services at the Dental Offices are borne by the Company, other than the
compensation and benefits of the dentists and hygienists who are employed by or
are independent contractors of the P.C.s. The Company is responsible for
preparing and has final authority with respect to annual budgets for the P.C.s
under the Management Agreements. This enables the Company to manage the
profitability of the P.C.s. Under the Management Agreements, the Company
provides the P.C.s with, among other things, the facilities, administrative
personnel and supplies, as well as numerous services, including administrative,
accounting, cash management, financial statements and reports, budgeting
including capital expenditures, recruiting, insurance, managed care contracting,
management information systems, litigation management, billing and collection
services. Each Management Agreement is for a term of 40 years, with automatic
renewal thereafter. Further, each Management Agreement generally may be
terminated by the P.C. only for cause, which includes an uncured breach of the
agreement by the Company, or upon the P.C.'s bankruptcy or voluntary dissolution
and may be terminated by the Company as of any anniversary date of the
Management Agreement upon 90 days' prior written notice.
The Company's Revenue is derived principally from fee-for-service Revenue
and Revenue from capitated managed dental care plans. Fee-for-service Revenue
consists of Revenue of the P.C.s or the Company (in states in which the
ownership of dental practices by the Company is permitted) received from
indemnity dental plans, preferred provider plans and direct payments by patients
not covered by any third-party payment arrangement. Managed dental care Revenue
consists of Revenue of the P.C.s or the Company (in states in which the
ownership of dental practices by the Company is permitted) received from
capitated managed dental care plans, including capitation payments and patient
co-payments. Capitated managed dental care contracts are between dental benefits
organizations, the Company and the P.C.s (except in Wisconsin). Under the
Management Agreements, the Company negotiates and administers these contracts on
behalf of the P.C.s. Under a capitated managed dental care contract, the dental
group practice provides dental services to the members of the dental benefits
organization and receives a fixed monthly capitation payment for each plan
member covered for a specific schedule of services regardless of the quantity or
cost of services to the participating dental group practice obligated to provide
them. This arrangement shifts the risk of utilization of these services to the
dental group practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Dental Offices (other than compensation and benefits of dentists and
hygienists), the risk of over-utilization of dental services at the Dental
Offices under capitated managed dental care plans is effectively shifted to the
Company. In addition, dental group practices participating in a capitated
managed dental care plan often receive co-payments for more complicated or
elective procedures. In contrast, under traditional indemnity insurance
arrangements, the insurance company pays whatever reasonable charges are billed
by the dental group practice for the dental services provided. See
"Business -- Payor Mix."
The Company seeks to increase fee-for-service business at the Dental
Offices by increasing the size of existing offices, opening new offices and
advertising. The Company seeks to supplement this fee-for-service business with
Revenue from contracts with capitated managed dental care plans. In
31
<PAGE> 33
1996, fee-for-service Revenue accounted for 60.8% of the Company's total
Revenue. Fee-for-service Revenue in the Dallas-Fort Worth market increased 21.0%
from 1994 to 1995 and 18.5% from 1995 to 1996. Managed dental care Revenue
increased as a percentage of Revenue over the last three years, from 21.8% in
1994 to 31.6% in 1995 and to 39.2% in 1996, due to the fact that managed dental
care Revenue has increased at a faster rate than fee-for-service Revenue,
principally at the Dallas-Fort Worth Dental Offices. As the Company has
increased capacity by expanding within its existing markets and into new
markets, managed dental care Revenue has contributed to overall higher
utilization of the Company's facilities. Thus, although the Company's
fee-for-service business generally is more profitable than its capitated managed
dental care business on a per-patient and per-procedure basis, capitated managed
dental care business serves to increase facility utilization and dentist
productivity. See "Business."
The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable terms in such contracts. In addition, the profitability of managed
dental care Revenue varies from market to market depending on the level of
capitation payments and co-payments in proportion to the level of benefits
required to be provided. Variations in the relative penetration and popularity
of capitated managed dental care from market to market across the country,
however, make it difficult to determine whether the Company's experience in new
markets will be consistent with its experience in Dallas-Fort Worth. The Company
expects that the level of profitability of its operations in new markets entered
through acquisition will vary depending in part on these factors and may not
replicate or be comparable to the Company's results in Dallas-Fort Worth.
32
<PAGE> 34
RESULTS OF OPERATIONS
As a result of the recent rapid expansion of its business through existing
market development and acquisitions and the Company's limited period of
affiliation with these practices, the Company believes that the period-to-period
comparisons set forth below may not be meaningful.
The following table sets forth the percentages of Revenue represented by
certain items reflected in the Company's consolidated statements of income. The
information contained in the table represents the historical results of the
Company and does not include results of the businesses acquired subsequent to
March 31, 1997. The information that follows should be read in conjunction with
the Consolidated Financial Statements and Notes thereto of the Company, as well
as the pro forma consolidated financial information, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Dental group practices revenue,
net............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Less: amounts retained by dental
group practices................. 31.2 33.2 32.1 32.5 32.8 32.6 34.7
----- ----- ----- ----- ----- ----- -----
Net revenue....................... 68.8 66.8 67.9 67.5 67.2 67.4 65.3
Operating expenses:
Clinical salaries and
benefits..................... 20.8 17.4 16.2 17.0 17.4 16.9 16.9
Other salaries and benefits..... 7.0 6.9 7.2 7.3 8.7 7.4 9.6
Dental supplies................. 5.6 5.4 5.3 6.3 6.2 5.2 6.3
Laboratory fees................. 4.9 4.9 4.5 4.8 4.6 5.1 4.1
Occupancy....................... 4.3 4.2 4.1 3.6 5.4 5.0 5.5
Advertising..................... 2.1 6.0 6.5 5.4 3.4 3.6 2.2
Depreciation and amortization... 2.8 3.2 2.6 2.2 4.0 3.9 3.9
General and administrative...... 11.6 10.2 10.0 8.3 9.9 9.1 10.2
----- ----- ----- ----- ----- ----- -----
59.1 58.2 56.4 54.9 59.6 56.2 58.7
----- ----- ----- ----- ----- ----- -----
Operating income.................. 9.7 8.6 11.5 12.6 7.6 11.2 6.6
Interest expense, net............. 0.9 0.7 0.8 0.7 4.7 4.1 4.0
----- ----- ----- ----- ----- ----- -----
Income before income taxes........ 8.8 7.9 10.7 11.9 2.9 7.1 2.6
Income taxes...................... -- -- -- -- 1.2 2.8 1.0
----- ----- ----- ----- ----- ----- -----
Net income........................ 8.8% 7.9% 10.7% 11.9% 1.7% 4.3% 1.6%
===== ===== ===== ===== ===== ===== =====
</TABLE>
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
Dental group practices revenue, net. Revenue increased from $6.3 million
for the first quarter of 1996 to $14.5 million for the first quarter of 1997, an
increase of $8.2 million, or 129.2%. This increase resulted principally from the
acquisitions of Midwest, Convenient and Arkansas Dental Health in September
1996, November 1996 and January 1997, respectively, which contributed combined
Revenue of $5.6 million for the first quarter of 1997. The acquisition of
MacGregor in February 1996 accounted for $1.3 million of the increase as a
result of being included for three months in 1997 versus two months in 1996.
Dental Offices in the Dallas-Fort Worth market contributed an additional $1.3
million of the increase in Revenue in the first quarter of 1997 as a result of
the opening of three de novo Dental Offices, the physical expansion of six
existing Dental Offices and the acquisition of a solo practice.
Fee-for-service Revenue increased from $3.9 million for the first quarter
of 1996 to $9.1 million for the first quarter of 1997, an increase of $5.2
million, or 133.3%. This increase resulted principally from the acquisitions of
Midwest, Convenient and Arkansas Dental Health, which contributed combined
fee-for-service Revenue of $3.8 million for the first quarter of 1997. The
acquisition of MacGregor accounted for $800,000 of the increase as a result of
being included for three months in 1997 versus two months in 1996. In the
Dallas-Fort Worth market, fee-for-service Revenue increased from $2.5 million
for the first quarter of 1996 to $3.1 million for the first quarter of 1997,
representing an increase of
33
<PAGE> 35
$574,000, or 23.0%. Managed dental care Revenue increased from $2.4 million for
the first quarter of 1996 to $5.4 million for the first quarter of 1997, an
increase of $3.0 million, or 122.5%. This increase resulted in part from the
acquisitions of Midwest, Convenient and Arkansas Dental Health, which
contributed combined managed dental care Revenue of $1.8 million for the first
quarter of 1997. The acquisition of MacGregor accounted for $526,000 of the
increase as a result of being included for three months in 1997 versus two
months in 1996. In the Dallas-Fort Worth market, managed dental care Revenue
increased $687,000, or 40.8%, in the first quarter of 1997 over the first
quarter of 1996. As a percentage of Revenue, fee-for-service Revenue increased
from 61.5% to 62.6% for the first quarters of 1996 and 1997, respectively. See
"-- Components of Revenue and Expenses" above.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $2.1 million for the first quarter of 1996 to
$5.0 million for the first quarter of 1997, an increase of $2.9 million, or
144.1%. The increase was due primarily to the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which together added amounts retained by
dental group practices of $2.1 million for the first quarter of 1997. The
acquisition of MacGregor accounted for $488,000 of the increase as a result of
being included for three months in 1997 versus two months in 1996. In the
Dallas-Fort Worth market, amounts retained by dental group practices increased
$409,000 in the first quarter of 1997, as dentist and hygienist compensation
increased as a result of higher productivity at the Dental Offices. As a percent
of Revenue, amounts retained by dental group practices increased from 32.6% to
34.7% for the first quarters of 1996 and 1997, respectively, resulting from the
acquisition of dental group practices with relatively higher dentist and
hygienist compensation levels than in Dallas-Fort Worth.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $1.1 million for the first quarter of 1996 to $2.4 million for the first
quarter of 1997, an increase of $1.3 million, or 129.8%. The increased clinical
salaries and benefits were due primarily to the increased number of Dental
Offices resulting from the acquisitions of Midwest, Convenient and Arkansas
Dental Health, which added combined clinical salaries of $992,000 for the first
quarter of 1997. The acquisition of MacGregor accounted for $108,000 of the
increase as a result of being included for three months in 1997 versus two
months in 1996. In the Dallas-Fort Worth market, clinical salaries and benefits
increased $284,000 as a result of the opening of three de novo Dental Offices
and the expansion of six Dental Offices. As a percent of Revenue, clinical
salaries and benefits remained constant at 16.9% for the first quarters of 1996
and 1997.
Other salaries and benefits. Other salaries and benefits increased from
$466,000 for the first quarter of 1996 to $1.4 million for the first quarter of
1997, an increase of $921,000, or 197.6%. This increase resulted primarily from
additional managerial infrastructure associated with MacGregor and Midwest as
well as the building of additional corporate infrastructure to manage the
Company's growth. As a percent of Revenue, other salaries and benefits increased
from 7.4% to 9.6% for the first quarters of 1996 and 1997, respectively, as the
first quarter of 1997 reflected a more fully staffed corporate infrastructure.
Dental supplies. Dental supplies expense increased from $327,000 for the
first quarter of 1996 to $912,000 for the first quarter of 1997, an increase of
$585,000, or 178.9%. This increase resulted from the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which added $397,000 of combined dental
supplies expense for the first quarter of 1997. The acquisition of MacGregor
accounted for $45,000 of the increase as a result of MacGregor being included
for three months in 1997 versus two months in 1996. In the Dallas-Fort Worth
market, dental supplies increased $144,000 in the first quarter of 1997 as a
result of greater productivity. As a percent of Revenue, dental supplies expense
increased from 5.2% to 6.3% for the first quarters of 1996 and 1997,
respectively. This increase is due to the incurrence of higher dental supply
expenses at acquired businesses.
Laboratory fees. Laboratory fees increased from $322,000 for the first
quarter of 1996 to $591,000 for the first quarter of 1997, an increase of
$269,000, or 83.5%. This increase resulted from the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which added $133,000 in combined
34
<PAGE> 36
laboratory fees for the first quarter of 1997. The acquisition of MacGregor
accounted for $105,000 of the increase as a result of MacGregor being included
for three months in 1997 versus two months in 1996. In the Dallas-Fort Worth
market, laboratory fees increased $42,000 in the first quarter of 1997 as a
result of greater productivity. As a percent of Revenue, laboratory fees
decreased from 5.1% to 4.1% for the first quarters of 1996 and 1997,
respectively, as a result of the inclusion of an internal lab in the acquisition
of Midwest.
Occupancy. Occupancy expense increased from $318,000 for the first quarter
of 1996 to $800,000 for the first quarter of 1997, an increase of $482,000 or
151.6%. This increase resulted from the acquisitions of Midwest, Convenient and
Arkansas Dental Health, which added a combined $295,000 to occupancy expense for
the first quarter of 1997. The acquisition of MacGregor accounted for $84,000 of
the increase as a result of MacGregor being included for three months in 1997
versus two months in 1996. In the Dallas-Fort Worth market, occupancy expense
increased $94,000 in the first quarter of 1997 as three de novo Dental Offices
were opened and six Dental Offices were expanded. As a percent of Revenue,
occupancy expense increased from 5.0% to 5.5% for the first quarters of 1996 and
1997, respectively, resulting from the assumption of higher-cost leases in
Houston.
Advertising. Advertising expense increased from $225,000 for the first
quarter of 1996 to $325,000 for the first quarter of 1997, an increase of
$100,000, or 44.4%. Increased advertising in the Houston market combined with
MacGregor being included in three months in 1997 versus two months in 1996
accounted for $44,000 of the increase and increased television and print
advertising in the Dallas-Fort Worth market accounted for $26,000 of the
increase. The acquisitions of Midwest, Convenient and Arkansas Dental Health,
which added a combined $30,000 to advertising expense for the first quarter of
1997, accounted for the remainder of the increase. As a percent of Revenue,
advertising expense decreased from 3.6% to 2.2% for the first quarters of 1996
and 1997, respectively. This decrease resulted from leveraging advertising
expense with greater market penetration and the acquisition of Midwest, which
historically has done no television or radio advertising.
Depreciation and amortization. Depreciation and amortization expense
increased from $248,000 for the first quarter of 1996 to $565,000 for the first
quarter of 1997, an increase of $317,000, or 127.8%. This increase was the
result of the acquisitions of Midwest, Convenient and Arkansas Dental Health,
which added combined depreciation and amortization expense of $176,000 for the
first quarter of 1997. The acquisition of MacGregor accounted for $83,000 of the
increase as a result of MacGregor being included for three months in 1997 versus
two months in 1996. Depreciation and amortization expenses for the Dallas-Fort
Worth market increased $66,000 in the first quarter of 1997 as three de novo
Dental Offices were opened and six Dental Offices were expanded. As a percent of
Revenue, depreciation and amortization expense remained constant at 3.9% for the
first quarters of 1996 and 1997.
General and administrative. General and administrative expense increased
from $573,000 for the first quarter of 1996 to $1.5 million for the first
quarter 1997, an increase of $885,000, or 154.5%. This increase resulted from
the acquisitions of Midwest, Convenient and Arkansas Dental Health and the
expansion of the Company's corporate infrastructure to manage growth. As a
percent of Revenue, general and administrative expense increased from 9.1% to
10.1% for the first quarters of 1996 and 1997, respectively. This increase was
due principally to Midwest having higher general and administrative costs as a
percent of Revenue than the Company's operations in Dallas-Fort Worth and the
additional corporate infrastructure in place in the first quarter of 1997.
Operating income. Operating income increased from $712,000 for the first
quarter of 1996 to $962,000 for the first quarter of 1997, an increase of
$250,000, or 35.1%. This increase resulted from the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which added combined operating income of
$450,000 for the first quarter of 1997. Operating income from the Company's
Dallas-Fort Worth operations increased $82,000 in the first quarter of 1997,
which was largely offset by increased corporate expenses due to the development
of corporate infrastructure. As a percent of Revenue, operating income decreased
from 11.3% to 6.6% for the first quarters of 1996 and 1997, respectively.
35
<PAGE> 37
This decrease was primarily the result of adding the Midwest acquisition, which
experienced lower operating margins than the Company's Dallas-Fort Worth
operations.
Interest expense, net. Interest expense, net increased from $259,000 for
the first quarter of 1996 to $579,000 for the first quarter of 1997, an increase
of $320,000, or 123.6%. This increase was attributable to an average of $23.2
million of indebtedness for three months in 1997 incurred under the Credit
Facility for the 1996 Transactions and the acquisitions of Midwest, Convenient
and Arkansas Dental Health compared to an average of $10.5 million of
indebtedness for two months in 1996 incurred under the Credit Facility for the
1996 Transactions.
Income taxes. Income taxes decreased from $174,000 for the first quarter of
1996 to $150,000 for the first quarter of 1997, a decrease of $24,000, or 13.8%.
This decrease is the result of lower net income before taxes, which decreased
from $453,000 for the first quarter of 1996 to $383,000 for the first quarter of
1997, a decrease of $71,000, or 15.5%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Dental group practices revenue, net. Revenue increased from $13.2 million
for 1995 to $36.0 million for 1996, an increase of $22.8 million, or 172.1%.
This increase resulted primarily from the acquisitions of MacGregor in February
1996 and Midwest in September 1996, which contributed Revenue of $12.1 million
and $5.3 million for the 11 months and four months ended December 31, 1996,
respectively. Dental Offices in the Dallas-Fort Worth market contributed an
additional $5.1 million of the increase in Revenue in 1996 resulting from the
opening of two de novo Dental Offices, the physical expansion of six existing
Dental Offices and the acquisition of a solo practice.
Fee-for-service Revenue increased from $9.1 million for 1995 to $21.9
million for 1996, an increase of $12.8 million, or 141.6%, due to acquisitions
in new markets and growth in existing markets. This increase resulted from the
acquisitions of MacGregor and Midwest, which contributed fee-for-service Revenue
of $7.6 million and $3.2 million for the respective periods following the dates
of acquisition. In the Dallas-Fort Worth market, fee-for-service Revenue
increased from $9.1 million for 1995 to $10.7 million for 1996, representing an
increase of $1.6 million, or 18.4%. Managed dental care Revenue increased from
$4.2 million for 1995 to $14.1 million for 1996, an increase of $9.9 million, or
238.4%, due to acquisitions in new markets and growth in existing markets. This
increase resulted in part from the acquisitions of MacGregor and Midwest, which
contributed managed dental care Revenue of $4.5 million and $2.1 million for the
respective periods following the dates of acquisition. In the Dallas-Fort Worth
market, managed dental care Revenue increased $3.3 million, or 80.8%, over 1995.
As a percentage of Revenue, fee-for-service Revenue decreased from 68.4% to
60.8% for 1995 and 1996, respectively, as managed dental care Revenue grew at a
higher rate than fee-for-service Revenue. See "-- Components of Revenue and
Expenses" above.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $4.3 million for 1995 to $11.8 million for 1996,
an increase of $7.5 million, or 174.4%. The increase was primarily due to the
acquisitions of MacGregor and Midwest which added amounts retained by dental
group practices of $3.8 million and $1.9 million for the respective periods
following the dates of acquisition. In the Dallas-Fort Worth market, amounts
retained by dental group practices increased $1.6 million as dentist and
hygienist compensation generally increased in relation to increased productivity
at the Dental Offices. As a percent of Revenue, amounts retained by dental group
practices increased from 32.5% to 32.8% for 1995 and 1996, respectively.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $2.2 million for 1995 to $6.3 million for 1996, an increase of $4.1
million, or 179.0%. The increased clinical salaries and benefits were due
primarily to the increased number of Dental Offices resulting from the
acquisitions of MacGregor and Midwest which added clinical salaries of $2.0
million and $1.0 million for the respective periods following the dates of
acquisition. As a percent of Revenue, clinical salaries and benefits increased
from 17.0% to 17.4% for 1995 and 1996, respectively, as a result of higher
salary costs in the acquired Dental Offices.
36
<PAGE> 38
Other salaries and benefits. Other salaries and benefits increased from
$971,000 for 1995 to $3.1 million for 1996, an increase of $2.1 million, or
222.0%. This increase resulted primarily from additional corporate
infrastructure associated with MacGregor and Midwest as well as the building of
additional corporate infrastructure in 1996 to manage growth. As a percent of
Revenue, other salaries and benefits increased from 7.3% to 8.7% for 1995 and
1996, respectively.
Dental supplies. Dental supplies expense increased from $833,000 for 1995
to $2.2 million for 1996, an increase of $1.4 million, or 166.0%. This increase
resulted primarily from the acquisitions of MacGregor and Midwest, which added
$688,000 and $442,000 of dental supplies expense for the respective periods
following the dates of acquisition. As a percent of Revenue, dental supplies
expense remained relatively constant at 6.3% and 6.2% for 1995 and 1996,
respectively.
Laboratory fees. Laboratory fees increased from $633,000 for 1995 to $1.6
million for 1996, an increase of $1.0 million, or 160.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $753,000 and
$25,000 to laboratory fees for the respective periods following the dates of
acquisition. As a percent of Revenue, laboratory fees decreased slightly from
4.8% to 4.6% for 1995 and 1996, respectively.
Occupancy. Occupancy expense increased from $471,000 for 1995 to $1.9
million for 1996, an increase of $1.4 million, or 311.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $766,000 and
$346,000 to occupancy expense for the respective periods following the dates of
acquisition. As a percent of Revenue, occupancy expense increased from 3.6% to
5.4% for 1995 and 1996, respectively, reflecting the assumption of higher-cost
leases in Houston.
Advertising. Advertising expense increased from $710,000 for 1995 to $1.2
million for 1996, an increase of $490,000, or 70.4%. This increase was the
result of advertising in the Houston market at a cost of $326,000 for the 11
months ended December 31, 1996 and an increase of $162,000 in television and
print advertising in the Dallas-Fort Worth market in 1996. As a percent of
Revenue, advertising expense decreased from 5.4% to 3.4% for 1995 and 1996,
respectively. This decrease resulted from leveraging advertising expense with
greater market penetration and the acquisition of Midwest which has not
conducted television or radio advertising.
Depreciation and amortization. Depreciation and amortization expense
increased from $293,000 for 1995 to $1.4 million for 1996, an increase of $1.1
million, or 388.1%. This increase was primarily the result of the acquisitions
of MacGregor and Midwest, which added depreciation and amortization expense of
$730,000 and $178,000 for the respective periods following the dates of
acquisition. Depreciation and amortization expense for the Dallas-Fort Worth
operations increased $226,000 as two de novo Dental Offices were opened and six
Dental Offices were expanded. As a percent of Revenue, depreciation and
amortization expense increased from 2.2% to 4.0% for 1995 and 1996,
respectively.
General and administrative. General and administrative expense increased
from $1.1 million for 1995 to $3.6 million for 1996, an increase of $2.5
million, or 224.3%. This increase resulted primarily from the acquisitions of
MacGregor and Midwest during 1996 and the expansion of the Company's corporate
infrastructure in 1996 to manage growth. As a percent of Revenue, general and
administrative expense increased from 8.3% to 9.9% for 1995 and 1996,
respectively. This increase was due principally to MacGregor and Midwest having
higher general and administrative costs as a percent of Revenue than the
Company's operations in Dallas-Fort Worth.
Operating income. Operating income increased from $1.7 million for 1995 to
$2.8 million for 1996, an increase of $1.1 million, or 67.0%. This increase
resulted from the addition of MacGregor and Midwest which added operating income
of $966,000 and $213,000 for the respective periods following the dates of
acquisition. Income from the Company's Dallas-Fort Worth operations increased
$781,000 in 1996, which was largely offset by increased expenses due to the
development of corporate infrastructure. As a percent of Revenue, operating
income decreased from 12.6% in 1995 to 7.6% in 1996. This decrease was primarily
the result of adding the MacGregor and Midwest acquisitions, which experienced
lower operating margins than the Company's Dallas-Fort Worth operations.
37
<PAGE> 39
Interest expense, net. Interest expense, net increased from $87,000 for
1995 to $1.7 million for 1996, an increase of $1.6 million, or 1,839.1%. This
increase is attributable to $17.4 million of indebtedness incurred under the
Credit Facility in connection with the 1996 Transactions and an additional $5.0
million of indebtedness incurred under the Credit Facility in connection with
the acquisition of Midwest.
Income taxes. Income taxes for 1996 were $425,000, representing an
effective tax rate of 38.7%. Prior to February 6, 1996, the Company had elected
to be treated as an S corporation for federal income tax purposes and,
therefore, no income tax expense was recorded for the year ended December 31,
1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Dental group practices revenue, net. Revenue increased from $9.6 million
for 1994 to $13.2 million for 1995, an increase of $3.6 million, or 38.3%. This
increase was due to expansion in the Dallas-Fort Worth market, including the
opening of two de novo Dental Offices.
Fee-for-service Revenue increased from $7.5 million for 1994 to $9.1
million for 1995, an increase of $1.6 million, or 21.0%, due to growth in the
Dallas-Fort Worth market. Managed dental care Revenue increased from $2.1
million for 1994 to $4.2 million for 1995, an increase of $2.1 million, or
100.5%, due to growth in the Dallas-Fort Worth market. As a percentage of
Revenue, fee-for-service Revenue decreased from 78.2% to 68.4% for 1994 and
1995, respectively. See "-- Components of Revenue and Expenses" above.
Amounts retained by dental group practices. Amounts retained by dental
groups increased from $3.1 million for 1994 to $4.3 million for 1995, an
increase of $1.2 million, or 40.1%. The increase was due primarily to higher
dentist compensation in 1995 compared to 1994, resulting from increased
productivity at the Dental Offices. As a percent of Revenue, amounts retained by
dental group practices increased from 32.1% to 32.5% for 1994 and 1995,
respectively.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $1.6 million for 1994 to $2.2 million for 1995, an increase of $600,000, or
44.4%. The increased clinical salaries and benefits resulted primarily from
higher patient volume which required increased staffing. As a percent of
Revenue, clinical salaries and benefits increased from 16.2% to 17.0% for 1994
and 1995, respectively, principally as a result of two de novo Dental Offices
opened in 1995 being fully staffed although in a start-up phase.
Other salaries and benefits. Other salaries and benefits increased from
$688,000 for 1994 to $971,000 for 1995, an increase of $283,000, or 41.1%. This
increase was principally due to increased executive compensation and staffing
levels. As a percent of Revenue, other salaries and benefits remained relatively
constant at 7.2% and 7.3% for 1994 and 1995, respectively.
Dental supplies. Dental supplies expense increased from $509,000 for 1994
to $833,000 for 1995, an increase of $324,000, or 63.7%. As a percent of
Revenue, dental supplies expense increased from 5.3% to 6.3% for 1994 and 1995,
respectively. These increases were due primarily to increased patient volume in
1995 relative to 1994 and to the initial stocking of dental supplies for the two
de novo Dental Offices opened in 1995.
Laboratory fees. Laboratory fees increased from $430,000 for 1994 to
$633,000 for 1995, an increase of $203,000, or 47.2%. As a percent of Revenue,
laboratory fees increased from 4.5% to 4.8% for 1994 and 1995, respectively.
Occupancy. Occupancy expense increased from $392,000 for 1994 to $471,000
for 1995, an increase of $79,000, or 20.2%, due primarily to the opening of two
de novo Dental Offices and the full year effect of occupancy expense in one de
novo Dental Office opened in the fourth quarter of 1994. As a percent of
Revenue, occupancy expense decreased from 4.1% to 3.6% for 1994 and 1995,
respectively.
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<PAGE> 40
Advertising. Advertising expense increased from $626,000 for 1994 to
$710,000 for 1995, an increase of $84,000, or 13.4%, due to additional
television and print advertising. As a percent of Revenue, advertising expense
decreased from 6.5% to 5.4% for 1994 and 1995, respectively. This decrease
resulted from leveraging advertising expense with greater market penetration.
Depreciation and amortization. Depreciation and amortization expense
increased from $251,000 for 1994 to $293,000 for 1995, an increase of $42,000,
or 16.7%, due to the opening of two de novo Dental Offices in 1995. As a percent
of Revenue, depreciation and amortization expense decreased from 2.6% to 2.2%
for 1994 and 1995, respectively.
General and administrative. General and administrative expense increased
from $952,000 for 1994 to $1.1 million for 1995, an increase of $148,000, or
15.4%, due to increased corporate expenses incurred in 1995. As a percent of
Revenue, general and administrative expense decreased from 10.0% to 8.3% for
1994 and 1995, respectively.
Operating income. Operating income increased from $1.1 million in 1994 to
$1.7 million in 1995, an increase of $600,000 or 53.4%. As a percent of Revenue,
operating income increased from 11.5% to 12.6%. These increases were the result
of increasing operating efficiencies in the Company's Dallas-Fort Worth
operations.
Interest expense, net. Interest expense, net, increased from $81,000 for
1994 to $87,000 for 1995, an increase of $6,000, or 7.4%.
39
<PAGE> 41
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth unaudited quarterly consolidated operating
results for each of the Company's last five quarters as well as such data
expressed as a percentage of Revenue for the periods indicated. This information
has been prepared by the Company on a basis consistent with the Company's
audited consolidated financial statements and includes all adjustments
(consisting only of normal recurring adjustments) that management considers
necessary for a fair presentation of the data. These quarterly consolidated
results are not necessarily indicative of future consolidated results of
operations. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
-------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Dental group practices revenue, net.......... $6,316 $7,526 $9,178 $12,960 $14,476
Less: Amounts retained by dental group
practices.................................. 2,060 2,358 2,967 4,417 5,029
------ ------ ------ ------- -------
Net revenue.................................. 4,256 5,168 6,211 8,543 9,447
Operating expenses:
Clinical salaries and benefits............. 1,065 1,266 1,608 2,320 2,447
Other salaries and benefits................ 466 684 836 1,141 1,387
Dental supplies............................ 327 435 517 937 912
Laboratory fees............................ 322 416 403 507 591
Occupancy.................................. 318 393 497 729 800
Advertising................................ 225 349 345 291 325
Depreciation and amortization.............. 248 313 374 495 565
General and administrative................. 573 726 960 1,305 1,458
------ ------ ------ ------- -------
3,544 4,582 5,540 7,725 8,485
------ ------ ------ ------- -------
Operating income............................. 712 586 671 818 962
Interest expense, net........................ 259 409 467 552 579
------ ------ ------ ------- -------
Income before income taxes................... 453 177 204 266 383
Income taxes................................. 174 71 79 101 150
------ ------ ------ ------- -------
Net income................................... $ 279 $ 106 $ 125 $ 165 $ 233
====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dental group practices revenue, net.......... 100.0% 100.0% 100.0% 100.0% 100.0%
Less: Amounts retained by dental group
practices.................................. 32.6 31.3 32.3 34.1 34.7
------ ------ ------ ------- -------
Net revenue.................................. 67.4 68.7 67.7 65.9 65.3
Operating expenses:
Clinical salaries and benefits............. 16.9 16.8 17.5 17.9 16.9
Other salaries and benefits................ 7.4 9.1 9.1 8.8 9.6
Dental supplies............................ 5.2 5.8 5.6 7.2 6.3
Laboratory fees............................ 5.1 5.5 4.4 3.9 4.1
Occupancy.................................. 5.0 5.2 5.4 5.6 5.5
Advertising................................ 3.6 4.7 3.8 2.2 2.2
Depreciation and amortization.............. 3.9 4.1 4.1 3.8 3.9
General and administrative................. 9.1 9.6 10.5 10.1 10.2
------ ------ ------ ------- -------
56.2 60.8 60.4 59.5 58.7
------ ------ ------ ------- -------
Operating income............................. 11.2 7.9 7.3 6.4 6.6
Interest expense, net........................ 4.1 5.4 5.1 4.3 4.0
------ ------ ------ ------- -------
Income before income taxes................... 7.1 2.5 2.2 2.1 2.6
Income taxes................................. 2.8 0.9 0.9 0.8 1.0
------ ------ ------ ------- -------
Net income................................... 4.3% 1.6% 1.3% 1.3% 1.6%
====== ====== ====== ======= =======
</TABLE>
40
<PAGE> 42
The Company's operating results may vary from quarter-to-quarter. During
1996, for example, factors including the acquisitions of businesses with lower
operating margins, amortization of intangibles recorded as a result of such
acquisitions and the building of corporate infrastructure to accommodate growth
contributed to successive declines in operating income as a percentage of
Revenue for each quarter-to-quarter period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had a $3.9 million working capital deficit,
representing an increase of $116,000 from the working capital deficit of $4.0
million at December 31, 1996. This working capital deficit included $8.9 million
in current liabilities, including $912,000 in accounts payable, $1.2 million in
accrued liabilities, $1.3 million in amounts payable to dental group practices
as consideration for accounts receivable acquired from such group practices and
$3.6 million in current maturities of notes payable and capital lease
obligations. These current liabilities were partially offset by current assets,
including $446,000 in cash and cash equivalents and $4.3 million in accounts
receivable, net of allowances. The Company's principal sources of liquidity as
of March 31, 1997 consisted of cash and cash equivalents, net accounts
receivable and borrowing capacity under the Credit Facility. The repayment of
$18.2 million of indebtedness under the Credit Facility with a portion of the
net proceeds from this offering and the retention of a portion of the net
proceeds for general corporate purposes will reduce the Company's working
capital deficit. There can be no assurance the Company will not have working
capital deficits in the future, particularly if additional indebtedness requires
current amortization of principal.
The Company has financed its acquisitions, capital expenditures and working
capital needs through a combination of borrowings under the Credit Facility,
private sales of preferred stock and Common Stock, the issuance of unsecured
promissory notes, the assumption of equipment financing and other indebtedness
and cash from operations.
For the quarters ended March 31, 1996 and 1997, cash provided by operations
was $716,000 and $472,000, respectively. During the quarters ended March 31,
1996 and 1997, the Company's net income was reduced primarily as a result of
non-cash expenses. For 1995 and 1996, cash provided by operations was $1.8
million and $2.3 million, respectively. During 1995 and 1996, the Company's net
income was reduced primarily as a result of non-cash expenses.
Cash used in investing activities was $16.8 million for the quarter ended
March 31, 1996 and $3.1 million for the quarter ended March 31, 1997. In the
quarter ended March 31, 1996, $16.5 million was utilized for acquisitions and
$252,000 was invested in the purchase of additional property and equipment. In
the quarter ended March 31, 1997, $2.7 million was utilized for acquisitions and
$384,000 was invested in the purchase of additional property and equipment. Cash
used in investing activities was $713,000 in 1995 and $23.4 million in 1996. In
1995, the Company invested in the purchase of additional property and equipment
for its Dallas-Fort Worth operations. In 1996, $22.3 million was utilized for
acquisitions and $1.2 million was invested in the purchase of additional
property and equipment.
For the quarters ended March 31, 1996 and 1997, cash provided by financing
activities was $16.9 million and $2.0 million, respectively. In the quarter
ended March 31, 1996, the cash provided was comprised of $15.6 million in net
borrowings and $9.3 million in proceeds from the issuance of stock, partially
offset by $6.7 million used to repurchase stock and $1.3 million in
distributions to the Company's then sole stockholder. In the quarter ended March
31, 1997, the cash provided was comprised of $1.7 million in proceeds from the
issuance of stock and $334,000 in net borrowings. Cash used in financing
activities for 1995 totaled $780,000. This was comprised of $1.1 million that
was distributed to the Company's then sole stockholder, partially offset by net
borrowings of $325,000. Cash provided by financing activities was $21.5 million
in 1996. This was comprised of $19.5 million in net borrowings and $10.7 million
in proceeds from the issuance of stock, partially offset by $6.7 million
utilized to repurchase stock and $2.0 million in distributions to the Company's
then sole stockholder.
41
<PAGE> 43
The Company has a Credit Facility, which expires August 29, 1999, with a
bank. Under the Credit Facility, the Company may borrow up to $30.0 million,
including up to $2.0 million for working capital needs. As of March 31, 1997,
the Company had outstanding borrowings of $22.0 million under the Credit
Facility. Working capital borrowings outstanding may at no time exceed a
specified borrowing base based on a percentage of eligible accounts receivable.
At March 31, 1997, the borrowing base under this formula was $2.8 million. The
amounts outstanding under the Credit Facility bear interest at variable rates
which are based upon either the lender's base rate or LIBOR, plus, in either
case, a margin which varies according to the ratio of the Company's funded debt
to Adjusted EBITDA, each as defined in the Credit Facility. The Credit Facility
prohibits the payment of dividends and other distributions to stockholders and
restricts or prohibits the Company from incurring indebtedness, incurring liens,
disposing of assets, making investments or making acquisitions, and requires the
Company to maintain certain financial ratios on an ongoing basis. The Credit
Facility is secured by pledges of all of the outstanding capital stock of, or
other equity interests in, the Company's subsidiaries, and a lien on
substantially all of the assets of the Company. After completion of this
offering, the Company expects to negotiate a new credit facility, although there
can be no assurance that it will be able to do so.
The Company made capital expenditures of $384,000 in the first quarter of
1997, principally for the opening of one de novo Dental Office and the purchase
of other fixed assets. The Company made capital expenditures of $1.2 million in
1996, principally for the opening of two de novo Dental Offices and the
expansion of six existing Dental Offices in the Dallas-Fort Worth market. The
establishment of additional de novo Dental Offices and the expansion of existing
Dental Offices in the future will require ongoing capital expenditures.
The net proceeds from this offering will enable the Company to repay a
significant portion of outstanding indebtedness under the Credit Facility and to
redeem all Redeemable Preferred Stock to be issued upon the conversion of the
Company's Convertible Participating Preferred Stock at the completion of this
offering. The Company believes that the remaining net proceeds from this
offering, together with cash generated from operations, will be sufficient to
fund its anticipated working capital needs and capital expenditures (other than
financing necessary to complete future acquisitions) for at least the next 12
months. The Company expects to fund future acquisitions (including the
acquisition of Indiana Dental) with cash from operations and borrowings under a
new senior credit facility. In the event the Company is not able to successfully
negotiate a new senior credit facility or identifies and completes future
acquisitions more quickly than it currently anticipates, the Company's current
sources of liquidity may not be adequate. In addition, in order to meet its
long-term liquidity needs the Company may issue additional equity and debt
securities, subject to market and other conditions. There can be no assurance
that such additional financing will be available on terms acceptable to the
Company. The failure to raise the funds necessary to finance its future cash
requirements could adversely affect the Company's ability to pursue its strategy
and could negatively affect its operations in future periods. See "Risk
Factors -- Limited Capital; Need for Additional Financing."
42
<PAGE> 44
BUSINESS
The Company manages dental group practices in selected markets, presently
including Dallas-Fort Worth, Houston, Wisconsin and Arkansas. Dentists
practicing at the Company's Dental Offices provide general dentistry services
such as examinations, cleanings, fillings, bonding, placing crowns and fitting
and placing fixed or removable prostheses. At many of the Company's Dental
Offices, dentists also provide specialty dental services such as orthodontics,
oral surgery, endodontics, periodontics and pediatric dentistry. The Company
seeks to build geographically dense networks of dental providers by expanding
within its existing markets and entering new markets through acquisition. At May
31, 1997, the Company owned and managed 67 Dental Offices, of which 16 were
internally developed and 51 were acquired by the Company. At May 31, 1997, 123
full-time general dentists and 13 full-time specialists practiced at the
Company's Dental Offices.
THE DENTAL SERVICES INDUSTRY
The dental services industry in the United States is highly fragmented.
Dental services typically are offered by local providers, primarily solo
practitioners or small groups of general dentists or specialists, practicing at
a single location. According to the American Dental Association (the "ADA") 1995
Distribution of Dentists in the United States by Region and State report, there
were approximately 153,300 active dental professionals in the United States.
Further, according to the ADA 1995 Survey of Dental Practice, nearly 88% of all
dentists practiced either alone or with one other dentist.
Consumer demand for dental services is increasing. Expenditures in the
dental services market grew at a compound annual rate of approximately 8.1% from
1980 to 1995. The growth in dental expenditures has resulted principally from
the increased availability of various forms of dental insurance, an increase in
the need for dental services as the United States population ages and an
increase in the demand for preventive and cosmetic dentistry. The United States
Health Care Financing Administration ("HCFA") has reported that the aggregate
domestic market for dental services in 1995 was $45.8 billion, representing
approximately 4.6% of total health care expenditures in the United States. HCFA
has projected that dental expenditures will reach $79.1 billion by the year
2005, representing a compound annual growth rate of approximately 5.6% through
the year 2005. Although the number of practicing dentists in the United States
relative to the total United States population has increased in recent years,
the ADA has recently projected growth in the number of dentists in private
practice from 1995 through 2020 of 11.1%, or less than 0.5% per annum. This rate
is below the projected annual growth rate of 0.8% for the United States
population over the same period.
Historically, most dental patients paid for dental services on an
out-of-pocket basis rather than through third-party payment arrangements. More
recently, the dental services industry has experienced a significant increase in
third-party payment arrangements such as indemnity insurance, preferred provider
payment plans and capitated managed dental care plans, which are often provided
by employers seeking to offer enhanced benefits to their employees. From 1980 to
1995, payments for dental services by private insurance companies in the United
States grew at a compound annual rate of 12.4%, from approximately $3.8 billion
to approximately $22.0 billion. Under an indemnity insurance plan, the patient
or the patient's employer pays insurance premiums and the insurance company
reimburses the dentist for all or a portion of the dentist's usual and customary
fee, with the patient paying the portion not covered by the insurance company.
Under preferred provider plans, dentists agree to provide dental services to
plan members on a discounted fee-for-service basis. Capitated managed dental
care plans typically pay participating dentists a fixed monthly amount for each
plan member covered for a specified schedule of services regardless of the
quantity or cost of services to the participating dentists, thereby shifting the
risk of utilization to the dentists. The National Association of Dental Plans
has estimated that 117 million or 46.7% of individuals in the United States in
1995 were covered by some form of dental care plan, with 31.4% of individuals
covered by dental indemnity insurance, 9.0% of individuals covered by capitated
managed dental care plans and 6.3% of individuals
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<PAGE> 45
covered by preferred provider payment plans. The remaining 139 million or 53.3%
of individuals in the United States in 1995 did not have coverage under any
third-party payment arrangement.
The Company believes that an increasing portion of the United States
population is obtaining coverage under preferred provider and capitated managed
dental care plans and that this presents opportunities for larger dental
practice management companies. Group practices with comprehensive networks of
dental providers in particular markets can offer these plans the ability to
enter these markets more quickly and to service their plan members more
efficiently than contracting through solo or smaller group practices. As a
result, having an extensive provider network can provide a group practice with
advantages in establishing and maintaining relationships with such plans,
including greater leverage than that of solo or smaller group practices when
negotiating provider agreements.
In recent years, general dental, orthodontic and other specialty practices
increasingly have formed larger group practices, following the consolidation
trend seen elsewhere in the health care industry. In these practices a separate
professional management team handles practice management functions such as
staffing, billing, information systems, managed care contracting, leasing,
purchasing and marketing, thereby enabling the dental professionals to focus on
providing high quality dental services. Several factors have contributed to the
increased formation of larger group practices in the dental services industry.
These include the increasing complexity of managing a dental practice due, in
part, to the shift to third-party reimbursement, the economies of scale
achievable in such areas as administration, purchasing and advertising, the need
for cost-effective management of patient care, the desire to capture revenues
from higher-margin specialty procedures, which would otherwise be referred to
independent specialists, and the growing importance of capital resources to
acquire and maintain state-of-the-art dental equipment, clinical facilities and
management information systems.
BUSINESS STRATEGY
The Company's objective is to be a leading dental practice management
company in each of its markets. The Company's strategy includes the following
key elements:
Expand in Existing Markets. The Company generates growth within its
existing markets by increasing patient volume and fees in existing Dental
Offices, either on a per-patient or per-procedure basis, by increasing the
physical space of existing Dental Offices to accommodate more single-chair
operatories and multi-chair specialty bays, and by opening Dental Offices on a
de novo basis. The Company intends to focus increasingly on acquisitions of solo
and smaller dental group practices within its existing markets as an additional
means of generating growth. Revenue from the Company's Dallas-Fort Worth
operations increased $3.6 million, or 38.3%, to $13.2 million in 1995, and
increased $5.1 million, or 38.1%, to $18.3 million in 1996. Operating income for
the Company's Dallas-Fort Worth operations increased $694,000, or 52.7%, to $2.0
million in 1995 and increased $805,000, or 40.0%, to $2.8 million in 1996.
However, there can be no assurance that the Company's revenue and operating
income in this market will continue to grow at these historical rates or that
the Company's operations in other markets will grow at rates comparable to those
experienced in Dallas-Fort Worth.
Enter New Markets. The Company enters selected new markets by acquiring
dental group practices which have a significant market presence or which the
Company believes can achieve such a presence in the near term. The Company then
seeks to use the acquired dental group practice as a "pedestal" from which to
expand by executing its existing market growth strategies. In 1996, the Company
entered three new markets, Houston, Wisconsin and Arkansas. In June 1997, the
Company entered into a definitive agreement to acquire a dental group practice
in Indiana.
Advertise and Market Dental Services. The Company seeks to increase patient
volume through television, radio and print advertising and other marketing
techniques. The Company emphasizes regional brand name recognition of its
affiliated Dental Offices, quality of care, comprehensive specialty services,
affordable payment plans for more complex procedures and patient satisfaction.
The Company complements its marketing program with patient call centers to
provide scheduling, informational and patient follow-up services. The Company
also supports its marketing program by
44
<PAGE> 46
offering convenient hours, selecting favorable locations for its Dental Offices,
offering same-day emergency care and introducing or expanding specialty services
at the Dental Offices. The Company's objective is to leverage its existing
advertising programs to generate revenue as it expands within its markets.
Manage Payor Mix. The Company seeks to optimize revenue mix at the Dental
Offices between revenue from fee-for-service business and revenue from capitated
managed dental care plans. The Company focuses on fee-for-service business
(which includes fees paid by indemnity insurers, fees from preferred provider
plans and direct patient billings) and supplements this business with revenue
derived from contracts with capitated managed dental care plans, thereby
increasing dentist productivity and facility utilization. In 1996,
fee-for-service Revenue accounted for approximately 60.8% of the Company's
Revenue, while Revenue from contracts with capitated managed dental care plans
accounted for approximately 39.2%.
Achieve Operational Efficiencies and Build Provider Networks. The Company
seeks to achieve operational efficiencies based on the best practices identified
in its affiliated groups. The Company adapts and implements these practices
throughout its provider networks, when appropriate, to (i) reduce purchasing and
administrative expenses, (ii) improve operational efficiencies in such areas as
scheduling, billing and personnel management and (iii) introduce and standardize
patient record keeping, treatment protocols and technique utilization. The
Company establishes and maintains geographically dense networks of dentists in
each of its markets. The Company believes these networks provide it with
advantages in establishing and maintaining relationships with capitated managed
dental care plans and other third-party payors.
EXPANSION
The Company emphasizes expansion within its existing markets and entry into
selected new markets by acquiring group practices which have a significant
market presence or which the Company believes can achieve such a presence in the
near term. Following each acquisition in a new market, the Company seeks to use
the acquired practice as a "pedestal" from which to expand by executing its
existing market growth strategies.
The following table sets forth the increase in the number of Dental Offices
owned and managed by the Company during each of the years indicated, including
the number of de novo Dental Offices and acquired Dental Offices in each such
year.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Offices at beginning of the period............. 8 9 10 12 53
De novo Offices................................ 1 1 2 2 2
Acquired Offices............................... - - - 39 12
-- -- -- -- --
Offices at end of the period................... 9 10 12 53 67
== == == == ==
</TABLE>
- ------------------------------
(1) Through May 31, 1997
Expansion Within Existing Markets. The Company's strategies for growth
within its existing markets include expanding existing Dental Offices, opening
de novo Dental Offices and acquiring solo practices and smaller group practices.
Historically, the Company has expanded its operations in its existing markets
principally through expansion of existing Dental Offices and establishment of de
novo Dental Offices rather than through acquisitions. The Company recently
completed its first acquisition of a solo practice in an existing market
(Dallas-Fort Worth) and intends to focus increasingly on the acquisition of solo
and smaller group practices within existing markets.
Expansion of an existing Dental Office typically involves increasing the
physical space of the Dental Office to accommodate more single-chair operatories
and multi-chair specialty bays. This
45
<PAGE> 47
permits the addition of general dentists, specialists, hygienists and dental
assistants. The Company expanded the physical space at six Dental Offices in the
Dallas-Fort Worth market in 1996.
The Company considers a number of factors when establishing a de novo
Dental Office or acquiring a solo or smaller group practice in an existing
market. The factors considered include location, current geographic coverage by
existing Dental Offices, demographics, expandability, profit potential, the
needs of managed dental care plans and other large payors and the availability
of managed dental care patients, as these patients can provide a new Dental
Office with a reliable source of revenue until the Dental Office can build or
expand its own fee-for-service patient base.
The average investment by the Company in the four de novo Dental Offices
opened since January 1, 1996 has been approximately $235,000, which includes the
cost of equipment, leasehold improvements and working capital associated with
the initial operations. The three de novo Dental Offices opened between January
1, 1996 and March 31, 1997 began contributing operating income to the Company
within three months of opening (the fourth de novo was opened in May 1997 and
had not yet begun contributing operating income at May 31, 1997). Future de novo
Dental Offices, however, may require a greater investment by the Company and may
not begin contributing operating income to the Company within that period of
time. The Company expenses operating costs (other than costs related to fixed
assets) in connection with the establishment of a de novo Dental Office as these
costs are incurred rather than capitalizing them.
Expansion to New Markets. Since January 1, 1996, the Company has entered
three new markets through five acquisitions. Prior to entering a new market, the
Company considers the population, demographics, market potential, competitive
environment, supply of available dentists, needs of managed care plans or other
large payors and general economic conditions within the market. The Company
seeks to identify and acquire group practices which have a significant market
presence or which the Company believes can achieve such a presence in the near
term. Factors the Company emphasizes when considering the acquisition of a
dental group practice include strong local reputation, large patient base,
profitability, convenient locations, high patient volume per dentist, low
malpractice claims history, favorable education credentials of the dentists and
strong references. In addition, the existence of a high quality local management
team that will remain actively involved in the business following the
acquisition is important to the Company's acquisition strategy. The Company
identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers.
Pending Acquisition. In June 1997, the Company entered into a definitive
agreement to acquire Indiana Dental for an aggregate purchase price of $3.6
million, consisting of $1.8 million in shares of Common Stock (valued at the
initial public offering price) and cash of approximately $1.8 million expected
to be funded from borrowings. Additional purchase consideration consists of (i)
options to purchase up to 40,000 shares of Common Stock which will be granted
over five years following the effective date of the acquisition if specified
financial performance goals are achieved and (ii) an additional, formula-based
amount of cash and Common Stock which will be paid if targeted annual operating
results are achieved in the current fiscal year. This offering is not
conditioned upon the closing of the acquisition of Indiana Dental and, except as
specifically stated herein, all information contained herein regarding the
Company and its business excludes Indiana Dental. Indiana Dental is an
Indiana-based dental practice which operates 11 dental offices with 14 dentists
and had $3.6 million in revenue for the year ended December 31, 1996. The
Company anticipates that the closing of the Indiana Dental acquisition will
occur on or about the commencement of this offering. There can be no assurance,
however, that the Indiana Dental acquisition will be completed.
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<PAGE> 48
DENTAL SERVICES
Dentists practicing at the Dental Offices provide general dentistry
services such as examinations, cleanings, fillings, bonding, placing crowns and
fitting and placing fixed or removable prostheses. At many of the Company's
Dental Offices, dentists also provide specialty dental services such as
orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry.
Specialty dental services are typically offered through teams which rotate
through several Dental Offices in a particular market. This enables the P.C.s or
the Company, as applicable, to capture revenue from services that would
otherwise be referred to independent specialists.
Except with respect to Dental Offices located in states in which the
ownership of dental practices by non-dentists is permitted, dental services
provided at the Dental Offices are provided by or under the supervision of
licensed dentists employed by or under independent contracts with the P.C.s. In
states in which the Company operates and in which the ownership of dental
practices by non-dentists is permitted (currently Wisconsin), dental services
provided at the Dental Offices are provided by or under the supervision of
licensed dentists employed by or under independent contracts with the Company.
See "-- Affiliation Structure -- Relationship with P.C.s." The Company owns all
of the operating assets of each of the Dental Offices, including inventory,
equipment, leases and leasehold improvements. The Company typically equips its
Dental Offices with state-of-the-art clinical and diagnostic equipment such as
fiber optic handpieces, intraoral video cameras and panoramic and cephalometric
X-ray equipment.
The following table shows the principal areas in which the Company owns and
manages Dental Offices, the number of Dental Offices and dentists in each area
at May 31, 1997, the year that each practice was established and the effective
date of each practice's affiliation with the Company:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS(1) FOUNDED OF ACQUISITION
--------------------- -------------- ------------ ------- -----------------
<S> <C> <C> <C> <C>
Monarch, Dallas-Fort Worth...... 16 48 1983 N/A
MacGregor, Houston.............. 16 36 1962 February 1, 1996
Midwest, Wisconsin.............. 22 32 1975 September 1, 1996
Convenient, Arkansas............ 1 3 1982 November 1, 1996
Arkansas Dental Health,
Arkansas...................... 3 5 1984 January 1, 1997
United, Arkansas................ 9 12 1990 April 1, 1997
-- ---
Total......................... 67 136
</TABLE>
- ------------------------------
(1) Includes full-time general dentists employed by the Company or the P.C.s, as
applicable, and full-time specialists, most of whom are independent
contractors.
The attributes of the Dental Offices vary from market to market. In urban
and suburban areas a Dental Office may have, for example, 15 or more
single-chair operatories, a multi-chair specialty bay, several full-time general
dentists, several dental hygienists and dental assistants, a business manager
and a receptionist. In more rural markets, a Dental Office may have, for
example, only three or four single chair operatories, and be staffed by one
general dentist, one hygienist or dental assistant and a receptionist. One
general dentist, designated as the Dental Director, oversees professional
matters at each Dental Office.
ADVERTISING AND MARKETING
The Company seeks to increase patient volume at the Dental Offices through
television, radio and print advertising and other marketing techniques. The
Company has developed these techniques over the past 14 years in its Dallas-Fort
Worth operations and adapts them for use in its other markets as appropriate.
The Company's advertising emphasizes regional brand name recognition of its
affiliated Dental Offices, quality of care, comprehensive specialty services,
affordable payment plans for more complex procedures and patient satisfaction.
The Company operates as "Monarch(TM) Dental" or under
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<PAGE> 49
established regional brand names, such as "MacGregor Dental Centers(SM)" in
Houston and "Midwest Dental(SM)" in Wisconsin, depending on the nature and
requirements of the relevant market. The Company believes the brand name
recognition by consumers and managed dental care payors generated by its
advertising programs has contributed to its growth.
The Company complements its advertising and marketing programs in
Dallas-Fort Worth with a regional call center for the Dental Offices located in
that market. See "-- Operations -- Call Centers; Scheduling" below. The
Company's advertising and marketing support activities also include the offering
of convenient office hours, selecting favorable locations for its Dental
Offices, offering same-day emergency care and introducing or expanding
additional, higher-margin specialty services at the Dental Offices. The Company
has been able to leverage its existing advertising program to generate revenue
as it expands within its markets.
PAYOR MIX
Third-party payment arrangements from which the Company derives revenue
directly or through the P.C.s include indemnity insurance, preferred provider
plans and capitated managed dental care plans. Under indemnity insurance plans,
the patient or the patient's employer pays insurance premiums and the insurance
company reimburses the dentist for all or a portion of the dentist's usual and
customary fee, with the patient paying the portion not covered by insurance.
Under preferred provider plans, dentists agree to provide dental services to
plan members on a discounted fee-for-service basis. Capitated managed dental
care plans typically pay dental group practices that agree to provide services
to plan members a fixed monthly amount for each plan member covered for a
specified schedule of services regardless of the quantity or cost of services to
the participating dental group practice obligated to provide them. This
arrangement shifts the risk of utilization to the dental group practice that
provides the dental services. Because the Company assumes responsibility under
the Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of the
P.C.s associated with the provision of dental services at the Dental Offices
(other than compensation and benefits of dentists and hygienists), the risk of
over-utilization of dental services at the Dental Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
members of capitated managed dental care plans pay the P.C.s or the Company, as
applicable, additional amounts as co-payments for more complex procedures. The
relative size of capitation payments and co-payments varies in accordance with
the level of benefits provided and plan design.
The Company seeks to optimize the revenue mix at the Dental Offices between
revenue from fee-for-service business and revenue from capitated managed dental
care plans. The Company focuses on fee-for-service business, which includes fees
paid by indemnity insurers, fees from preferred provider plans and direct
patient billings. The Company seeks to increase fee-for-service business by
expanding its operations within existing markets, entering new markets and
advertising.
The Company seeks to supplement fee-for-service business with revenue
derived from contracts with capitated managed dental care plans. Although only
approximately 9% of individuals in the United States were enrolled in capitated
managed dental care plans in 1995, the Company believes that capitated managed
dental care will play an increasingly important role in the provision of dental
services. Capitated managed dental care relationships with the Company and the
P.C.s increase dentist productivity and facility utilization. These
relationships also provide increased co-payment revenue, referrals of additional
fee-for-service patients and opportunities for dentists practicing at the Dental
Offices to educate patients about the benefits of elective dental procedures
that may not be covered by the patients' capitated managed dental care plans.
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<PAGE> 50
The following tables set forth information regarding the sources of the
Company's Revenue for the years ended December 31, 1994, 1995 and 1996 and the
three months ended March 31, 1997 and the sources of the Company's Revenue in
each of its markets for the year ended December 31, 1996, beginning with the
respective dates of acquisition for Houston, Wisconsin and Arkansas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------------------------------ ENDED
1994 1995 1996 MARCH 31, 1997
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
-------------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee-for-Service (1).............. $7,478 78.2% $9,051 68.5% $21,863 60.8% $9,069 62.6%
Managed Dental Care:
Capitation..................... 773 8.1% 1,642 12.4% 8,142 22.6% 3,367 23.3%
Co-payment..................... 1,308 13.7% 2,530 19.1% 5,975 16.6% 2,040 14.1%
------ ----- ------- ----- ------- ----- ------- -----
Total.................... $9,559 100.0% $13,223 100.0% $35,980 100.0% $14,476 100.0%
====== ===== ======= ===== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
BY MARKET FOR YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------------------
DALLAS-FORT WORTH HOUSTON WISCONSIN ARKANSAS
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
-------------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fee-for-Service (1).................. $10,719 58.7% $7,629 62.9% $3,182 60.6% $333 97.7%
Managed Dental Care:
Capitation......................... 3,269 17.9% 3,444 28.4% 1,423 27.1% 6 1.7%
Co-payment......................... 4,272 23.4% 1,056 8.7% 645 12.3% 2 0.6%
------- ----- ------- ----- ------ ----- ---- -----
Total........................ $18,260 100.0% $12,129 100.0% $5,250 100.0% $341 100.0%
======= ===== ======= ===== ====== ===== ==== =====
</TABLE>
- ------------------------------
(1) Constitutes Revenue derived from indemnity dental plans, preferred provider
plans and direct payments by patients not covered by any third-party payor.
OPERATIONS
The Company has achieved operational efficiencies based on the best
practices identified in its affiliated dental groups. The Company adapts and
implements these practices throughout its provider networks, when appropriate,
to (i) reduce purchasing and administrative expenses, (ii) improve operational
efficiencies in such areas as scheduling, billing and personnel management and
(iii) introduce and standardize patient record keeping, treatment protocols and
technique utilization. The Company establishes and maintains geographically
dense networks of dentists in each of its markets. The Company believes that
these provider networks offer preferred provider and capitated managed dental
care plans the ability to enter the markets served by the networks more quickly
and comprehensively and to service their plan members more efficiently than
contracting through solo or smaller group practices. The Company believes these
networks provide it with advantages in establishing and maintaining
relationships with capitated managed dental care plans and other third-party
payors, including greater leverage than that of solo or smaller group practices
when negotiating provider agreements.
Recruiting
Establishing geographically dense networks of providers by effective
recruiting of qualified dentists is an important element of the Company's
business strategy. The ADA has projected that the number of dentists practicing
in the United States will increase at a slower rate than the projected rate of
increase of the overall United States population through 2020. In the Company's
experience, many dentists in the early stages of their careers have incurred
substantial student loans. As a result they face significant financial
constraints to starting their own practices or buying into existing practices,
especially in view of the capital-intensive nature of modern dentistry. The
Company believes that practice in its network of Dental Offices offers both
recently graduated dentists and more experienced dentists without their own
practices advantages over a solo or smaller group practice, including relief
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from the burden of administrative and management responsibilities and the
resulting ability to focus almost exclusively on practicing dentistry.
Advantages to dentists may also include, depending upon the market involved,
compensation which rewards productivity, employee benefits such as health
insurance, paid vacation, continuing education, payment of professional
membership fees and malpractice insurance, and, for affiliated specialists, the
prospect of a steadier stream of referrals than a specialist practicing
independently. In markets in which it is difficult to recruit and retain
dentists, such as certain rural areas, the Company may seek to establish
partnerships in which these dentists retain a portion of the equity interest in
the practice.
The Company believes that hygienists, dental assistants and office staff
are critical to attracting and retaining patients. Accordingly, the Company
actively recruits such staff by offering salaries and benefits which it believes
are generally superior to those offered by many solo or smaller group practices.
Call Centers; Scheduling
The Company maintains a regional call center in Dallas-Fort Worth. The call
center staff fields calls generated by advertising, schedules patient visits,
answers patient questions and initiates contact with patients for follow-up of
ongoing treatment programs. The Company has implemented or is currently
implementing similar call centers that will serve each of its other markets.
The Company utilizes a centralized management information system in the
call centers to schedule patient appointments. The Dental Offices generally
offer extended office hours and Saturday appointments. The Company sends
patients to the Dental Office that is most convenient for the patient in terms
of timing and location. The Company's centralized scheduling systems provide the
Company with better control over patient scheduling, resulting in increased
productivity, as well as the ability to analyze and control the revenue mix at
the Dental Offices by balancing fee-for-service and capitated managed dental
care patients. This also enables the staff at each Dental Office to focus on
patient care and customer service by eliminating a significant number of
incoming calls.
Purchasing
The integration of the Dental Offices enables the Company to take advantage
of economies of scale that are generally not available to solo or smaller group
practices. The Company is able to purchase dental supplies, laboratory services,
insurance, office furniture, equipment, information systems and advertising at
reduced costs. The Company also can contract for employee benefits at a lower
cost than solo or smaller group practices typically can obtain for themselves
and their employees.
Management Information Systems
The Company has licensed for use at its Dental Offices a management
information system for dental practice management. Substantially all of the
Dental Offices are currently utilizing this information system. The Company uses
the information system to track data related to each Dental Office's operations
and financial performance. The information system can provide each of the Dental
Offices with data such as patient and practitioner scheduling information,
insurance coverage information, clinical record-keeping and revenue and
collection data (including credit history). Within each market, the Company uses
the information system to manage billing and collections, including electronic
insurance claims processing. In addition, the Company uses the information
system to provide information for case management and outcome related research.
Quality Assurance
The Company requires the dentists and hygienists at each of its Dental
Offices to develop and implement clinical management procedures and treatment
protocols, as well as uniform business and administrative standards under which
dental services are provided. These procedures, protocols and
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standards vary from region to region and are determined by the Dental Directors
in each region in consultation with and under the guidance of a committee of the
Regional Dental Directors. The protocols include treatment planning, diagnostic
screening, radiographic records, record keeping, specialty referrals and dental
hygiene protocols. State licensing authorities require dentists to undergo
annual training. The dentists and hygienists practicing at the Dental Offices
can obtain some of the required continuing education training through the
Company's internal training programs in each regional market, certain of which
have been accredited by the Academy of General Dentistry.
AFFILIATION STRUCTURE
Relationship with P.C.s
In states in which the ownership of dental practices by non-dentists is
prohibited, the Company derives all of its revenue from its Management
Agreements with the P.C.s. Under each of the Management Agreements, the Company
receives a management fee equal to the Company's costs plus the lower of (i) 30%
of the P.C.'s net revenues or (ii) the P.C.'s net pre-tax income. The Company's
costs include all direct and indirect costs, overhead and expenses relating to
the Company's provision of services to the P.C.s under the Management
Agreements, such that substantially all costs associated with the provision of
dental services at the Dental Offices are borne by the Company, other than the
compensation and benefits of the dentists and hygienists who are employed by or
are independent contractors of the P.C.s. Under the Management Agreements, the
Company provides the P.C.s with, among other things, the facilities,
administrative personnel and supplies, as well as numerous services, including
administrative, accounting, cash management, financial statements and reports,
budgeting including capital expenditures, recruiting, insurance, litigation
management, negotiation of managed dental care contracts (which are entered into
by the Company and the P.C.s (except in Wisconsin)), management information
systems, billing and collection services. Each Management Agreement is for a
term of 40 years, with automatic renewal thereafter. Further, each Management
Agreement generally may be terminated by the P.C. only for cause, which includes
an uncured breach of the agreement by the Company, or upon the P.C.'s bankruptcy
or voluntary dissolution and may be terminated by the Company as of any
anniversary date of the Management Agreement upon 90 days' prior written notice.
In addition to the Management Agreements, the Company has a contractual right to
designate or approve the licensed dentists who own each P.C.'s capital stock. In
states in which non-dentists are permitted to own dental practices, such as
Wisconsin, there is no need for this structure and the dentists are employed
directly by or are independent contractors of the Company.
Employment Agreements
All dentists practicing at the Dental Offices have entered into employment
agreements or independent contractor agreements through their professional
corporations with the P.C.s or, in the case of dentists practicing in dental
offices located in states (currently Wisconsin) in which the ownership of dental
practices by the Company is permitted, the Company. Such agreements typically
contain a non-competition agreement for up to three years following their
termination within a specified geographic area, usually a specified number of
miles from the relevant Dental Office. The agreements with dentists who have
sold their practices to the Company generally are for a specified initial term
of up to five years. Under each agreement, the dentist assigns billing and
collection rights to the Company, in the case of states in which non-dentists
are permitted to own dental practices, or to the P.C. in other states, with the
P.C. in turn assigning such rights to the Company under the terms of the
applicable Management Agreement. In return, the dentist receives either a fixed
salary or collections-based compensation, which may have a minimum guarantee,
and a package of benefits which varies from region to region. The dentists'
compensation and benefits are paid by the entity, either the Company or the
relevant P.C., with whom the dentist has entered into an employment agreement.
At May 31, 1997, 89.0% of the dentists practicing at the Dental Offices received
collections-based compensation while 11.0% received a fixed salary.
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COMPETITION
The dental services industry is highly fragmented, consisting primarily of
solo and smaller group practices. The dental practice management segment of this
industry, currently in its formative stage, is highly competitive and is
expected to become more competitive. In this regard, the Company expects that
the provision of multi-specialty dental services at convenient locations will
become increasingly more common. The Company is aware of several dental practice
management companies that are currently operating in its existing markets.
Companies with dental practice management businesses similar to that of the
Company, which currently operate in other parts of the country, may begin
targeting the Company's existing markets for expansion. Such competitors may be
better capitalized or otherwise enjoy competitive advantages which may make it
difficult for the Company to compete against them or to acquire additional
Dental Offices on terms acceptable to the Company. As the Company seeks to
expand its operations into new markets, it is likely to face competition from
dental practice management companies which already have established a strong
business presence in such locations.
The business of providing general dental, orthodontic and other specialty
dental services is highly competitive in the markets in which the Company
operates. The Company believes it competes with other providers of dental and
specialty services on the basis of factors such as brand name recognition,
convenience, cost and the quality and range of services provided. Competition
may include practitioners who have more established practices and reputations.
The Company's affiliated dental practices also compete in the retention and
recruitment of general dentists, specialists and clinical staff. If the
availability of dentists begins to decline in the Company's markets, it may
become more difficult to attract qualified dentists to staff the Dental Offices
sufficiently or to expand them. The Dental Offices may not be able to compete
effectively against other existing practices or against new single or multi-
specialty dental practices that enter its markets, or to compete against such
other practices in the recruitment of qualified dentists.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal
levels. There can be no assurance that the regulatory environment in which the
Company or P.C.s operate will not change significantly in the future. The laws
and regulations of all states in which the Company operates impact the Company's
operations but do not currently materially restrict the Company's operations in
those states. In addition, state and federal laws regulate health maintenance
organizations and other managed care organizations for which dentists may be
providers. In general, regulation of health care-related companies is
increasing. In connection with its operations in existing markets and expansion
into new markets, the Company may become subject to additional laws, regulations
and interpretations or enforcement actions. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
State Regulation
The laws of many states, including Arkansas, Indiana and Texas but
excluding Wisconsin, permit a dentist to conduct a dental practice only as an
individual, a member of a partnership or an employee of a professional
corporation, limited liability company or limited liability partnership. These
laws typically prohibit, either by specific provision or as a matter of general
policy, non-dental entities, such as the Company, from practicing dentistry,
from employing dentists and, in certain circumstances, hygienists or dental
assistants, or from otherwise exercising control over the provision of dental
services. Because under the Management Agreements the Company bears all costs
associated with the provision of dental services by the P.C.s at the Dental
Offices other than compensation and benefits of dentists and hygienists and
determines annual budgets for the P.C.s, the Company is effectively able to
manage the profitability of the Dental Offices. Under the Management Agreements,
however, the P.C.s control all clinical aspects of the practice of dentistry and
the provision of dental services at the Dental
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Offices, including the exercise of independent professional judgment regarding
the diagnosis or treatment of any dental disease, disorder or physical
condition. Under the Management Agreements, persons to whom dental services are
provided at the Dental Offices are patients of the P.C.s and not of the Company
and the Company does not have or exercise any control or direction over the
manner or methods in which dental services are performed nor does the Company
interfere in any way with the exercise of professional judgment by the dentists
who are employees or independent contractors of the P.C.s.
Many states in which the Company's Dental Offices presently are located
have fraud and abuse laws which are similar to the federal fraud and abuse law
described below, and which in many cases apply to referrals for items or
services reimbursable by any insurer, not just by Medicare and Medicaid. A
number of states, including all of the states in which Dental Offices are
currently located, also impose significant penalties for submitting false claims
for dental services. Many states, including all of the states in which the
Dental Offices are currently located, either prohibit or require disclosure of
self-referral arrangements and impose penalties for the violation of these laws.
Many states also prohibit dentists from splitting fees with non-dentists.
Many states, including Indiana and Texas, but excluding Wisconsin, limit
the ability of a person other than a licensed dentist to own or control
equipment or offices used in a dental practice. Some of these states allow
leasing of equipment and office space to a dental practice, under a bona fide
lease, if the equipment and office remain under the control of the dentist. Some
states (none in which the Company currently operates) prohibit the advertising
of dental services under a trade or corporate name. Some states, including
Arkansas, require all advertisements to be in the name of the dentist. A number
of states also regulate the content of advertisements of dental services and the
use of promotional gift items. In addition, many states impose limits on the
tasks that may be delegated by dentists to hygienists and dental assistants.
Some states (none in which the Company currently operates) require entities
designated as "clinics" to be licensed, and may define clinics to include dental
practices that are owned or controlled in whole or in part by non-dentists.
These laws and their interpretations vary from state to state and are enforced
by the courts and by regulatory authorities with broad discretion.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. As the Company or the P.C.s contract with third-party
payors, on a capitation or other basis under which the Company or the relevant
P.C. assumes financial risk, the Company or the P.C.s may become subject to
state insurance laws. Specifically, in some states, regulators may determine
that the Company or the P.C.s are engaged in the business of insurance,
particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. To the extent that the Company or the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's revenue may be materially and adversely affected.
Federal Regulation
Many of the federal laws regulating the provision of dental care apply only
to dental services which are reimbursed under the Medicare or Medicaid programs.
Because very little dental care is currently provided by Medicare and Medicaid,
the Company derives very little revenue from these programs. Therefore, the
current impact of these laws is negligible. However, there can be no assurance
that the reach of these laws will not be expanded in the future to cover
services reimbursable by any payor. If these laws were to be expanded in such a
manner, they could have a material adverse effect upon the Company.
The federal fraud and abuse statute prohibits, subject to certain safe
harbors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce, (i) the referral
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of a person for service, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or the arrangement or
recommendation of a purchase, lease or order of any item or service which is, in
each case, reimbursable under Medicare or Medicaid. The statute reflected the
federal government's policy of 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. Because dental services are
covered under various government programs, including Medicare and Medicaid, this
federal law applies to dentists and the provision of dental services.
Significant prohibitions against dentist self-referrals for services
covered by Medicare and Medicaid programs were enacted, subject to certain
exceptions, by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician and dentist
self-referral legislation known as Stark I (which applied only to clinical
laboratory referrals) by dramatically enlarging the list of services and
investment interests to which the self-referral prohibitions apply. Effective
January 1, 1995, Stark II prohibits a physician or dentist, or a member of his
or her immediate family, from making referrals for certain "designated health
services" to entities in which the physician or dentist has an ownership or
investment interest, or with which the physician or dentist has a compensation
arrangement. "Designated health services" include, among other things, clinical
laboratory services, radiology and other diagnostic services, radiation therapy
services, durable medical equipment, prosthetics, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services. Stark II
prohibitions include referrals within the physician's or dentist's own group
practice (unless such practice satisfies the "group practice" exception) and
referrals in connection with the physician's or dentist's employment
arrangements with the P.C. (unless the arrangement satisfies the employment
exception). Stark II also prohibits billing the Medicare or Medicaid programs
for services rendered following prohibited referrals. Noncompliance with, or
violation of, Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Even if the Company were deemed to provide "designated health services," the
Company believes its activities would be protected under the employment and
group practice exceptions to Stark II. Nevertheless, there can be no assurance
that Stark II will not be interpreted or hereafter amended in a manner that has
a material adverse effect on the Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans
associated with certain managed care organizations that offer risk-based
Medicare or Medicaid contracts. These regulations define physician incentive
plans to include any compensation arrangement (such as capitation arrangements,
bonuses and withholds) that may directly or indirectly have the effect of
reducing or limiting services furnished to patients covered by the Medicare or
Medicaid programs. Direct monetary compensation which is paid by a managed care
plan, dental group or intermediary to a dentist for services rendered to
individuals covered by the Medicare or Medicaid programs is subject to these
regulations, if the compensation arrangement places the dentist at substantial
financial risk. When applicable, the regulations generally require disclosure to
the federal government or, upon request, to a Medicare beneficiary or Medicaid
recipient regarding such financial incentives, and require the dentist to obtain
stop-loss insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing agents.
These rules prohibit a billing agent from receiving a fee based on a percentage
of Medicare collections and may require
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Medicare payments for the services of dentists to be made directly to the
dentist providing the services or to a lock box account opened in the name of
the applicable P.C.
Federal regulations also allow state licensing boards to revoke or restrict
a dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including
governmental insurers, are subject to significant regulation. Some payors limit
the extent to which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met such as acceptance by dentists of assignment of the payor
receivables from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Dental Office staff unless certain conditions are met such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Dental Office
staff must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its Revenue under such programs.
The operations of the Dental Offices are also subject to compliance with
regulations promulgated by the Occupational Safety and Health Administration
("OSHA"), relating to such matters as heat sterilization of dental instruments
and the usage of barrier techniques such as masks, goggles and gloves. The
Company incurs expenses on an ongoing basis relating to OSHA monitoring and
compliance.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
INSURANCE
The Company maintains professional malpractice and general liability
insurance for itself and maintains professional liability insurance covering
dentists, hygienists and dental assistants at the Dental Offices. The Company
generally is a named insured under such policies and is named as an additional
insured on each individual dentist's policy. The Company maintains general
liability and umbrella coverage, including malpractice coverage, of $5 million
per occurrence and $5 million in the
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aggregate. Certain types of risks and liabilities are not covered by insurance,
however, and there can be no assurance that coverage will continue to be
available upon terms satisfactory to the Company or that the coverage will be
adequate to cover losses. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims asserted against the
dentists, the P.C.s or the Company may have a material adverse effect on the
Company's business, financial condition and operating results. While the Company
believes its insurance policies are adequate in amount and coverage for its
current operations, there can be no assurance that the coverage maintained by
the Company will be sufficient to cover all future claims or will continue to be
available in adequate amounts or at a reasonable cost.
LEGAL PROCEEDINGS
From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. The
dentists employed by the P.C.s or the Company are from time to time subject to
malpractice claims. Such claims, if successful, could result in damage awards
exceeding, perhaps substantially, applicable insurance coverage.
FACILITIES AND EMPLOYEES
The Company's corporate headquarters are located at 4201 Spring Valley
Road, Dallas, Texas, in approximately 8,500 square feet occupied under a lease
which expires on December 31, 1999.
The Company also leases real estate at the location of each Dental Office.
Typically, each acquired Dental Office is located at the site used by the
respective selling dentist prior to the Company's acquisition. For the year
ended December 31, 1996, the Company had lease costs of approximately $1.6
million. The Company anticipates that, as it acquires Dental Offices, it will
lease the sites formerly utilized by the selling dentists. See "Certain
Transactions."
As of May 31, 1997, the Company had approximately 689 employees, including
32 dentists and 43 hygienists located at Midwest but excluding the 104 dentists
and 29 hygienists employed by or contracting with the P.C.s. The Company is not
party to any collective bargaining agreement with a labor union and considers
its relations with its employees to be satisfactory.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of May
31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Warren F. Melamed, D.D.S. .................. 50 Chairman of the Board, President, Chief
Dental Officer and Director
Gary W. Cage................................ 52 Chief Executive Officer and Director
Charles G. Shears, D.D.S.................... 61 Executive Vice President and Director
David L. Hehli, D.D.S....................... 54 President, Midwest
Steven G. Peterson.......................... 32 Chief Financial Officer
Glenn E. Hemmerle(1)(2)..................... 51 Director
Roger B. Kafker(2).......................... 35 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation and Option Committee.
Warren F. Melamed, D.D.S., founded the Company in 1983 and has served as
its President and Chairman since then. From 1985 until March 1997, Dr. Melamed
served as the Chief Executive Officer of the Company and since March 1997, has
served as the Chief Dental Officer of the Company.
Gary W. Cage has served as Chief Executive Officer of the Company since
March 1997 and served as Chief Operating Officer of the Company from March 1996
to March 1997. Prior to joining the Company, he served as Chief Financial
Officer, Senior Vice President, Treasurer and Secretary of EmCare Holdings Inc.,
a provider of management services to emergency physicians, from October 1992 to
March 1996; as Chief Financial Officer of Team Bancshares, Inc., a bank holding
company, from 1989 to October 1992; and as Chief Financial Officer of Texas
American Bancshares, Inc., a bank holding company, from 1974 to 1989.
Charles G. Shears, D.D.S., founded MacGregor in 1962 and served as its
President and Chief Executive Officer from then until February 1996, when he
became Executive Vice President and a director of the Company in connection with
the 1996 Transactions.
David L. Hehli, D.D.S., founded Midwest in 1975 and has served as its
President since then, including following the completion of the Company's
acquisition of Midwest.
Steven G. Peterson has served as Chief Financial Officer of the Company
since April 1997 and served as Director of Finance of the Company from April
1996 to April 1997. Prior to joining the Company, he served as Director of
Finance of EmCare Holdings Inc. from October 1993 to April 1996. From June 1990
until October 1993, Mr. Peterson served in numerous positions with Bank One,
Texas, N.A., and its predecessor, Team Bancshares, Inc., most recently as Vice
President and Director of Planning and Budgeting.
Glenn E. Hemmerle has served as a director of the Company since August
1996. He has served as President and Chief Executive Officer of The Johnny
Rockets Group, Inc., a restaurant-chain operator, since February 1997. Prior to
February 1997, Mr. Hemmerle served as President and Chief Executive Officer of
Pearl Vision, Inc., a retail eyeglass company, from July 1994 to November 1996;
and as President and Chief Executive Officer of Crown Books Inc., a retail
bookseller, from August 1992 to July 1994. Mr. Hemmerle is also a director of
The Bombay Company, a retail furniture company.
Roger B. Kafker has served as a director of the Company since February
1996. He has been associated with TA Associates, Inc. or its predecessor since
1989 and became a Principal of that firm in 1994 and a Managing Director in
1995. Mr. Kafker is also a director of ANSYS, Inc., a software company.
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BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at five.
Following this offering, the Company's Board of Directors will be divided into
three classes, with the members of each class of directors serving for staggered
three-year terms. The Board of Directors will consist of one Class I Director
(Dr. Shears), two Class II Directors (Dr. Melamed and Mr. Kafker) and two Class
III Directors (Messrs. Cage and Hemmerle), whose initial terms will expire at
the 1998, 1999 and 2000 annual meetings of stockholders, respectively. Within 90
days after the completion of this offering, the Company intends to expand the
Board of Directors and elect an additional Class I director who will not be an
officer or an employee of the Company.
The Board of Directors has established an Audit Committee (the "Audit
Committee") and a Compensation and Option Committee (the "Compensation
Committee"). The Audit Committee recommends the firm to be appointed as
independent accountants to audit financial statements and to perform services
related to the audit, reviews the scope and results of the audit with the
independent accountants, reviews with management and the independent accountants
the Company's annual operating results, considers the adequacy of the internal
accounting procedures and considers the effect of such procedures on the
accountants' independence. Within 90 days following the completion of this
offering, the Audit Committee will consist of Mr. Hemmerle and an additional
director who is neither an officer nor an employee of the Company; such
individual has not been selected at the date of this Prospectus. The
Compensation Committee reviews and recommends the compensation arrangements for
officers and other senior-level employees, reviews general compensation levels
for other employees as a group, determines the options or stock to be granted to
eligible persons under the 1996 Stock Plan and takes such other action as may be
required in connection with the Company's compensation and incentive plans. The
Compensation Committee consists of Messrs. Hemmerle and Kafker.
Non-employee directors other than Mr. Kafker (the "Independent Directors")
receive fees of $2,000 for each meeting of the Board of Directors or committee
they attend, and each director is reimbursed for travel and other expenses
incurred in attending meetings. Each Independent Director acquired 10,000 shares
of restricted Common Stock at the time he joined the Board of Directors. See
"-- Employee Stock and Other Benefit Plans -- Restricted Stock Grants" below.
The Company intends to grant options to acquire approximately this number of
shares to Independent Directors who join the Board of Directors in the future.
In addition, in May 1997, the Company granted to Mr. Hemmerle options to
purchase 10,000 shares of Common Stock at an exercise price per share equal to
the initial public offering price per share. These options vest annually over
four years in equal installments.
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EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth information concerning
compensation for services rendered in all capacities awarded to, earned by or
paid to the Chief Executive Officer and the other most highly compensated
executive officers of the Company whose aggregate base salary and bonus exceeded
$100,000 during 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL LONG TERM
COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ------------------------------ --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Warren F. Melamed, D.D.S..................... 275,000 -- -- 10,717(2)
Chairman of the Board
Gary W. Cage................................. 134,615 70,000 25,000 --
Chief Executive Officer
Charles G. Shears, D.D.S..................... 224,657 -- -- 11,000(3)
Executive Vice President
</TABLE>
- ------------------------------
(1) One executive officer, David L. Hehli, D.D.S., joined the Company on
September 1, 1996, and would have appeared in the table above had he been
employed by the Company for a full fiscal year.
(2) Includes $2,000 contributed by the Company to Dr. Melamed's 401(k) account
as a matching contribution and $8,717 paid to Dr. Melamed as a car
allowance.
(3) Constitutes payments to Dr. Shears as a car allowance.
Option Grants. The following table sets forth information concerning the
individual grant of options to purchase Common Stock to the Named Executive
Officers during 1996. No stock appreciation rights ("SARs") have been granted.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------- -------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gary W. Cage.......... 25,000 100% 3.00 10/31/06 47,167 119,531
</TABLE>
- ------------------------------
(1) The options, which were granted under the 1996 Stock Plan, become
exercisable in four equal annual installments, commencing on the first
anniversary of the grant date. All options are subject to the employee's
continued employment and terminate ten years after the grant date, subject
to earlier termination in accordance with the 1996 Stock Plan and the
applicable option agreement. All options were granted at fair market value
as determined by the Compensation Committee on the date of the grant. See
"-- Employee Stock and Other Benefit Plans -- 1996 Stock Option and
Incentive Plan" below.
(2) This column shows the hypothetical gains or "option spreads" of the options
granted based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the terms of the options. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock
prices. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses
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<PAGE> 61
associated with the exercise of the option or the sale of the underlying
shares, or reflect nontransferability, vesting or termination provisions.
The actual gains, if any, on the exercises of stock options will depend on
the future performance of the Common Stock, among other things.
Option Exercises and Holdings. The following table sets forth information
concerning the number and value of unexercised options to purchase Common Stock
held by the Named Executive Officers. None of the Named Executive Officers
exercised any stock options during 1996.
AGGREGATED OPTION EXERCISES IN 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/96 AT 12/31/96($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary W. Cage................................... -- 25,000 -- 200,000
</TABLE>
- ------------------------------
(1) There was no public trading market for the Common Stock as of December 31,
1996. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of $11.00 per share, less the
applicable exercise price.
Executive Bonuses. Executive bonuses are granted at the discretion of the
Compensation Committee.
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
1996 Stock Option and Incentive Plan. The 1996 Stock Option and Incentive
Plan, as amended, was initially adopted by the Board of Directors in February
1996 and was subsequently approved by the Company's stockholders. The 1996 Stock
Plan permits (i) the grant of Incentive Options, (ii) the grant of Non-Qualified
Options, (iii) the issuance or sale of Common Stock with or without vesting or
other restrictions ("Stock Grants"), (iv) the issuance or sale of Common Stock
without restrictions ("Unrestricted Stock"), (v) the grant of Common Stock upon
the attainment of specified performance goals ("Performance Share Awards") and
(vi) the grant of the right to receive cash dividends with the holders of the
Common Stock as if the recipient held a specified number of shares of the Common
Stock ("Dividend Equivalent Rights"). These grants may be made to officers and
other employees, directors, advisors, consultants and other key persons of the
Company and its subsidiaries. The 1996 Stock Plan provides for the issuance of
1,376,250 shares of Common Stock of which (i) 435,750 shares were subject to
outstanding options with a weighted average exercise price of $10.41 per share
(assuming an initial public offering price of $11.00 per share) and (ii) 345,208
were sold as restricted stock awards for an aggregate cash purchase price of
$73,184 and remained outstanding as of May 31, 1997. On and after the date the
1996 Stock Plan becomes subject to Section 162(m) of the Internal Revenue Code
of 1986, as amended, options with respect to no more than 150,000 shares of
Common Stock may be granted to any one individual in any calendar year.
The 1996 Stock Plan is administered by the Compensation Committee. Subject
to the provisions of the 1996 Stock Plan, the Compensation Committee has full
power to determine from among the persons eligible for grants under the 1996
Stock Plan the individuals to whom grants will be made, the combination of
grants to participants and the specific terms of each grant, including vesting.
Incentive Options may be granted only to officers or other full-time employees
of the Company or its subsidiaries, including members of the Board of Directors
who are also full-time employees of the Company or its subsidiaries.
The option exercise price of options granted under the 1996 Stock Plan is
determined by the Compensation Committee but, in the case of Incentive Options,
may not be less than 100% of the fair market value of the underlying shares on
the date of grant. If any employee of the Company or any subsidiary owns (or is
deemed to own) at the date of grant shares of stock representing in excess of
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<PAGE> 62
10% of the combined voting power of all classes of stock of the Company or any
parent or subsidiary, the option exercise price for Incentive Options granted to
such employee may not be less than 110% of the fair market value of the
underlying shares on that date. Non-Qualified Options may be granted at prices
less than the fair market value of the underlying shares on the date granted.
Options typically are subject to vesting schedules, terminate 10 years from the
date of grant and may be exercised for specified periods subsequent to the
termination of the optionee's employment or other business relationship with the
Company. At the discretion of the Compensation Committee, any option may include
a "reload" feature pursuant to which an optionee exercising an option receives
in addition to the number of shares of Common Stock due on the exercise of such
an option an additional option with an exercise price equal to the fair market
value of the Common Stock on the date such additional option is granted. Upon
the exercise of options, the option exercise price must be paid in full either
in cash or by certified or bank check or other instrument acceptable to the
Compensation Committee or, in the sole discretion of the Compensation Committee,
by delivery of shares of Common Stock already owned by the optionee.
The 1996 Stock Plan also permits Stock Grants, Performance Share Awards and
grants of Dividend Equivalent Rights. Stock Grants may be made to persons
eligible under the 1996 Stock Plan, subject to such conditions and restrictions
as the Compensation Committee may determine. Prior to the vesting of shares,
recipients of Stock Grants generally will have all the rights of a stockholder
with respect to the shares, including voting and dividend rights, subject only
to the conditions and restrictions set forth in the 1996 Stock Plan or in any
agreement. The Compensation Committee may also make Stock Grants to persons
eligible under the 1996 Stock Plan in recognition of past services or other
valid consideration, or in lieu of cash compensation. In the case of Performance
Share Awards, the issuance of shares of Common Stock will occur only after the
conditions and restrictions set forth in the grant agreement are satisfied. In
addition, the Compensation Committee may grant Dividend Equivalent Rights in
conjunction with any other grant made pursuant to the 1996 Stock Plan or as a
free-standing grant. Dividend Equivalent Rights may be paid currently or deemed
to be reinvested in additional shares of Common Stock, which may thereafter
accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or
extend the date or dates on which all or any particular award or awards granted
under the 1996 Stock Plan may be exercised or vest. To the extent not exercised,
all options granted under the 1996 Stock Plan terminate upon the dissolution,
liquidation or sale of the Company unless assumed by a successor entity, except
as the Compensation Committee otherwise determines.
Restricted Stock Grants. Since adopting the 1996 Stock Plan in connection
with the 1996 Transactions in February 1996, the Company has sold an aggregate
of 345,208 shares of restricted Common Stock for an aggregate cash purchase
price of $73,184 to employees and directors of the Company under the 1996 Stock
Plan or separate restricted stock agreements. These shares generally vest in
equal monthly installments (or annually in the case of the shares sold to Dr.
Melamed) over four years beginning with the date of sale, with unvested shares
subject to repurchase at cost upon the termination of the purchaser's employment
or other relationship with the Company. Shares of restricted Common Stock
generally would be treated as fully vested in the event of a sale of the
Company.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan was adopted by the Board of Directors and approved by the
Company's stockholders. Up to 250,000 shares of Common Stock may be issued under
the Purchase Plan. The Purchase Plan is administered by the Compensation
Committee.
The first offering under the Purchase Plan will begin on August 1, 1997 and
end on December 31, 1997, 1998. Subsequent offerings will commence on each
January 1 and July 1 thereafter and will have a duration of six months.
Generally, all employees who are customarily employed for more than 20 hours per
week as of the first day of the applicable offering period are eligible to
participate in the Purchase Plan. Any employee who owns or is deemed to own
shares of stock representing in excess of 5% of the
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<PAGE> 63
combined voting power of all classes of stock in the Company may not participate
in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares which may
be purchased by any participating employee during any offering period is limited
to 1,000 shares (as adjusted by the Compensation Committee from time to time).
Unless the employee has previously withdrawn from the offering, his or her
accumulated payroll deductions will be used to purchase Common Stock on the last
business day of the period at a price equal to 85% of the fair market value of
the Common Stock on the first or last day of the offering period, whichever is
lower. Under applicable tax rules, an employee may purchase no more than $25,000
worth of Common Stock in any calendar year. No Common Stock has been issued to
date under the Purchase Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Dr. Warren F.
Melamed and Gary W. Cage. The terms of the agreements are substantially similar
except with respect to minimum annual base salary ($300,000 for Dr. Melamed and
$200,000 for Mr. Cage). The agreements have initial employment terms ending on
June 30, 2001 and automatically renew for one year periods thereafter. In the
event of a termination of employment without cause or material breach by the
Company, the agreements provide for severance equal to the greater of the
executive's unpaid compensation under the agreement through the end of the
initial term or two year's average total compensation over the three most
recently completed years beginning with fiscal 1996. Upon termination by the
Company of the executive's employment without cause or upon a resignation by the
executive for Good Reason (as defined) within twelve months following a change
in control of the Company (as defined), the executive is entitled to receive
severance equal to the greater of the executive's unpaid total compensation
under the agreement up to a maximum of three year's total compensation or two
year's average total compensation. As provided in the employment agreements, the
executives have also entered into non-competition agreements with the Company
pursuant to which they may not engage in certain competitive activities in the
dental industry without the Company's consent prior to the later of June 30,
2001 or the date on which they stop receiving severance payments following the
termination of employment for any reason.
In connection with the 1996 Transactions, the Company also entered into a
Non-Competition Agreement with Dr. Shears. The agreement provides that Dr.
Shears will not engage in certain competitive activities without the Company's
consent prior to February 5, 1999. In the event that Dr. Shears' employment with
the Company terminates other than as a result of death or disability prior to
February 5, 1999, the agreement provides that Dr. Shears will be engaged as a
consultant to the Company at a rate of $500 per month until such date.
The Company entered into an Employment Agreement with Dr. Hehli in
connection with the acquisition of Midwest pursuant to which Dr. Hehli continues
to serve as President of Midwest. The agreement provides for (i) an annual base
salary of $200,000, subject to annual inflation adjustments beginning in 1997,
(ii) an employment term ending on December 31, 2001 and (iii) the continuation
of base salary payments and other benefits until December 31, 2001 in the event
such employment is terminated by the Company without cause (as defined) or by
Dr. Hehli following a material breach of the agreement by the Company.
The Company has also entered into a Non-Competition Agreement with Dr.
Hehli and certain entities affiliated with Dr. Hehli. The agreement provides
that Dr. Hehli and each such entity will not engage in certain competitive
activities without the Company's consent prior to one year following the later
to occur of the termination of Dr. Hehli's employment with the Company or the
receipt by Dr. Hehli of his last base salary payment.
62
<PAGE> 64
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since April 1996, all executive officer compensation decisions have been
made by the Compensation Committee. Between February 1996 and April 1996,
executive officer compensation decisions were made by Dr. Melamed and Mr.
Kafker. Prior to then, Dr. Melamed determined compensation as Chairman and sole
owner of the Company. The Compensation Committee reviews and makes
recommendations to the Board of Directors regarding the compensation for senior
management and key employees of the Company, including salaries and bonuses. The
current members of the Compensation Committee are Messrs. Hemmerle and Kafker,
neither of whom is an executive of the Company.
In February 1996, the Company completed a series of transactions
principally including the repurchase of shares of Common Stock from Dr. Melamed
and the concurrent acquisition of MacGregor from an entity controlled by Dr.
Shears. In connection with these transactions, the Company incurred $17.4
million of indebtedness under a senior secured credit facility from a bank;
investors principally including investment funds associated with TA Associates,
Inc. purchased from the Company an aggregate of $10.0 million of Convertible
Participating Preferred Stock; the Company redeemed Common Stock from Dr.
Melamed for $6.7 million; Dr. Melamed contributed interests in two corporations
holding ownership interests in the Company's Dallas-Fort Worth Dental Offices in
exchange for an aggregate of 356,240 shares of Common Stock and a cash payment
of $425,000 and the Company repaid outstanding indebtedness to Dr. Melamed of
$446,000; and the Company acquired MacGregor for consideration consisting of
cash in the amount of $14.9 million, the assumption of indebtedness of
approximately $662,000 and other ordinary course obligations and 700,000 shares
of Common Stock. Upon the completion of this offering, the Convertible
Participating Preferred Stock will convert into 2,400,000 shares of Common Stock
and 3,840,000 shares of Redeemable Preferred Stock. As required by the terms of
the Redeemable Preferred Stock, the Company will immediately redeem all of the
Redeemable Preferred Stock upon its issuance for $8.0 million in cash with a
portion of the net proceeds from this offering. See "Certain Transactions."
The Company leases one facility from Dr. Melamed in connection with which
the Company made aggregate lease payments of $65,000 during the year ended
December 31, 1996. The Company believes that this lease is on terms and at rates
no less favorable to the Company than could have been obtained from an
unaffiliated third party.
The Company has entered into a Management Agreement with Modern Dental
Professionals, P.C., a dental professional corporation owned by Dr. Melamed (the
"Texas P.C."), which employs or contracts with all of the dental professionals
practicing at the Dental Offices in Texas under the Management Agreement. The
Company provides the Texas P.C. with, among other things, the facilities,
administrative personnel and supplies, as well as numerous services, including
administrative, accounting, cash management, financial statements and reports,
budgeting including capital expenditures, recruiting, insurance, litigation
management, managed care contracting, management information systems, billing
and collection services. The Management Agreement is for a term of 40 years,
with automatic renewal thereafter, and generally may be terminated by the Texas
P.C. only for cause, which includes an uncured material breach of the agreement
by the Company, or upon the Texas P.C.'s bankruptcy or voluntary dissolution.
The Management Agreement may be terminated by the Company as of any anniversary
date of the Management Agreement upon 90 days' prior written notice.
The Company receives a management fee under the Management Agreement with
the Texas P.C. equal to the Company's costs plus the lower of (i) 30% of the
Texas P.C.'s net revenues or (ii) the P.C.'s net pre-tax income. The Company's
costs include all direct and indirect costs, overhead and expenses relating to
the Company's provision of services to the Texas P.C. under the Management
Agreement.
In addition to the Management Agreement with the Texas P.C., the Company
has a contractual right to designate or approve the licensed dentist or dentists
who own the Texas P.C.'s capital stock in the event Dr. Melamed ceases to be
affiliated with the Company for any reason.
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<PAGE> 65
CERTAIN TRANSACTIONS
In February 1996, the Company completed a series of transactions intended
to add TA Associates, Inc. as an equity partner, provide liquidity for Dr.
Melamed, the Company's founder, and facilitate the acquisition of MacGregor. In
connection with these transactions:
(i) the Company incurred $17.4 million of senior secured indebtedness
under the Credit Facility;
(ii) the TA Investors invested $10.0 million to acquire 4,800,000
shares of Convertible Participating Preferred Stock which are convertible
into 2,400,000 shares of Common Stock and 3,840,000 shares of Redeemable
Preferred Stock redeemable upon completion of this offering for an
aggregate cash payment of $8.0 million;
(iii) the Company redeemed shares of Common Stock held by Dr. Melamed
for an aggregate price of $6.7 million;
(iv) Dr. Melamed contributed to the Company interests in two
corporations holding ownership interests in the Company's Dallas-Fort Worth
Dental Offices, one of which was wholly-owned by Dr. Melamed and held a 1%
interest in each of the 13 Dental Offices then operating in Dallas-Fort
Worth and the other of which was 50% owned by Dr. Melamed and held a 98%
interest in the remaining Dental Office then operating in that market, in
exchange for an aggregate of 356,240 shares of Common Stock having a value
of $75,523 ($0.21 per share) at the date of issuance and a cash payment of
$425,000 and the Company repaid outstanding indebtedness to Dr. Melamed of
$446,000;
(v) the Company acquired MacGregor from Shears Vanguard Ltd., an
entity controlled by Dr. Charles G. Shears, an executive officer and
director of the Company, in exchange for (1) a cash payment of $14.9
million plus assumption of indebtedness of approximately $662,000 and other
ordinary course obligations and (2) 700,000 shares of Common Stock having a
value of $148,400 ($0.21 per share) at the date of issuance;
(vi) Dr. Melamed and the Company entered into an employment agreement
and Dr. Melamed purchased 150,000 shares of restricted Common Stock at a
purchase price of $0.21 per share as described under
"Management -- Employee Stock and Other Benefit Plans -- Restricted Stock
Grants" and "-- Employment Agreements"; and
(vii) Dr. Shears and the Company entered into a one-year employment
agreement providing for a base salary of $250,000.
In August 1996, the Company acquired Midwest from Dr. David L. Hehli,
President of Midwest, in exchange for (i) a cash payment of $5.3 million plus
the assumption of ordinary course obligations and (ii) 350,000 shares of Common
Stock having a value of $700,000 ($2.00 per share) at the date of issuance. The
Company also agreed to grant options to acquire up to 80,000 shares of Common
Stock upon the achievement by Midwest of specified financial performance goals
over the five calendar years following the acquisition. Each of these options
will be granted at an exercise price equal to the fair market value of the
Common Stock on the date of grant. In connection with the Midwest Acquisition,
the Company incurred $5.0 million of additional indebtedness under the Credit
Facility and Dr. Hehli and the Company entered into the employment agreement
described under "Management -- Employment Agreements."
Pursuant to an Amended and Restated Stockholders' Agreement (the
"Stockholders' Agreement") among the Company and the TA Investors, Dr. Melamed
and subsequent transferees of a portion of shares held by him (the "Monarch
Investors"), Dr. Shears and Shears Vanguard, Ltd. and subsequent transferees of
a portion of shares held by them (the "MacGregor Investors"), and Dr. Hehli and
a subsequent transferee of a portion of the shares held by him (the "Hehli
Investors," and together with the TA Investors, the Monarch Investors and the
MacGregor Investors, the "Investors") initially entered into in connection with
the 1996 Transactions and subsequently amended in connection with the
acquisition of Midwest, (i) each Investor received "piggy back" registration
rights, (ii) the TA Investors received demand registration rights, (iii) each
Investor granted to and received from the
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<PAGE> 66
other Investors rights (the "Co-Sale Rights") to participate on a pro rata basis
in certain resales of Common Stock and agreed to restrictions on transfers of
shares, (iv) each Investor was granted participation rights with respect to
certain future issuances of securities by the Company and (v) each Investor
agreed to elect one individual nominated by TA Investors, the Monarch Investors
and the MacGregor Investors to the Board of Directors. Mr. Kafker, a Managing
Director of TA Associates, Inc., and Drs. Melamed and Shears have been elected
as directors of the Company pursuant to the Stockholders' Agreement, as the
respective nominees of the TA Investors, Monarch Investors and MacGregor
Investors. Also in connection with the 1996 Transactions, the Company agreed to
indemnify the TA Investors and the controlling persons of the TA Investors (one
of whom is Mr. Kafker, a director of the Company) against claims and
liabilities, including claims and liabilities arising under the securities laws.
Effective upon and subject to the completion of this offering, provisions
of the Stockholders' Agreement relating to the participation rights, the Co-Sale
Rights, restrictions on transfers of shares and the election of the Board of
Directors will terminate in accordance with their original terms.
In December 1996 and January 1997, pursuant to the pro rata participation
rights contained in the Stockholders' Agreement, the Company sold an aggregate
of 1,704,550 shares of Series A Convertible Junior Preferred Stock to the
Investors for an aggregate purchase price of $3.0 million (or approximately
$1.76 per share).
The Company provides administrative services to Midwest Dental Plan, Ltd.
(the "Midwest Plan"), a capitated managed dental care plan of which Dr. Hehli
owns a majority interest, pursuant to an administrative services and management
agreement. The Company receives a percentage of the gross premiums or other
amounts received by the Midwest Plan under existing contracts with employer
groups. In addition, Midwest is a provider of dental services under the Midwest
Plan in exchange for capitation payments and co-payments from plan members. The
Company received $646,000 under these arrangements during the year ended
December 31, 1996.
The Company leases one facility from Dr. Melamed, 10 facilities from
entities controlled by Dr. Shears and four facilities from Dr. Hehli, in
connection with which the Company made aggregate lease payments of $65,000,
$326,000 and $87,000 to Drs. Melamed, Shears and Hehli, respectively, during the
year ended December 31, 1996. The Company believes that these leases are on
terms and at rates no less favorable to the Company than could have been
obtained from unaffiliated third parties.
Dr. Melamed's wife, Janet L. Melamed, is currently an employee of the
Company and receives an annual base salary of $150,000. Following the completion
of this offering, Mrs. Melamed will receive an annual base salary of $50,000.
The Company has entered into a Management Agreement dated as of February 6,
1996 with Modern Dental Professionals, P.C., a dental professional corporation
owned by Dr. Melamed, which employs or contracts with all of the dental
professionals practicing at the Dental Offices in Texas under the Management
Agreement. The Company provides the Texas P.C. with, among other things, the
facilities, administrative personnel and supplies, as well as numerous services,
including administrative, accounting, cash management, financial statements and
reports, budgeting including capital expenditures, recruiting, insurance,
litigation management, managed care contracting, management information systems,
billing and collection services. The Management Agreement is for a term of 40
years, with automatic renewal thereafter, and generally may be terminated by the
Texas P.C. only for cause, which includes an uncured breach of the agreement by
the Company, or upon the Texas P.C.'s bankruptcy or voluntary dissolution. The
Management Agreement may be terminated by the Company as of any anniversary date
of the Management Agreement upon 90 days' prior written notice.
The Company receives a management fee under the Management Agreement with
the Texas P.C. equal to the Company's costs plus the lower of (i) 30% of the
Texas P.C.'s net revenues or (ii) the P.C.'s net pre-tax income. The Company's
costs include all direct and indirect costs, overhead and expenses relating to
the Company's provision of services to the Texas P.C. under the Management
Agreement.
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<PAGE> 67
In addition to the Management Agreement with the Texas P.C., the Company
has a contractual right to designate or approve the licensed dentist or dentists
who own the Texas P.C.'s capital stock in the event Dr. Melamed ceases to be
affiliated with the Company for any reason.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of May 31, 1997 and as adjusted to
reflect the sale of the shares of Common Stock offered hereby of (i) each person
known by the Company to own beneficially five percent or more of the outstanding
shares of Common Stock, (ii) each director and the Named Executive Officers of
the Company and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(1)
SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(2) OWNED OFFERING OFFERING
--------------------------- ------------ -------- --------
<S> <C> <C> <C>
TA Associates Group(3)................................. 2,673,200 39.8% 28.3%
Warren F. Melamed, D.D.S.(4)........................... 2,015,932 30.0 21.3
David L. Hehli, D.D.S.................................. 347,841 5.2 3.7
Charles G. Shears, D.D.S.(5)........................... 115,930 1.7 1.2
Gary W. Cage(6)........................................ 100,000 1.5 1.1
Glenn E. Hemmerle(7)................................... 10,000 * *
Roger B. Kafker(8)..................................... 5,115 * *
All executive officers and directors as a group (seven
persons)(9).......................................... 2,604,818 38.8 27.5
</TABLE>
- ------------------------------
* Less than 1%.
(1) All percentages have been determined as of May 31, 1997 in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). For purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares of Common Stock which
such person has the right to acquire within 60 days after the date of this
Prospectus. For purposes of computing the percentage of outstanding shares
of Common Stock held by each person or group of persons named above, any
security which such person or persons has or have the right to acquire
within 60 days after the date of this Prospectus is deemed to be
outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. As of May 31, 1997,
a total of 6,708,723 shares of Common Stock were issued and outstanding and
no options to acquire Common Stock were exercisable within 60 days of the
estimated effective date of this offering. The applicable percentage of
"beneficial ownership" after this offering is based upon 9,458,723 shares of
Common Stock outstanding. The number of shares of Common Stock set forth
herein includes shares of non-voting Class A Common Stock which will
automatically convert into an equal number of shares of Common Stock upon
completion of this offering and shares of Convertible Participating
Preferred Stock and Series A Convertible Junior Preferred Stock which will
each automatically convert into one half of one share of Common Stock upon
completion of this offering.
(2) The address of the TA Associates Group is High Street Tower, Suite 2500, 125
High Street, Boston, MA 02110-2720. The address of Mr. Kafker is c/o TA
Associates, Inc., High Street Tower, Suite 2500, 125 High Street, Boston, MA
02110-2720. The address of all other listed stockholders is c/o Monarch
Dental Corporation, 4201 Spring Valley Road, Suite 320, Dallas, TX 75244.
(3) Includes (i) 1,829,029 shares of Common Stock owned by Advent VII L.P., (ii)
631,433 shares of Common Stock owned by Advent Atlantic and Pacific II L.P.,
(iii) 182,885 shares of Common Stock owned by Advent New York L.P. and (iv)
29,853 shares of Common Stock owned by TA Venture Investors Limited
Partnership. Advent VII L.P., Advent Atlantic and Pacific II L.P., Advent
New York L.P. and TA Venture Investors Limited Partnership are part of an
affiliated group of investment partnerships referred to, collectively, as
the TA Associates Group. The general partner of Advent VII L.P. is TA
Associates VII L.P. The general partner of Advent Atlantic and Pacific II
L.P. is TA Associates AAP II Partners L.P. The general partner of Advent New
York L.P. is TA Associates VI L.P. The general partner of each of TA
Associates VII L.P.,
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<PAGE> 69
TA Associates AAP II Partners L.P. and TA Associates VI L.P. is TA
Associates, Inc. In such capacity, TA Associates, Inc. exercises sole voting
and investment power with respect to all of the shares held of record by the
named investment partnerships, with the exception of those shares held by TA
Venture Investors Limited Partnership; individually, no stockholder,
director or officer of TA Associates, Inc. is deemed to have or share such
voting or investment power. Principals and employees of TA Associates, Inc.
(including Mr. Kafker, a director of the Company) comprise the general
partners of TA Venture Investors Limited Partnership. In such capacity, Mr.
Kafker may be deemed to share voting and investment power with respect to
the 29,853 shares held of record by TA Venture Investors Limited
Partnership. Mr. Kafker disclaims beneficial ownership of such shares,
except as to 5,115 shares as to which he holds a pecuniary interest.
(4) Includes 150,000 shares of restricted stock held by Dr. Melamed, 37,500 of
which vested on February 6, 1997, and the remainder of which vest in equal
annual installments of 37,500 shares on each of February 6, 1998, 1999, and
2000 and are subject to repurchase at a price of $0.21 per share upon a
termination of Dr. Melamed's employment prior to the relevant vesting date.
Does not include 289,830 shares held by irrevocable trusts for the benefit
of members of Dr. Melamed's family of which Dr. Melamed is not a trustee, as
to which shares Dr. Melamed disclaims beneficial ownership. Excludes
unvested options to purchase 150,000 shares.
(5) All shares are held jointly with Dr. Shears' wife. Does not include 695,580
shares held by irrevocable trusts for the benefit of members of Dr. Shears'
family of which Dr. Shears is not a trustee, as to which shares Dr. Shears
disclaims beneficial ownership.
(6) Constitutes 100,000 shares of restricted stock held by Mr. Cage,
approximately 31,250 of which are vested, and the remainder of which will
become vested in equal monthly installments of approximately 2,083 shares
and are subject to repurchase at a price of $0.21 per share upon a
termination of Mr. Cage's employment prior to the relevant vesting date.
Excludes unvested options to purchase 200,000 shares.
(7) Constitutes 10,000 shares of restricted stock held by Mr. Hemmerle,
approximately 2,500 shares of which are vested, and the remainder of which
will become vested in equal monthly installments of approximately 208 shares
and are subject to repurchase at a price of $0.21 per share upon a
termination of Mr. Hemmerle's service as a director prior to the relevant
vesting date. Excludes unvested options to purchase 10,000 shares.
(8) Includes 5,115 shares of Common Stock beneficially owned by Mr. Kafker
through TA Venture Investors Limited Partnership, all of which shares are
included in the 2,673,200 shares described in footnote (3) above. Does not
include any shares beneficially owned by Advent VII L.P., Advent Atlantic
and Pacific II L.P. or Advent New York L.P., of which Mr. Kafker disclaims
beneficial ownership.
(9) Includes 270,000 shares of restricted stock held by executive officers and
directors which are subject to repurchase in certain circumstances.
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<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Prior to the completion of this offering, there are 4,800,000 shares of
Convertible Participating Preferred Stock and 1,704,550 shares of Series A
Convertible Junior Preferred Stock outstanding. In connection with and subject
to this offering, each share of Convertible Participating Preferred Stock will
convert into one-half of one share of Common Stock and eight-tenths of a share
of Redeemable Preferred Stock, and each share of Series A Convertible Junior
Preferred Stock will convert into one-half of one share of Common Stock.
Pursuant to the terms of the Redeemable Preferred Stock, all of the outstanding
shares of Redeemable Preferred Stock will be redeemed by the Company upon
completion of this offering for $8.0 million.
Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, of which 9,458,723
shares will be issued and outstanding, and 2,000,000 shares of undesignated
preferred stock issuable in one or more series by the Board of Directors
("Preferred Stock"), of which no shares will be issued and outstanding.
Common Stock. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by stockholders and are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. Any issuance of Preferred Stock
with a dividend preference over Common Stock could adversely affect the dividend
rights of holders of Common Stock. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election, subject to any voting rights of the holders of any then
outstanding Preferred Stock. The holders of Common Stock have no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding shares
of Common Stock, including the shares offered hereby, are, or will be upon
completion of the offering, fully paid and non-assessable.
The Company's Amended and Restated By-laws (the "By-laws"), which will be
effective upon completion of this offering, provide, subject to the rights of
the holders of any Preferred Stock then outstanding, that the number of
directors shall be fixed by the Board of Directors. The directors, other than
those who may be elected by the holders of any Preferred Stock, are divided into
three classes, as nearly equal in number as possible, with each class serving
for a three-year term. Subject to any rights of the holders of any Preferred
Stock to elect directors, and to remove any director whom the holders of any
Preferred Stock had the right to elect, any director of the Company may be
removed from office only for cause and by the affirmative vote of at least
two-thirds of the total votes which would be eligible to be cast by stockholders
in the election of such director.
Undesignated Preferred Stock. Under the Company's Restated Certificate of
Incorporation (the "Certificate") the Board of Directors of the Company is
authorized, without further action of the stockholders, to issue up to 2,000,000
shares of Preferred Stock in one or more series and to fix the designations,
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereon as set forth in the Certificate. Any such Preferred Stock
issued by the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring or seeking to acquire, a significant portion of the outstanding Common
Stock.
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<PAGE> 71
CERTAIN PROVISIONS OF CERTIFICATE AND BY-LAWS
A number of provisions of the Certificate and By-laws which will be
effective upon completion of this offering concern matters of corporate
governance and the rights of stockholders. Certain of these provisions, as well
as the ability of the Board of Directors to issue shares of Preferred Stock and
to set the voting rights, preferences and other terms thereof, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors, including takeovers which stockholders may
deem to be in their best interests. To the extent takeover attempts are
discouraged, temporary fluctuations in the market price of the Company's Common
Stock, which may result from actual or rumored takeover attempts, may be
inhibited. These provisions, together with the classified Board of Directors and
the ability of the Board of Directors to issue Preferred Stock without further
stockholder action, also could delay or frustrate the removal of incumbent
directors or the assumption of control by stockholders, even if such removal or
assumption would be beneficial to stockholders of the Company. These provisions
also could discourage or make more difficult a merger, tender offer or proxy
contest, even if favorable to the interests of stockholders, and could depress
the market price of the Common Stock. The Board of Directors believes that these
provisions are appropriate to protect the interests of the Company and all of
its stockholders. The Board of Directors has no present plans to adopt any other
measures or devices which may be deemed to have an "anti-takeover effect."
Meetings of Stockholders. The By-laws provide that a special meeting of
stockholders may be called only by the Board of Directors unless otherwise
required by law. The By-laws provide that only those matters set forth in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law. In addition, the By-laws set forth
certain advance notice and informational requirements and time limitations on
any director nomination or any new proposal which a stockholder wishes to make
at an annual meeting of stockholders.
No Stockholder Action by Written Consent. The Certificate provides that any
action required or permitted to be taken by the stockholders of the Company at
an annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders in
lieu thereof.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The By-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. The Certificate contains a provision permitted by Delaware law that
generally eliminates the personal liability of directors for monetary damages
for breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the Delaware General Corporation Law or obtained an
improper personal benefit. This provision does not alter a director's liability
under the federal securities laws and does not affect the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. The Company has also entered into indemnification agreements with each of
its directors reflecting the foregoing and requiring the advancement of expenses
in proceedings involving the directors in most circumstances.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and (with
certain exceptions) thereafter approved by a majority (or 80% in the case of any
proposed amendment to the provisions of the Certificate relating to the
composition of the Board of Directors or amendments of the Certificate) of the
total votes eligible to be cast by holders of voting stock with respect to such
amendment.
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Amendment of the By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by holders of voting stock with respect to such amendment or repeal at an annual
meeting of stockholders or a special meeting called for such purpose unless the
Board of Directors recommends that the stockholders approve such amendment or
repeal at such meeting, in which case such amendment or repeal shall only
require the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal.
Ability to Adopt Shareholder Rights Plan. The Board of Directors may in the
future resolve to issue shares of Preferred Stock or rights to acquire such
shares to implement a shareholder rights plan. A shareholder rights plan
typically creates voting or other impediments to discourage persons seeking to
gain control of the Company by means of a merger, tender offer, proxy contest or
otherwise if such change in control is not in the best interest of the Company
and its stockholders. The Board of Directors has no present intention of
adopting a shareholder rights plan and is not aware of any attempt to obtain
control of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such by-law or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the Certificate nor the By-laws contains any such exclusion.
TRANSFER AGENT AND REGISTRAR
The Company has selected ChaseMellon Shareholder Services L.L.C. as the
transfer agent and registrar for the Common Stock.
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<PAGE> 73
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have a total of 9,458,723
shares of Common Stock outstanding. Of these shares, the 2,750,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of the
Company, as defined in the Securities Act, who would be required to sell such
shares under Rule 144 under the Securities Act. The remaining 6,708,723 shares
of Common Stock outstanding will be "restricted securities" as that term is
defined by Rule 144 (the "Restricted Shares"). The Restricted Shares were issued
and sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act.
Of the Restricted Shares, 5,448,541 Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144, certain of which may be sold
under Rule 144 in accordance with Rule 701 under the Securities Act as described
below, beginning 90 days after the date of this Prospectus and an additional
1,013,515 shares will become eligible for sale in the public market under Rule
144 at various dates thereafter through April 1, 1998 at which date all of such
shares will be eligible for sale. Substantially all such shares are subject to
the lock-up agreements described below. The remaining 246,667 Restricted Shares
are subject to vesting provisions and will become eligible for sale in the
public market under Rule 144 at various times as they become vested.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least one year (including the holding period of any prior owner except an
affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately 94,587 shares upon completion of the
offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements, and to the availability of current public information
about the Company. In addition, a person who is not deemed to have been an
affiliate of the Company at the time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), would be
entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Rule 144 also provides that affiliates who are
selling shares that are not Restricted Shares must nonetheless comply with the
same restrictions applicable to Restricted Shares with the exception of the
holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to the exercise of options outstanding prior to
this offering or the grant of Common Stock prior to this offering pursuant to
written compensation plans or contracts may be resold by persons other than
affiliates beginning 90 days after the date of this Prospectus, subject only to
the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days
after the date of this Prospectus, subject to all provisions of Rule 144 except
its one-year minimum holding period requirement.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate 6,708,473 shares of Common Stock after
the offering, have agreed that they will not, without the prior written consent
of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock beneficially owned by them during the 180-day period
following the date of this Prospectus other than transfers pursuant to bona fide
gifts. In addition, the Company has agreed that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will
not, directly or indirectly, sell, offer, contract to sell, make any short sale,
pledge, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
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dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock, or enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences or ownership of Common Stock, during the
180-day period following the date of this Prospectus, except that the Company
may issue, and grant options to purchase, shares of Common Stock under its
current stock option and purchase plans and may issue, and grant options to
purchase, shares of Common Stock under its current stock option and purchase
plans and may issue shares of Common Stock in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
lock-up agreement.
As of May 31, 1997, 1,376,250 shares of Common Stock were reserved for
issuance under the 1996 Stock Plan, of which 435,750 shares were issuable upon
the exercise of outstanding stock options, 500,000 shares of Common Stock were
reserved for issuance under the Acquisition Plan, of which up to 185,000 shares
will be the subject of options to be granted if certain acquired dental
practices achieve certain financial performance goals, and 250,000 shares of
Common Stock were reserved for issuance under the Purchase Plan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management -- Employee Stock and Other Benefit Plans -- 1996 Stock
Option and Incentive Plan" and "-- 1997 Employee Stock Purchase Plan." The
Company intends to file a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock issuable pursuant to the
1996 Stock Plan or the Purchase Plan. The Company expects to file this
registration statement within approximately 90 days following the date of this
Prospectus, and such registration statement will become effective upon filing.
Shares covered by this registration statement will thereupon be eligible for
sale in the public markets, subject to Rule 144 limitations applicable to
affiliates and the lock-up agreements described above. Shares issuable under
options granted under the Acquisition Plan will be issued pursuant to an
effective registration statement filed under the Securities Act or an available
exemption from the registration requirements of the Securities Act.
The holders of approximately 2,782,328 shares of Common Stock have the
right in certain circumstances to require the Company to register their shares
under the Securities Act for resale to the public and holders of approximately
6,377,265 shares have the right to include their shares in a registration
statement filed by the Company under the terms of the Stockholders' Agreement.
See "Certain Transactions."
Prior to this offering, there has been no public market for the Common
Stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors -- Shares Eligible for Future Sale."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Montgomery Securities and Salomon Brothers Inc, have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
Montgomery Securities.......................................
Salomon Brothers Inc........................................
---------
Total....................................................... 2,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the Representatives of the Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 412,500
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain stockholders of the Company, including the executive officers and
directors, who will own in the aggregate 6,708,473 shares of Common Stock after
the offering, have agreed that they will not, without the prior written consent
of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire Common Stock beneficially owned by them
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during the 180-day period following the date of this Prospectus other than
transfers pursuant to bona fide gifts. In addition, the Company has agreed that,
without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, the Company will not, directly or indirectly, sell, offer,
contract to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock, or enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, during the 180-day period following the date of
this Prospectus, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option and purchase
plans and may issue shares of Common Stock in connection with certain
acquisition transactions, provided such shares are subject to the 180-day
lock-up agreement. Sales of such shares in the future could adversely affect the
market price of the Common Stock. Hambrecht & Quist LLC may, in its sole
discretion, release any of the shares subject to the lock-up agreements at any
time without notice.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are prevailing
market and economic conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts and
by Haynes and Boone, L.L.P., Dallas, Texas. Certain legal matters related to
this offering will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Austin, Texas. As of the date of this Prospectus, a total of
32,400 and 12,000 shares of Convertible Participating Preferred Stock and 5,151
and 1,912 shares of Series A Convertible Junior Participating Preferred Stock
were beneficially owned by certain partners of Goodwin, Procter & Hoar LLP and a
partner of Haynes and Boone, L.L.P., respectively; such shares will be
convertible into an aggregate of 25,731 shares of Common Stock and 35,520 shares
of Redeemable Preferred Stock upon completion of this offering.
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EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of MacGregor Dental Centers, Midwest Dental Care,
United Dental Care and Dental Centers of Indiana included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-3
Consolidated Balance Sheets as of December 31, 1995 and
1996 and March 31, 1997 (Unaudited).................... F-4
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1995 and 1996 and the Three Month
Periods Ended March 31, 1996 and 1997 (Unaudited)...... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1994, 1995 and 1996
and the Three Month Period Ended March 31, 1997
(Unaudited)............................................ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Three Month
Periods Ended March 31, 1996 and 1997 (Unaudited)...... F-7
Notes to Consolidated Financial Statements................ F-8
MONARCH DENTAL CORPORATION AND SUBSIDIARIES -- ACQUISITIONS
MACGREGOR DENTAL CENTERS, INC. AND SHEARS MANAGEMENT, INC.
(COLLECTIVELY REFERRED TO AS "MACGREGOR DENTAL CENTERS")
Report of Independent Public Accountants.................. F-21
Combined Balance Sheets as of September 30, 1994 and
1995................................................... F-22
Combined Statements of Operations for the Years Ended
September 30, 1994 and 1995............................ F-23
Combined Statements of Stockholder's Equity for the Years
Ended September 30, 1994 and 1995...................... F-24
Combined Statements of Cash Flows for the Years Ended
September 30, 1994 and 1995............................ F-25
Notes to Combined Financial Statements.................... F-26
ADVANCE DENTAL MANAGEMENT, MIDWEST DENTAL CARE -- MONDOVI,
S.C., AND MIDWEST DENTAL CARE -- SHEBOYGAN, S.C.
(COLLECTIVELY REFERRED TO AS "MIDWEST DENTAL CARE")
Report of Independent Public Accountants.................. F-31
Combined Balance Sheets as of December 31, 1994 and
1995................................................... F-32
Combined Statements of Operations for the Years Ended
December 31, 1994 and 1995............................. F-33
Combined Statements of Stockholder's Equity for the Years
Ended December 31, 1994 and 1995....................... F-34
Combined Statements of Cash Flows for the Years Ended
December 31, 1994 and 1995............................. F-35
Notes to Combined Financial Statements.................... F-36
UNITED DENTAL CARE TOM HARRIS D.D.S. AND ASSOCIATES AND
WILLIAM T. HARRIS ("TOM") AND ASSOCIATES
(COLLECTIVELY REFERRED TO AS "UNITED DENTAL CARE")
Report of Independent Public Accountants.................. F-42
Combined Balance Sheets as of December 31, 1995 and 1996
and March 31, 1997 (Unaudited)......................... F-43
Combined Statements of Operations for the Years Ended
December 31, 1995 and 1996 and the Three Month Periods
Ended March 31, 1996 and 1997 (Unaudited).............. F-44
Combined Statements of Stockholder's Equity for the Years
Ended December 31, 1995 and 1996 and the Three Month
Period Ended March 31, 1997 (Unaudited)................ F-45
Combined Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996 and the Three Month Periods
Ended March 31, 1996 and 1997 (Unaudited).............. F-46
Notes to Combined Financial Statements.................... F-47
</TABLE>
F-1
<PAGE> 79
<TABLE>
<S> <C>
DENTAL CENTERS OF INDIANA, INC., DRS. JOHNSON, TERRY &
ASSOCIATES AND DCI-LEE, INC.
(COLLECTIVELY REFERRED TO AS "DENTAL CENTERS OF INDIANA")
Report of Independent Public Accountants.................. F-51
Combined Balance Sheets as of December 31, 1996 and March
31, 1997 (Unaudited)................................... F-52
Combined Statements of Operations for the Year Ended
December 31, 1996 and the Three Month Period Ended
March 31, 1997 (Unaudited)............................. F-53
Combined Statements of Stockholders' Equity for the Year
Ended December 31, 1996 and the Three Month Period
Ended March 31, 1997 (Unaudited)....................... F-54
Combined Statements of Cash Flows for the Year Ended
December 31, 1996 and the Three Month Period Ended
March 31, 1997 (Unaudited)............................. F-55
Notes to Combined Financial Statements.................... F-56
</TABLE>
F-2
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Monarch Dental Corporation:
We have audited the accompanying consolidated balance sheets of Monarch
Dental Corporation (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Monarch Dental Corporation
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 28, 1997, except as to
paragraphs 2, 3 and 4 of Note 13,
for which the date is June 19, 1997
F-3
<PAGE> 81
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
------------------------ -------------------------
1995 1996 HISTORICAL PRO FORMA
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 759,919 $ 1,059,337 $ 446,294 $ 446,294
Accounts receivable -- net of
allowances of approximately $385,000
and $1,676,000, respectively........ 987,120 3,431,114 4,343,184 4,343,184
Other current assets.................. 21,102 191,922 216,542 216,542
---------- ----------- ----------- -----------
Total current assets............ 1,768,141 4,682,373 5,006,020 5,006,020
Property and equipment, net of
accumulated depreciation of $1,889,728
and $2,741,097, respectively.......... 1,296,792 4,681,943 5,236,906 5,236,906
Intangible assets, net of accumulated
amortization of $573,156 in 1996...... -- 22,971,867 25,531,469 25,531,469
Other assets............................ 117,342 569,640 579,074 579,074
---------- ----------- ----------- -----------
Total assets.................... $3,182,275 $32,905,823 $36,353,469 $36,353,469
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 485,877 $ 1,070,035 $ 912,342 $ 912,342
Accrued payroll....................... 348,317 1,301,723 1,301,166 1,301,166
Accrued liabilities................... 217,762 752,622 1,177,511 1,177,511
Deferred income taxes................. -- 203,267 207,183 207,183
Payable to affiliated dental group
practices........................... 138,430 1,083,339 1,301,224 1,301,224
Deferred purchase price............... -- 545,000 -- --
Unearned revenue...................... -- 157,137 392,569 392,569
Current maturities of notes payable
and capital lease obligations....... 228,310 3,563,891 3,592,316 3,592,316
Redeemable Preferred Stock payable.... -- -- -- 8,000,000
---------- ----------- ----------- -----------
Total current liabilities....... 1,418,696 8,677,014 8,884,311 16,884,311
Deferred income taxes................... -- 115,352 570,119 570,119
Notes payable........................... 15,752 18,358,829 18,805,714 18,805,714
Notes payable to related party.......... 1,061,155 -- -- --
Capital lease obligations............... -- 410,252 617,472 617,472
Other liabilities....................... 63,980 1,041,619 1,034,142 1,034,142
---------- ----------- ----------- -----------
Total liabilities............... 2,559,583 28,603,066 29,911,758 37,911,758
Commitments and contingencies
Convertible Participating Preferred
Stock, $.01 par value, 4,800,000
shares authorized; 4,800,000 shares
issued and outstanding in 1996........ -- 9,313,315 9,313,315 --
Redeemable Common Stock, $.01 par value,
175,000 shares issued and outstanding
at December 31, 1996.................. -- 397,767 437,823 --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value,
2,000,000 shares authorized; no
shares issued or outstanding........ -- -- -- --
Series A Convertible Junior Preferred
Stock, $.01 par value; 1,704,550
shares authorized; 734,645 shares
issued and outstanding at December
31, 1996............................ -- 7,346 17,045 --
Common Stock, $.01 par value;
50,000,000 shares authorized;
28,040,223 and 3,133,750 shares
issued and outstanding in 1995 and
1996, respectively.................. 280,402 31,338 32,128 74,837
Common Stock to be issued, 30,000
shares in 1996...................... -- 75,000 -- --
Additional paid-in capital............ -- 1,936,322 3,907,264 5,689,694
Retained earnings (deficit)........... 342,290 (7,458,331) (7,265,864) (7,322,820)
---------- ----------- ----------- -----------
Total stockholders' equity
(deficit)..................... 622,692 (5,408,325) (3,309,427) (1,558,289)
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)..................... $3,182,275 $32,905,823 $36,353,469 $36,353,469
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 82
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dental group practices revenue, net......... $9,558,757 $13,222,740 $35,980,260 $6,315,454 $14,475,561
Less -- Amounts retained by dental group
practices................................. 3,070,179 4,300,351 11,801,862 2,059,582 5,028,465
---------- ----------- ----------- ---------- -----------
Net revenue................................. 6,488,578 8,922,389 24,178,398 4,255,872 9,447,096
Operating expenses:
Clinical salaries and benefits............ 1,553,120 2,243,385 6,259,230 1,064,960 2,446,786
Other salaries and benefits............... 688,176 971,001 3,127,336 465,673 1,387,354
Dental supplies........................... 509,442 833,160 2,215,405 325,650 911,867
Laboratory fees........................... 429,888 633,012 1,648,017 322,783 590,729
Occupancy................................. 391,790 470,984 1,937,353 318,382 800,355
Advertising............................... 625,980 709,530 1,210,100 224,772 325,026
Depreciation and amortization............. 251,500 293,393 1,430,447 248,230 565,003
General and administrative................ 950,234 1,098,877 3,563,998 573,420 1,457,786
---------- ----------- ----------- ---------- -----------
5,400,130 7,253,342 21,391,886 3,543,870 8,484,906
---------- ----------- ----------- ---------- -----------
Operating income............................ 1,088,448 1,669,047 2,786,512 712,002 962,190
Interest expense, net....................... 81,328 87,309 1,686,392 258,582 579,384
---------- ----------- ----------- ---------- -----------
Income before income taxes.................. 1,007,120 1,581,738 1,100,120 453,420 382,806
Income taxes................................ -- -- 425,466 174,409 150,283
---------- ----------- ----------- ---------- -----------
Net income.................................. 1,007,120 1,581,738 674,654 279,011 232,523
Pro forma income taxes...................... 389,755 612,133 -- -- --
---------- ----------- ----------- ---------- -----------
Pro forma net income........................ $ 617,365 $ 969,605 $ 674,654 $ 279,011 $ 232,523
========== =========== =========== ========== ===========
Net income per common share................. $ 0.10 $ 0.04 $ 0.03
=========== ========== ===========
Weighted average number of common shares
outstanding............................... 6,895,651 6,895,651 6,895,651
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 83
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
JUNIOR PREFERRED TOTAL
STOCK COMMON STOCK COMMON ADDITIONAL RETAINED STOCKHOLDERS'
------------------- ----------------------- STOCK TO PAID-IN EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT BE ISSUED CAPITAL (DEFICIT) (DEFICIT)
--------- ------ ----------- --------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993..................... -- $ -- -- $ -- $ -- $ -- $ 269,834 $ 269,834
Net income............... -- -- -- -- -- -- 1,007,120 1,007,120
Distributions............ -- -- -- -- -- -- (1,134,000) (1,134,000)
Issuance of Common
Stock.................. -- -- 28,040,223 280,402 -- -- (277,402) 3,000
--------- ------- ----------- --------- -------- ---------- ----------- -----------
BALANCE, December 31,
1994..................... -- -- 28,040,223 280,402 -- -- (134,448) 145,954
Net income............... -- -- -- -- -- -- 1,581,738 1,581,738
Distributions............ -- -- -- -- (1,105,000) (1,105,000)
--------- ------- ----------- --------- -------- ---------- ----------- -----------
BALANCE, December 31,
1995..................... -- -- 28,040,223 280,402 -- -- 342,290 622,692
Net income............... -- -- -- -- -- -- 674,654 674,654
Accretion on Redeemable
Common Stock........... -- -- -- -- -- -- (47,767) (47,767)
Distributions............ -- -- -- -- -- -- (2,007,997) (2,007,997)
Redemption of Common
Stock.................. -- -- (26,534,463) (265,345) -- -- (6,419,511) (6,684,856)
Issuance of Class A
Common Stock........... -- -- 353,750 3,538 -- 71,457 -- 74,995
Issuance of Series A
Junior Preferred
Stock.................. 734,645 7,346 -- -- -- 1,285,629 -- 1,292,975
Issuance of Common
Stock.................. -- -- 1,274,240 12,743 75,000 579,236 -- 666,979
--------- ------- ----------- --------- -------- ---------- ----------- -----------
BALANCE, December 31,
1996..................... 734,645 $7,346 3,133,750 $ 31,338 $ 75,000 $1,936,322 $(7,458,331) $(5,408,325)
Net income............... -- -- -- -- -- -- 232,523 232,523
Accretion on Redeemable
Common Stock........... -- -- -- -- -- -- (40,056) (40,056)
Issuance of Common
Stock.................. -- -- 87,500 875 (75,000) 276,374 -- 202,249
Issuance of Series A
Junior Preferred
Stock.................. 969,905 9,699 -- -- -- 1,696,293 -- 1,705,992
Repurchase of Common
Stock.................. -- -- (8,542) (85) -- (1,725) -- (1,810)
--------- ------- ----------- --------- -------- ---------- ----------- -----------
BALANCE, March 31, 1997
(Unaudited).............. 1,704,550 $17,045 3,212,708 $ 32,128 $ -- $3,907,264 $(7,265,864) $(3,309,427)
========= ======= =========== ========= ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 84
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 1,007,120 $ 1,581,738 $ 674,654 $ 279,012 $ 232,523
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization...... 251,500 293,393 1,430,447 248,230 565,003
Changes in assets and liabilities,
net of effects from
acquisitions --
Accounts receivable, net......... (64,694) (377,629) 166,298 (67,652) (376,012)
Other current assets............. 68,126 (3,991) 410,096 (2,603) (24,620)
Other noncurrent assets.......... 18,191 (81,721) 219,902 19,481 (8,872)
Accounts payable and accrued
expenses...................... 149,167 281,185 (1,918,083) 208,675 (143,961)
Other current liabilities........ -- 138,430 944,909 30,507 --
Other liabilities................ 56,382 7,598 (93,705) -- 227,954
Deferred income taxes............ -- -- 425,666 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by operating
activities.................. 1,485,792 1,839,003 2,260,184 715,650 472,015
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment... (310,076) (712,519) (1,128,835) (252,173) (383,827)
Cash paid for dental group practices,
including related costs............ -- -- (22,291,515) (16,538,016) (2,741,189)
----------- ----------- ------------ ----------- -----------
Net cash used in investing
activities.................. (310,076) (712,519) (23,420,350) (16,790,189) (3,125,016)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of
issuance costs..................... 247,000 587,000 21,772,750 17,386,750 2,145,000
Payments on notes payable and capital
lease obligations.................. (304,316) (262,028) (2,301,598) (1,811,018) (1,810,913)
Distributions to stockholders......... (1,134,000) (1,105,000) (2,007,997) (1,315,144) --
Redemption of Common Stock............ -- -- (6,684,856) (6,684,856) (1,811)
Issuance of stock..................... 3,000 -- 10,681,285 9,345,115 1,707,682
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in)
financing activities........ (1,188,316) (780,028) 21,459,584 16,920,847 2,039,958
----------- ----------- ------------ ----------- -----------
NET INCREASE (DECREASE) IN
CASH.................................. (12,600) 346,456 299,418 846,308 (613,043)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 426,063 413,463 759,919 759,919 1,059,337
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 413,463 $ 759,919 $ 1,059,337 1,606,227 $ 446,294
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest........................... $ 61,545 $ 29,620 $ 1,529,508 $ 258,582 $ 511,638
=========== =========== ============ =========== ===========
Cash paid for taxes................... $ -- $ -- $ -- $ -- $ 150,000
=========== =========== ============ =========== ===========
Equipment acquired under capital
leases............................. $ -- $ 20,589 $ 526,351 $ -- $ 348,443
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 85
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF BUSINESS AND REORGANIZATION:
Monarch Dental Corporation ("Monarch"), a Delaware corporation, and
subsidiaries (collectively, the "Company"), manages dental group practices in
selected markets presently including Dallas-Fort Worth, Houston, Wisconsin and
Arkansas. As of December 31, 1996, the Company managed 53 dental group practices
in Texas, Arkansas and Wisconsin.
The Company has grown substantially in a relatively short period of time,
principally through acquisitions. In 1996, the Company completed four
acquisitions resulting in the addition of 39 Dental Offices. The Company has
incurred substantial indebtedness to finance these acquisitions, which in turn
has contributed to a working capital deficit of approximately $4.0 million at
December 31, 1996. The Company also has a stockholders' deficit of approximately
$5.4 million at December 31, 1996.
Monarch was originally incorporated in Texas on December 28, 1994, and was
wholly-owned by Warren F. Melamed, D.D.S. ("Melamed"). On December 30, 1994,
eight Texas S corporations (later converted to limited partnerships) owned by
Melamed merged with and into Monarch in exchange for 1,150 shares of Monarch
Common Stock. These transactions were accounted for as a reorganization of
entities under common control.
On February 6, 1996, Melamed and another investor contributed their
respective interests in one limited partnership to Monarch in exchange for cash
and Common Stock in Monarch. The limited partnership interest held by the
investor was recorded by Monarch at fair market value. Under the Amended and
Restated Certificate of Incorporation of Monarch, Melamed's 1,150 shares were
converted into 28,040,223 shares of Common Stock in a transaction accounted for
as a stock split. Under a Stock Redemption Agreement, on February 6, 1996,
Monarch redeemed 26,534,463 shares of Common Stock from Melamed for cash of $6.7
million. Melamed also purchased 150,000 shares of Monarch restricted Common
Stock at fair market value. These transactions on February 6, 1996 are
collectively referred to as the "Reorganization".
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation/Basis of Consolidation
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting. These financial statements present the
financial position and results of operations of the entities under common
control. All intercompany accounts and transactions have been eliminated in the
consolidation.
In two states the Company accounts for its management activities with the
dental group practices under long-term management agreements (the "Management
Agreements"). In one state, the Company employs the dentists and hygienists. The
Company does not consolidate the operating results (including the revenues and
expenses) of the dental group practices under Management Agreements since these
revenues and expenses are not earned or incurred by the Company.
The Company has presented dental group practices revenue and amounts
retained by dental group practices (which consists of 30% of the dental groups
practices' net revenue, including dental hygienist salaries and contracted
dental specialists and is retained by the affiliated dental group practices in
accordance with the Management Agreements), in the accompanying consolidated
statements of income to arrive at the Company's net revenue. The Company
believes that a display presentation combining the revenue of the dental group
practices under Management Agreements with those owned by the Company
(collectively referred to as the "Dental Offices") is more meaningful. See
further discussion below.
F-8
<PAGE> 86
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's consolidated financial statements have been prepared in
anticipation of an initial public offering (the "offering").
Basis of Presentation -- Interim Financial Statements (unaudited)
The financial statements for the three months ended March 31, 1996 and
1997, have been prepared by the Company, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of its operations for the three months
ended March 31, 1996 and 1997, have been included herein. The results of
operations for the three-month period are not necessarily indicative of the
results for the full year.
Dental Group Practices Revenue, Net
Dental group practices revenue, net represents the revenue of the Dental
Offices reported at the estimated realizable amounts from third-party payors and
patients for services rendered, net of contractual and other adjustments. In
certain states, dental services are billed and collected by the Company in the
name of the Dental Offices. As of December 31, 1996, dental services were
provided by the Company's Dental Offices under two separate Management
Agreements.
Revenue under certain third-party payor agreements is subject to audit and
retroactive adjustments. There are no material claims, disputes or other
unsettled matters that exist to management's knowledge concerning third-party
reimbursements.
During 1994, 1995 and 1996, the Company estimates that approximately 45%,
45% and 47%, respectively, of dental group practices revenue, net was received
under agreements with third-party payors. Approximately 26% of the Company's
revenue for the year ended December 31, 1996 was derived from contracts with
Prudential Dental Maintenance Organization, Inc. and Compcare Health Services
Insurance Corporation, respectively. These contracts continue until terminated
by either party upon 60 to 90 days' prior written notice, and the material
economic terms can be renegotiated periodically. Since the Company is required
to provide only basic dental services under these contracts, there are no
significant future losses anticipated under these contracts.
Net Revenue
Net revenue represents revenue from Dental Offices less amounts retained by
dental group practices. The amounts retained by dental group practices represent
amounts paid by (i) the professional corporations as salary, benefits and other
payments to employed dentists, hygienists and contracted specialists, and (ii)
the Company as salary, benefits and other payments to employed dentists,
hygienists and contracted specialists in states where it operates and in which
ownership of dental practices by the Company is permitted (currently Wisconsin).
The Company's historical net revenue and operating income levels would be the
same as those reported even if the Company employed all of the dentists,
hygienists and contracted specialists. Under the Management Agreements, the
Company assumes responsibility for the management of all aspects of the dental
group practices' business (including all operating expenses consisting of
occupancy, dental supplies, laboratory fees, advertising and other costs) other
than the provision of dental services and retains a 100% residual interest in
the net income of the dental group practices. The Company's net revenue is
dependent upon the revenue of the dental group practices.
F-9
<PAGE> 87
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the dental group practices revenue, net, amounts retained by
dental group practices and net revenues of the Company is as follows:
<TABLE>
<CAPTION>
DENTISTS AND
PROFESSIONAL HYGIENISTS
CORPORATIONS EMPLOYED BY
UNDER AND SPECIALISTS
MANAGEMENT CONTRACTED BY
AGREEMENTS THE COMPANY TOTAL
------------ --------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1996
Dental group practices revenue, net........... $30,730 $5,250 $35,980
Amounts retained by dental group practices.... 9,860 1,942 11,802
------- ------ -------
Net revenue................................... $20,870 $3,308 $24,178
======= ====== =======
1995
Dental group practices revenue, net........... $13,222 $ -- $13,222
Amounts retained by dental group practices.... 4,300 -- 4,300
------- ------ -------
Net revenue................................... $ 8,922 $ -- $ 8,922
======= ====== =======
1994
Dental group practices revenue, net........... $ 9,559 $ -- $ 9,559
Amounts retained by dental group practices.... 3,070 -- 3,070
------- ------ -------
Net revenue................................... $ 6,489 $ -- $ 6,489
======= ====== =======
</TABLE>
Melamed is the sole shareholder of Modern Dental Professional, P.C.
("Modern Dental"), the professional corporation in Texas which employs the
dentists and other licensed personnel. Dental group practices revenue, net
generated by Modern Dental approximated 85% of the Company's total dental group
practices revenue, net during 1996. The Company and Melamed have a succession
agreement whereby upon any termination of Melamed's affiliation with the
Company, Melamed is required to sell his ownership interest in Modern Dental for
a nominal amount.
Advertising
The costs of advertising, promotion and marketing are expensed in the year
incurred.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable represent receivables from patients and other
third-party payors for dental services provided. Such amounts are recorded net
of contractual allowances and estimated bad debts. Unearned revenue represents
amounts relating to longer term services, such as orthodontics.
The Dental Offices grant credit without collateral to their patients, most
of whom are local residents and are insured under third-party payor agreements.
Periodically, the Dental Offices transfer the patient receivables to the
Company. Amounts collected on behalf of and payable to the Dental Offices is
reflected as payable to affiliated dental group practices in the accompanying
consolidated balance sheets. The Company does not believe these receivables
represent any concentrated credit
F-10
<PAGE> 88
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk. Management continually monitors and periodically adjusts its allowances
associated with these receivables.
At December 31, 1996, approximately 56% and 30% of the Company's accounts
receivable were from services rendered in Texas and Wisconsin, respectively. In
addition, at December 31, 1996, approximately $1.4 million in accounts
receivable were from third-party payors.
Property and Equipment
Property and equipment are stated at cost or fair market value at dates of
acquisition, net of accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over the following
useful lives.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements.................. Remaining life of lease
Furniture and fixtures.................. 5-8
Dental equipment........................ 5
Computer equipment...................... 5
</TABLE>
Equipment held under capital lease obligations is amortized on a
straight-line basis over the shorter of the lease term or estimated life of the
asset.
Intangible Assets
The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the acquired dental group
practices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. Costs of acquisition in excess of the net
estimated fair value of tangible assets acquired and liabilities assumed is
allocated first to identifiable intangibles and then either to the Management
Agreement (in those transactions where the Company has effectively acquired the
right to manage the Dental Office) or goodwill (for acquired Dental Offices).
The Management Agreement represents the Company's right to manage the Dental
Offices during the 40-year term of the agreement. The assigned value of the
Management Agreement is amortized using the straight-line method over its
estimated useful life of 30 years. The Management Agreements cannot be
terminated by the related professional corporation without cause, consisting
primarily of bankruptcy or material default. The value assigned to goodwill is
amortized over 40 years. At December 31, 1996, the weighted average life
assigned to all intangible assets was approximately 32 years.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each Dental Office's relative market share and local market
competitive environment, current period and forecasted operating results, cash
flow levels of the Dental Offices and the impact on the net revenue earned by
the Company, and legal factors governing the practice of dentistry.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of the
consolidation of professional corporation revenues and the accounting for
business combinations. The Company is unable to predict the impact, if any, that
this
F-11
<PAGE> 89
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
review may have on the Company's acquisition strategy, allocation of purchase
price related to acquisitions, and amortization life assigned to intangible
assets.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
At the Reorganization, Monarch terminated its status as an S corporation
and is now subject to federal income taxes. As such, the consolidated financial
statements in 1994 and 1995 include a pro forma adjustment for federal income
taxes as if Monarch had not been treated as an S corporation. In 1996, the
Company accounted for income taxes under the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109.
Net Income Per Common Share
The net income per common share is based on the weighted average number of
common shares outstanding adjusted for actual shares issued during the period.
The weighted average number of common shares outstanding includes all shares
issued or contingently issuable since and including the Reorganization as if
those shares were issued on January 1, 1996. Shares of Common Stock issuable
upon conversion of the Convertible Participating Preferred Stock, Redeemable
Common Stock and Series A Convertible Junior Preferred Stock are assumed to be
common stock equivalent shares. Fully diluted pro forma net income per share is
not presented because the effect is not material.
Supplemental pro forma net income per share for the year ended December 31,
1996 and the three months ended March 31, 1997, was $0.18 and $0.05 (unaudited),
respectively, assuming certain proceeds from the offering are used to retire
$18,225,000 of the Company's outstanding indebtedness under its credit agreement
discussed in Note 6 and to redeem the Company's Redeemable Preferred Stock.
Unaudited Pro Forma Consolidated Balance Sheet at March 31, 1997
Upon completion of the offering, the Company will convert its Convertible
Participating Preferred Stock into 2,400,000 shares of Common Stock and
3,840,000 shares of Redeemable Preferred Stock. In addition, the Company's
Redeemable Common Stock and Series A Convertible Junior Preferred Stock will be
converted into 175,000 and 852,265 shares, respectively, of Monarch Common
Stock. The unaudited pro forma balance sheet information is presented as if such
conversions had occurred as of March 31, 1997.
3. ACQUISITIONS:
Concurrent with the Reorganization discussed in Note 1, Monarch acquired
certain assets and assumed certain liabilities of MacGregor Dental Centers, Inc.
and Shears Management, Inc. (collectively referred to as "MacGregor"), for cash
and Common Stock in an asset contribution transaction. MacGregor operates and
manages 15 dental offices in the Houston, Texas area. The dentists and
hygienists practicing in MacGregor dental offices are employed by Modern Dental.
This acquisition was accounted for using the purchase method of accounting.
F-12
<PAGE> 90
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 1, 1996, Monarch acquired certain assets and assumed certain
liabilities of Midwest Dental Care -- Sheboygan, SC ("Sheboygan") and Midwest
Dental Care -- Mondovi, SC ("Mondovi") in a stock purchase transaction for cash
and Common Stock. Additionally, Monarch acquired certain assets and liabilities
of Advance Dental Management, a related entity to Sheboygan and Mondovi, for
cash and Common Stock, in an asset purchase transaction. The Company also agreed
to grant to the seller of these three entities (collectively referred to as
"Midwest"), options to acquire up to 80,000 shares of Common Stock upon the
achievement of specified financial performance goals. This acquisition was
accounted for using the purchase method of accounting.
On October 1, 1996, Monarch acquired certain assets and assumed certain
liabilities of the dental practice of an individual dentist in Dallas, Texas,
for cash and Common Stock in an asset purchase transaction. This acquisition was
accounted for using the purchase method of accounting.
On November 7, 1996, Monarch acquired all of the outstanding stock of
Convenient Dental Care, Inc. ("Convenient") in Arkansas, for a promissory note
and Common Stock in a stock purchase transaction. The Common Stock was issued
and the note repaid in January 1997. Additionally, the seller has a right to
receive additional purchase consideration of up to $200,000, contingent upon
meeting specified financial performance goals in 1997.
Obligations related to contingent purchase consideration cannot be
quantified and, accordingly, have not been reflected in the accompanying
consolidated financial statements. Such liability, if any, will be recorded as
additional purchase price in the period in which the outcome of the
contingencies becomes known.
All of the acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed based on the
estimated fair values at the dates of acquisition. The estimated fair values of
assets acquired and liabilities assumed during 1996 are summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 473,632
Accounts receivable, net.................................... 2,610,292
Other assets................................................ 675,866
Property and equipment...................................... 2,511,731
Liabilities assumed......................................... (5,442,942)
Intangible assets........................................... 23,545,023
Less -- Fair value of Common Stock issued and to be
issued.............................................. (941,455)
Deferred purchase price (payable in cash)........... (667,000)
-----------
Cash purchase price......................................... $22,765,147
===========
</TABLE>
The fair value of Common Stock issued and to be issued for each acquisition
is based on a valuation performed by an independent third party.
F-13
<PAGE> 91
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information reflects the historical operating results of the
Monarch and MacGregor dental practice groups for the year ended December 31,
1996.
<TABLE>
<CAPTION>
MONARCH MACGREGOR
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Dental group practices revenue, net..... $18,084 $13,224
Operating expenses:
Salaries and benefits................. 5,174 3,493
Bad debt expense...................... 635 710
Management fee expense................ 12,275 9,021
------- -------
18,084 13,224
------- -------
Operating income........................ $ -- --
======= =======
</TABLE>
Under the Management Agreement between the Company and the dental group
practices, the Company received 100% of the practices pre-tax income in 1996.
Accordingly, there is no operating income at the dental group practice entity.
The following unaudited pro forma information reflects the effect of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1995. Future results may differ
substantially from pro forma results and cannot be considered indicative of
future results.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Dental group practices revenue, net......................... $30,497 $49,546
======= =======
Net income.................................................. $ 929 $ 748
======= =======
Net income per common share................................. $ 0.14 $ 0.11
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Dental equipment.......................................... $ 1,989,110 $ 4,103,901
Furniture and fixtures.................................... 243,460 1,680,788
Leasehold improvements.................................... 660,875 1,280,114
Computer equipment........................................ 293,075 358,237
----------- -----------
3,186,520 7,423,040
Less -- Accumulated depreciation and amortization......... (1,889,728) (2,741,097)
----------- -----------
Property and equipment, net............................... $ 1,296,792 $ 4,681,943
=========== ===========
</TABLE>
F-14
<PAGE> 92
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZATION PERIOD
-------------------
<S> <C> <C>
Management Agreements 30 years $17,276,138
Goodwill 40 years 6,268,885
Less -- Accumulated amortization (573,156)
-----------
Intangible assets, net $22,971,867
===========
</TABLE>
6. NOTES PAYABLE:
Notes payable consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Borrowings under credit facility............................ $ -- $21,551,686
Other notes payable, with an interest rate of prime plus
0.5%, secured by certain receivables and property......... 74,067 --
-------- -----------
74,067 21,551,686
Less -- Current maturities.................................. (58,315) (3,192,857)
-------- -----------
Notes payable, net.......................................... $ 15,752 $18,358,829
======== ===========
</TABLE>
The maturities of notes payable at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997............................................ $ 3,192,857
1998............................................ 3,192,857
1999............................................ 15,165,972
-----------
Total........................................... $21,551,686
===========
</TABLE>
Effective February 5, 1996, and modified August 29, 1996, the Company
entered into a credit agreement (the "Credit Facility") with a commercial bank.
The Credit Facility provides for a three-year commitment to fund revolving
credit borrowings of up to $30 million. Of this amount, $2.0 million is
available for general working capital purposes. Under the terms of the Credit
Facility, the Company paid a commitment fee of approximately $577,000 which has
been capitalized in other assets in the accompanying, consolidated balance sheet
and amortized as an adjustment to interest expense using the effective interest
method. The interest rate under the Credit Facility is set at the Company's
option as follows: (i) reserve adjusted LIBOR plus 2.0% to 3.25%; or (ii) the
bank's base rate plus 1.25% to 1.5%. The Credit Facility includes certain
restrictive covenants including limitations on the payment of dividends and
making acquisitions as well as the maintenance of certain financial ratios. The
Credit Facility is secured by substantially all the assets of the Company. At
December 31, 1996, subject to certain conditions as defined by the credit
agreement, the Company had approximately $8.4 million of borrowings available.
Of this amount, $2.0 million is available for working capital purposes.
F-15
<PAGE> 93
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, Melamed had $1.5 million in notes payable to a
commercial bank which the Company guaranteed. At December 31, 1995, portions of
these borrowings were loaned to the Company from Melamed, at various terms as
follows:
<TABLE>
<S> <C>
Various notes to shareholder, principal and interest payable
monthly ranging from 7.25% to 9%, maturing through
December 2000............................................. $1,210,561
Less -- Current maturities.................................. (149,406)
----------
Total....................................................... $1,061,155
==========
</TABLE>
The notes were repaid to Melamed during 1996 and the Company was released
from its guarantee.
Interest expense on the shareholder notes payable approximated $54,000,
$69,000 and $7,654 for the years ended December 31, 1994, 1995 and 1996,
respectively.
7. STOCKHOLDERS' EQUITY:
Upon completion of the offering, the Company will have authorized the
issuance of 52,000,000 shares of stock, of which (a) 2,000,000 shares, par value
$0.01 per share, are to be undesignated Preferred Stock, and (b) 50,000,000
shares, par value $0.01 per share, are to be designated Common Stock.
Convertible Participating Preferred Stock
On February 6, 1996, Monarch sold 4,800,000 shares of Convertible
Participating Preferred Stock (the "Preferred Stock") to an unrelated investor
group for approximately $10.0 million. The Preferred Stock has voting and
dividend rights equal to Common Stock, and automatically converts to 2,400,000
shares of Common Stock plus 3,840,000 shares of Redeemable Preferred Stock upon
the offering. The Redeemable Preferred Stock is automatically redeemed upon the
consummation of an initial public offering for cash of approximately $8.0
million.
Redeemable Common Stock
In connection with the acquisition of Midwest, the seller acquired the
right to put 175,000 shares of Common Stock back to the Company contingent upon
certain events as defined in the Midwest purchase agreement. These shares have
been reflected as Redeemable Common Stock in the accompanying consolidated
balance sheets. The put right expires upon the consummation of an initial public
offering.
Series A Convertible Junior Preferred Stock
During 1996, the Company issued 734,645 shares of Series A Convertible
Junior Preferred Stock (the "Junior Preferred Stock") to the holders of the
Convertible Participating Preferred Stock. Subsequent to December 31, 1996, an
additional 969,905 shares were issued, resulting in a total of 1,704,550 shares
outstanding as of February 28, 1997. The Junior Preferred Stock will convert
into Common Stock on a 1-for-2 basis upon the offering.
Common Stock
Of the 3,133,750 shares of Common Stock outstanding, 203,750 shares are
designated as non-voting Class A Common Stock. These shares will be converted to
Common Stock upon the offering.
F-16
<PAGE> 94
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock to be Issued
In connection with the acquisition of Convenient in November 1996, 30,000
shares of Common Stock valued at $75,000 were issued in January 1997. The number
of common shares to be issued and the price per share were fixed as of the
consummation date of the acquisition in November 1996.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which is effective for fiscal
years beginning after December 15, 1995. Under SFAS No. 123, the Company may
elect to recognize stock-based compensation expense based on the fair value of
the awards or continue to account for stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
disclose in the financial statements the effects of SFAS No. 123 as if the
recognition provisions were adopted. The Company has not adopted the recognition
provisions of SFAS No. 123. The Company has calculated the effects of SFAS No.
123 and determined that the result is immaterial.
The following table summarizes the activity during 1996 under the Company's
1996 Stock Option and Incentive Plan. A total of 1,000,000 shares are reserved
under the plan.
<TABLE>
<CAPTION>
SHARES
------
<S> <C>
Outstanding at beginning of year............................ --
Granted..................................................... 25,000
Exercised................................................... --
Canceled.................................................... --
------
Outstanding at end of year.................................. 25,000
------
Exercisable at end of year.................................. --
Price range................................................. $3.00
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Operating and Capital Lease Obligations
The Company leases all of its facilities, including the Dental Offices and
corporate office, under noncancelable operating leases, extending through 2009.
Rent expense totaled approximately $297,000, $367,000 and $1.6 million for the
years ended December 31, 1994, 1995 and 1996, respectively.
F-17
<PAGE> 95
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of December
31, 1996:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- ---------
<S> <C> <C>
1997........................................................ $1,867,996 $ 396,913
1998........................................................ 1,671,885 243,716
1999........................................................ 1,306,840 176,607
2000........................................................ 947,174 36,312
2001........................................................ 804,076 11,065
Thereafter.................................................. 2,218,631 --
---------- ---------
Total minimum lease obligation............................ $8,816,602 864,613
==========
Less- Amounts representing interest....................... (83,327)
---------
Present value of minimum lease obligations................ 781,286
Less- Current maturities.................................. (371,034)
---------
Capital lease obligations, net............................ $ 410,252
=========
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to its
business activities. Management does not believe the resolution of such matters
will have a material adverse effect on the Company's financial position, results
of operations or liquidity.
Management Agreements
The Company has no material commitments and guarantees to the dental group
practices under Management Agreements.
9. INCOME TAXES:
The 1996 income tax provision consisted of the following (in thousands):
<TABLE>
<S> <C>
Current:
Federal................................................... $184
State..................................................... 20
----
204
Deferred.................................................... 221
----
Total....................................................... $425
====
</TABLE>
The Company's effective tax rate of 38.7% is greater than the federal rate
of 34% due to the impact of state income taxes.
Deferred income taxes are recorded for temporary differences between the
basis of assets and liabilities for financial reporting purposes and income tax
purposes. As a result of the Reorganization, the Company recorded a deferred tax
provision of approximately $58,000 relating to its conversion from an S
corporation to a C corporation.
F-18
<PAGE> 96
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences comprising the deferred tax assets and liabilities in
the consolidated balance sheet as of December 31, 1996 are as follows (in
thousands):
<TABLE>
<S> <C> <C>
Deferred tax asset:
Tax loss carryforwards.................................... $(158)
Cash to accrual and other................................. (76)
-----
$(234)
Deferred tax liability:
Accelerated depreciation.................................. 173
Intangible assets amortization............................ 176
-----
349
-----
Net deferred tax liability................................ $ 115
=====
</TABLE>
The deferred income tax provision of $221,000 in 1996 relates primarily to
the excess of the tax over book amortization of intangible assets.
10. RELATED-PARTY TRANSACTIONS:
The Company leases several of its facilities from affiliated entities.
Total rent expense paid to related parties for the years ended December 31,
1994, 1995 and 1996, was approximately $35,000, $42,000 and $478,000
respectively.
The Management Agreement activity between the Company and the Dental
Offices is reflected as a liability in the consolidated balance sheet. Such
amounts are generally payable within a 30-day period following month-end.
11. BENEFIT PLANS:
401(k) Plans
The Company maintains two defined contribution plans which conform to IRS
provisions for 401(k) plans. One plan covers all employees of the Company except
MacGregor and Midwest, referred to as the "Monarch 401(k) Plan." Under this
plan, employees are eligible to participate in the plan provided they have
attained the age of 18, have completed 1,000 hours of service, and have been
employed for at least one year. The Company makes discretionary matching
contributions up to a maximum dollar amount. The second plan, referred to as the
"Midwest 401(k) Plan," covers all employees of the Company's Midwest subsidiary.
Under the Midwest 401(k) Plan, employees are eligible to participate in the plan
provided they have attained the age of 21, have completed 1,000 hours of
service, and have been employed for at least one year. Employer matching
contribution percentages as well as additional contributions are determined
annually. Total contributions by the Company for both plans were approximately
$27,000 and $76,000 for the years ended December 31, 1995 and 1996,
respectively. There were no contributions for the year ended December 31, 1994.
Health and Welfare Benefit Plan
The Company has two self-funded plans to provide these benefits to
full-time employees. The first plan, referred to as the "Monarch Health Plan,"
is a self-funded plan covering all employees of the Company except MacGregor and
Midwest. The Company maintains stop-loss insurance coverage whereby if total
monthly plan claims exceed a defined calculated amount, the excess claims
amounts are covered by the stop-loss policy. Monthly contribution amounts are
determined by the plan administrator based on funding requirements and plan
experience.
F-19
<PAGE> 97
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The second plan covers all employees of Midwest and is also a self-funded
plan which maintains stop-loss insurance coverage. This plan's stop-loss policy
stipulates if total annual plan claims exceed $240,000 or if an individual's
insured claims exceed $20,000 annually, the excess amounts are covered by the
stop-loss policy. Monthly contribution amounts are determined annually by the
plan administrator based on funding requirements and plan experience.
Total contributions by the Company for these plans were approximately
$228,000 and $355,000 for the years ended December 31, 1995 and 1996,
respectively. There were no contributions for the year ended December 31, 1994.
12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's notes payable, capital lease
obligations, and convertible participating preferred stock are based on similar
issues or on current rates available to the Company. The carrying values and
estimated fair values were estimated to be the same at December 31, 1995 and
1996.
13. SUBSEQUENT EVENTS:
Effective January 1, 1997, the Company acquired certain assets and assumed
certain liabilities of and executed a Management Agreement with Arkansas Dental
Health Associates, Inc. for $1.6 million in cash and 57,500 shares of Common
Stock in a stock purchase transaction. This acquisition will be accounted for
using the purchase method of accounting.
Effective April 1, 1997, the Company acquired certain assets and assumed
certain liabilities of United Dental Care Tom Harris D.D.S. & Associates in
Arkansas for $2.8 million in cash and 68,750 shares of Common Stock in an asset
purchase transaction. This acquisition will be accounted for using the purchase
method of accounting.
Effective June 19, 1997, the Company signed a definitive agreement with
Dental Centers of Indiana, Inc., Drs. Johnson, Terry & Associates and DCI-Lee,
Inc. (collectively, "Dental Centers of Indiana") under which the Company has
agreed to acquire Dental Centers of Indiana pursuant to a merger transaction.
The acquisition is expected to be effective concurrent with the completion of
the offering and will be accounted for using the purchase method of accounting.
The Company plans to use the net proceeds from the offering of its Common
Stock (i) to repay a portion of outstanding indebtedness under the Credit
Facility; (ii) to redeem all of the outstanding Redeemable Preferred Stock; and
(iii) for working capital and other general corporate purposes. On May 1, 1997,
the Company approved a 1-for-2 reverse stock split which became effective on
June 19, 1997. The accompanying financial statements give retroactive effect to
the stock split.
F-20
<PAGE> 98
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
MacGregor Dental Centers:
We have audited the accompanying combined balance sheets of MacGregor
Dental Centers, Inc. and Shears Management, Inc. (collectively referred to as
"MacGregor Dental Centers" -- both Texas corporations) as of September 30, 1994
and 1995, and the related combined statements of operations, stockholder's
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MacGregor Dental Centers as
of September 30, 1994 and 1995, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
December 13, 1996
F-21
<PAGE> 99
MACGREGOR DENTAL CENTERS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 388,390 $ 549,114
Short-term investments................ 663,361 207,146
Accounts receivable -- net of
allowances of $1,064,344 and
$1,268,824, respectively........... 1,114,360 969,342
Prepaids and other current assets..... 300,324 116,426
---------- ----------
Total current assets.......... 2,466,435 1,842,028
Investments............................. 367,736 --
Property and equipment, net............. 4,042,787 3,870,298
Other assets............................ 278,787 267,516
---------- ----------
Total assets.................. $7,155,745 $5,979,842
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable...................... $ 502,757 $ 504,628
Accrued payroll....................... 376,662 306,649
Accrued liabilities................... 145,716 232,059
Current maturities of notes payable... 319,104 432,836
Current maturities of capital lease
obligations........................ 87,949 95,544
---------- ----------
Total current liabilities..... 1,432,188 1,571,716
Notes payable........................... 528,090 392,006
Capital lease obligations............... 183,193 92,389
---------- ----------
Total liabilities............. 2,143,471 2,056,111
Commitments and contingencies
Stockholder's equity.................... 5,012,274 3,923,731
---------- ----------
Total liabilities and
stockholder's equity........ $7,155,745 $5,979,842
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-22
<PAGE> 100
MACGREGOR DENTAL CENTERS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
SEPTEMBER 30, JANUARY 31,
-------------------------- --------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................ $14,424,399 $13,878,120 $4,380,402 $4,626,040
Operating expenses:
Salaries and benefits................. 6,204,151 6,684,748 1,884,373 2,228,249
Dental supplies....................... 894,270 784,607 206,171 261,535
Laboratory fees....................... 838,779 808,017 258,247 269,339
Occupancy............................. 962,418 887,005 255,584 295,668
Advertising........................... 355,001 378,577 144,063 126,192
Payroll taxes......................... 414,115 427,077 144,709 142,359
Depreciation and amortization......... 347,075 428,336 151,955 142,779
General and administrative............ 3,681,300 2,822,188 825,628 940,729
----------- ----------- ---------- ----------
13,697,109 13,220,555 3,870,730 4,406,850
----------- ----------- ---------- ----------
Operating income.............. 727,290 657,565 509,672 219,190
Other income (expense):
Interest expense, net................. (33,255) (12,156) (19,880) (4,052)
Other income.......................... 29,007 75,851 -- 25,284
Gain (loss) on disposal of assets..... 16,127 (153,402) -- (51,134)
----------- ----------- ---------- ----------
Net income.............................. $ 739,169 $ 567,858 $ 489,792 $ 189,288
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE> 101
MACGREGOR DENTAL CENTERS
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995
<TABLE>
<S> <C>
BALANCE, September 30, 1993................................. $ 4,282,572
Net income................................................ 739,169
Distributions to stockholder.............................. (9,467)
-----------
BALANCE, September 30, 1994................................. 5,012,274
Net income................................................ 567,858
Distributions to stockholder.............................. (1,656,401)
-----------
BALANCE, September 30, 1995................................. 3,923,731
Net income................................................ 189,288
Contributions from stockholder............................ 62,467
-----------
BALANCE, January 31, 1996 (unaudited)....................... $ 4,175,486
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE> 102
MACGREGOR DENTAL CENTERS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
SEPTEMBER 30, JANUARY 31,
---------------------- ---------------------
1994 1995 1995 1996
--------- ---------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 739,169 $ 567,858 $ 489,792 $ 189,288
Adjustments to reconcile net income to net cash
provided by operating activities --
Gain (loss) on disposal of assets............ 16,127 (153,402) -- --
Depreciation and amortization................ 347,075 428,336 151,955 142,779
Changes in assets and liabilities --
Accounts receivable, net................... (171,605) 145,018 (85,640) (6,503)
Other current assets....................... (97,891) 183,898 (240,670) 104,238
Other noncurrent assets.................... (48,791) 11,271 (58,198) 162,566
Accounts payable and accrued expenses...... (16,417) 18,201 (135,438) (196,630)
--------- ---------- --------- ---------
Net cash provided by operating
activities............................ 767,667 1,201,180 121,801 395,738
--------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net........ (336,821) (102,080) (25,691) (942,892)
Purchases of investments........................ (491,887) (392,572) (75,241) --
Proceeds from sales of investments.............. -- -- -- 207,146
--------- ---------- --------- ---------
Net cash used in investing activities... (828,708) (494,652) (100,932) (735,746)
--------- ---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable..................... 358,084 454,534 -- 95,347
Payments on notes payable....................... (218,598) (623,336) (286,795) (206,116)
Payments on capital lease obligations........... (42,929) (89,771) (35,996) (35,804)
Distributions to stockholder.................... (9,467) (287,231) -- --
Contributions from stockholder.................. -- -- -- 62,467
--------- ---------- --------- ---------
Net cash provided by (used in) financing
activities............................ 87,090 (545,804) (322,791) (84,106)
--------- ---------- --------- ---------
NET INCREASE IN CASH.............................. 26,049 160,724 (301,922) (424,114)
CASH, beginning of period......................... 362,341 388,390 388,390 549,114
--------- ---------- --------- ---------
CASH, end of period............................... $ 388,390 $ 549,114 $ 86,468 $ 125,000
========= ========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......... $ 34,956 $ 77,780 $ 7,909 $ 5,870
========= ========== ========= =========
Equipment acquired under capital leases......... $ 24,815 $ 6,362 $ -- $ --
========= ========== ========= =========
Noncash distributions paid to stockholder for:
Assumption of stockholder's notes payable,
net........................................ $ -- $ 146,450 $ -- $ --
Transfer of investments to stockholder....... -- 1,222,720 -- --
--------- ---------- --------- ---------
$ -- $1,369,170 $ $
========= ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE> 103
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
MacGregor Dental Centers, Inc. and Shears Management, Inc. (collectively
referred to as "MacGregor Dental Centers" or the "Company") are Texas-based
corporations. These corporations are affiliated entities under common control.
Accordingly, their financial position and results of operations have been
combined for financial reporting purposes. All significant intercompany
transactions have been eliminated in the accompanying combined financial
statements.
The combined operations of the Company include management services and
dental services. The Company's operations are located in Houston, Texas, with 15
dental offices throughout the Houston area.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
Basis of Presentation -- Interim Financial Statements
The financial statements for the four months ended January 31, 1995 and
1996, have been prepared by the Company, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of its operations for the four months
ended January 31, 1995 and 1996, have been included herein. The results of
operations for the four-month period are not necessarily indicative of the
results for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements.
Management does not believe these receivables represent any concentrated credit
risk. Furthermore, management continually monitors and adjusts its allowances
associated with these receivables.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
F-26
<PAGE> 104
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Maintenance, minor repairs and replacements are charged
directly to expense as incurred. Major renewals and betterments are capitalized.
When property and equipment is sold or otherwise disposed of, the asset accounts
and related accumulated depreciation accounts are relieved and any gain or loss
is included in other income and expense.
Depreciation expense is computed based on the straight-line method using
the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings............................................. 31
Leasehold improvements................................ 10
Machinery and equipment............................... 7
Furniture and fixtures................................ 7
Automobiles........................................... 5
Assets held under capitalized leases.................. 5
</TABLE>
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered, and is recognized as
services are performed for fee-for-service patients. Premiums received from
third-party payors under dental plans are due monthly and are recognized as
revenue during the period in which the services are provided to the members.
S Corporation -- Income Tax Status
The Company, with the consent of its stockholder, has elected to be taxed
as an S corporation under the Internal Revenue Code. In lieu of corporate income
taxes, the stockholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the accompanying combined financial
statements.
3. SHORT-TERM INVESTMENTS:
As of September 30, 1995, the Company held a U.S. Treasury bill that
matured on January 12, 1996, totaling $107,000, with a current market value of
$105,000. This security is reported at the lower of amortized cost or market
value in the accompanying combined financial statements. The amortized cost of
this security was $104,985. This security is classified as hold to maturity. The
Company also had certificates of deposit classified as short-term investments at
September 30, 1995. The balance outstanding at September 30, 1994 was comprised
of certificates of deposit.
F-27
<PAGE> 105
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of September 30:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Land........................................................ $2,536,471 $2,186,253
Buildings................................................... 314,564 208,297
Leasehold improvements...................................... 2,144,255 2,414,242
Machinery and equipment..................................... 1,329,259 1,493,559
Furniture and fixtures...................................... 528,478 528,478
Automobiles................................................. -- 171,083
Property held under capital leases
Equipment................................................. 328,943 335,506
Automobiles............................................... 30,783 30,783
---------- ----------
Total property and equipment...................... 7,212,753 7,368,201
Less -- Accumulated depreciation and amortization........... (3,169,966) (3,497,903)
---------- ----------
Property and equipment, net................................. $4,042,787 $3,870,298
========== ==========
</TABLE>
5. NOTES PAYABLE:
Notes payable consists of the following as of September 30:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
$150,000 line of credit to bank, with interest due monthly
at a rate of 9.25%, due September 13, 1996, secured by
automobiles............................................... $ -- $119,531
$100,000 line of credit to bank, with interest at a rate of
8.25%, due November 14, 1994, unsecured................... 98,090 --
$175,000 line of credit to bank, with monthly interest
payments at a rate of 7.78%, due October 5, 1995, secured
by Stockholder's certificate of deposit................... -- 175,000
$200,000 line of credit to bank, with monthly interest
payments at a rate of 9.25%, due March 14, 1996,
unsecured................................................. -- 160,000
Note payable to bank, with monthly payments of $7,779,
including principal and interest at a rate of 8.15%, due
July 1, 2000, secured by equipment........................ -- 370,311
Notes payable to stockholder................................ 749,104 --
-------- --------
847,194 824,842
Less -- Current maturities.................................. (319,104) (432,836)
-------- --------
Notes payable, net.......................................... $528,090 $392,006
======== ========
</TABLE>
The following are maturities of notes payable as of September 31, 1995 for
each of the next five years, ending September 30:
<TABLE>
<S> <C>
1996............................................... $432,836
1997............................................... 108,461
1998............................................... 120,571
1999............................................... 83,125
2000............................................... 79,849
--------
Total.................................... $824,842
========
</TABLE>
Interest expense charged to operations during the years ended September 30,
1994 and 1995, was $48,995 and $62,920, respectively.
F-28
<PAGE> 106
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
The Company leases office equipment and automobiles under capital leases
expiring in various years through 1997. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset.
The Company has operating leases for all of its facilities, including the
clinics and the business office, extending through 2004. Rent expense totaled
$555,967 and $616,760 for the years ended September 30, 1994 and 1995,
respectively.
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of September
30, 1995:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1996........................................................ $ 565,992 $105,392
1997........................................................ 502,304 97,930
1998........................................................ 419,037 --
1999........................................................ 163,797 --
2000........................................................ 118,797 --
Thereafter.................................................. 358,494 --
---------- --------
Total minimum lease obligation............................ $2,128,421 203,322
==========
Less -- Amounts representing interest..................... (15,389)
--------
Present value of minimum lease obligations................ 187,933
Less -- Current maturities................................ (95,544)
--------
Capital lease obligations, net............................ $ 92,389
========
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The stockholder has a management agreement with the Company. The Company
paid the stockholder $1,102,204 and $331,495 in management fees under this
arrangement for the years ended September 30, 1994 and 1995, respectively.
The Company purchased $320,000 and $240,331 in equipment and automobiles
from a corporation controlled by the stockholder in 1994 and 1995, respectively.
Marketable securities, with a fair market value of $1,198,359, were distributed
to the stockholder during the year ended September 30, 1995. Although these
securities were carried at fair value, due to the related-party nature of the
transaction, this distribution was recorded at cost, which was $1,122,720 at the
date of the transfer.
The Company made payments of $182,957 and $172,100 for computer services
for the years ended September 30, 1994 and 1995, respectively, to family members
of the stockholder.
The Company leases several of its facilities from affiliated companies who
have owners in common with the Company. Total rent expense to related parties
for the years ended September 30, 1994 and 1995, was $282,840 and $362,137,
respectively.
The Company paid a corporation controlled by the stockholder $102,923 and
$97,253 for the years ended September 30, 1994 and 1995, respectively, for
contract services and fee reimbursements.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all
F-29
<PAGE> 107
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
financial instruments (including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities,
notes payable and capital lease obligations) approximate fair value as of
September 30, 1994 and 1995.
9. SUBSEQUENT EVENT:
Effective February 1, 1996, the Company was acquired by Monarch Dental
Corporation in an asset purchase transaction.
F-30
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
Midwest Dental Care:
We have audited the accompanying combined balance sheets of Advance Dental
Management, Midwest Dental Care -- Mondovi, S.C., and Midwest Dental
Care -- Sheboygan, S.C. (collectively referred to as "Midwest Dental
Care" -- all Wisconsin corporations) as of December 31, 1994 and 1995, and the
related combined statements of operations, stockholder's equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Midwest Dental Care as of
December 31, 1994 and 1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
September 19, 1996
F-31
<PAGE> 109
MIDWEST DENTAL CARE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 250,137 $ 8,555
Accounts receivable -- net of allowances of $35,000 in
1994 and 1995, respectively............................ 919,473 865,456
Inventories............................................... 250,720 235,015
Employee advances......................................... 18,000 28,350
Deferred income taxes..................................... 28,000 53,000
Prepaids and other current assets......................... 145,087 108,858
---------- ----------
Total current assets.............................. 1,611,417 1,299,234
Note receivable from stockholder............................ 844,472 1,047,130
Property and equipment, net................................. 1,668,841 1,607,689
Other assets................................................ 103,464 96,636
---------- ----------
Total assets...................................... $4,228,194 $4,050,689
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 532,116 $ 528,156
Accrued payroll........................................... 12,748 10,699
Accrued liabilities....................................... 555,582 596,002
Deferred income taxes..................................... 16,000 35,000
Due to affiliates......................................... 246,199 193,910
Unearned revenue.......................................... 17,720 13,352
Current maturities of notes payable....................... 237,789 270,142
Current maturities of capital lease obligations........... 149,904 163,796
---------- ----------
Total current liabilities......................... 1,768,058 1,811,057
Deferred income taxes....................................... 182,000 167,000
Notes payable............................................... 977,353 961,029
Capital lease obligations................................... 266,995 96,288
---------- ----------
Total liabilities................................. 3,194,406 3,035,374
Commitments and contingencies
Stockholder's equity........................................ 1,033,788 1,015,315
---------- ----------
Total liabilities and stockholder's equity........ $4,228,194 $4,050,689
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-32
<PAGE> 110
MIDWEST DENTAL CARE
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, AUGUST 31,
------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES.............................. $13,652,228 $14,380,157 $9,443,997 $10,405,838
OPERATING EXPENSES:
Salaries and benefits................... 8,698,895 9,094,609 5,980,076 6,640,625
Dental supplies......................... 1,018,666 1,087,011 784,639 881,097
Laboratory fees......................... 62,776 66,852 41,591 55,430
Payroll taxes........................... 558,031 587,053 416,781 451,964
Depreciation and amortization........... 290,563 314,734 192,086 339,275
General and administrative.............. 2,597,410 3,020,759 1,809,465 1,861,381
----------- ----------- ---------- -----------
13,226,341 14,171,018 9,224,638 10,229,772
----------- ----------- ---------- -----------
Operating income................ 425,887 209,139 219,359 176,066
OTHER EXPENSE:
Interest, net........................... 91,545 112,900 42,588 38,316
Other................................... 14,545 7,191 -- --
----------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES................ 319,797 89,048 176,771 137,750
INCOME TAXES (BENEFIT).................... (43,321) (18,460) 2,200 1,250
----------- ----------- ---------- -----------
NET INCOME................................ $ 363,118 $ 107,508 $ 174,571 $ 136,500
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-33
<PAGE> 111
MIDWEST DENTAL CARE
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<S> <C>
BALANCE, December 31, 1993.................................. $ 466,737
Net income................................................ 363,118
Subordinated debt contributed by stockholder.............. 286,933
Dividends paid............................................ (83,000)
----------
BALANCE, December 31, 1994.................................. 1,033,788
Net income................................................ 107,508
Dividends paid............................................ (96,000)
Non-cash dividend paid.................................... (29,981)
----------
BALANCE, December 31, 1995.................................. 1,015,315
Net income................................................ 136,500
Dividends paid............................................ (56,200)
----------
BALANCE, August 31, 1996 (unaudited)........................ $1,095,615
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-34
<PAGE> 112
MIDWEST DENTAL CARE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
DECEMBER 31, AUGUST 31,
--------------------- -------------------------
1994 1995 1995 1996
--------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 363,118 $ 107,508 $ 174,571 $ 136,500
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation and amortization............ 290,563 314,734 192,086 339,275
Gain on disposal of assets............... -- 1,798 (2,000) --
Changes in assets and liabilities --
Accounts receivable, net............... (214,473) 54,017 (590) (114,295)
Inventories............................ 44,280 15,705 (217) (20,475)
Prepaids and other current assets...... (74,087) 25,879 93,419 49,831
Other noncurrent assets................ 176,064 (225,811) (253,308) (53,798)
Accounts payable....................... (429,884) (3,960) 165,014 151,980
Accrued expenses and other current
liabilities......................... (14,280) 34,003 291,729 330,136
Due to affiliates...................... 543,199 (52,289) (339,614) (194,456)
Deferred income taxes.................. 5,000 (21,000) -- --
--------- --------- --------- ---------
Net cash provided by operating
activities........................ 689,500 250,584 321,090 624,698
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.... (253,319) (255,380) (178,523) (111,710)
--------- --------- --------- ---------
Net cash used in investing
activities........................ (253,319) (255,380) (178,523) (111,710)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................. 567,065 267,969 254,000 --
Proceeds from capital lease obligations..... -- -- -- 50,925
Payments on notes payable................... (559,502) (251,940) (228,632) (205,572)
Payments on capital lease obligations....... (127,607) (156,815) (87,382) (65,331)
Distributions to stockholder................ (83,000) (96,000) (96,000) --
--------- --------- --------- ---------
Net cash used in financing
activities........................ (203,044) (236,786) (158,014) (219,978)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH............... 233,137 (241,582) (15,447) 293,010
CASH AND CASH EQUIVALENTS, beginning of
year........................................ 17,000 250,137 250,137 8,555
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year........ $ 250,137 $ 8,555 $ 234,690 $ 301,565
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest...... $ 132,720 $ 144,357 $ 96,000 $ 89,000
========= ========= ========= =========
Equipment acquired under capital leases..... $ 305,085 $ -- $ -- $ 53,619
========= ========= ========= =========
Noncash distributions paid to stockholder
for:
Dividend paid to stockholder............. $ -- $ 29,981 $ -- $ 56,200
Contribution of subordinated debt by
stockholder............................ 286,933 -- -- --
--------- --------- --------- ---------
$ 286,933 $ 29,981 $ -- $ 56,200
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-35
<PAGE> 113
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. DESCRIPTION OF BUSINESS:
Advance Dental Management, Midwest Dental Care -- Mondovi, S.C., and
Midwest Dental Care -- Sheboygan, S.C. (collectively referred to as "Midwest
Dental Care" or the "Company") are Wisconsin corporations. The accompanying
combined financial statements of the Company include Advance Dental Management
(ADM); Midwest Dental Care -- Mondovi, S.C. ("Mondovi"); Midwest Dental
Care -- Sheboygan, S.C. ("Sheboygan"); Midwest Dental Care -- Appleton Mall,
S.C. ("Appleton"); First Dental, S.C. ("First Dental"); and Damar Dental
Laboratories, Inc. ("Damar"). The entities are affiliated entities under common
control. Accordingly, their financial position and results of operations have
been combined for financial reporting purposes. All significant intercompany
transactions have been eliminated in the accompanying combined financial
statements.
The combined operations of the Company include management services, dental
laboratory operations, and dental services. The Company's operations are located
in the state of Wisconsin.
Effective January 2, 1995, First Dental merged with Mondovi and Appleton
merged with Sheboygan. Because these mergers were a transfer of assets and
liabilities among two entities under common control, the assets and liabilities
transferred were accounted for at historical cost in a manner similar to a
pooling-of-interests.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
Basis of Presentation -- Interim Financial Statements
The financial statements for the eight months ended August 31, 1995 and
1996, have been prepared by the Company, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of its operations for the eight months
ended August 31, 1995 and 1996, have been included herein. The results of
operations for the eight-month period are not necessarily indicative of the
results for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include money market accounts, and all highly liquid debt investments with
original maturities of three months or less.
F-36
<PAGE> 114
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----------------------
<S> <C>
Furniture and fixtures............... 10
Equipment............................ 5-10
Leasehold improvements............... Remaining life of lease
</TABLE>
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and others for services rendered, and is recognized as
services are performed for fee-for-service patients. Premiums received from
third party payors under dental plans are due monthly and are recognized as
revenue during the period in which the services are provided to the members.
Concentrations of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements.
Management does not believe these receivables represent any concentrated credit
risk. Furthermore, management continually monitors and adjusts its allowances
associated with these receivables.
3. NOTE RECEIVABLE FROM STOCKHOLDER:
The Company held a note receivable from its sole stockholder in the amount
of $844,472 and $1,047,130 as of December 31, 1994 and 1995, respectively. The
note bears interest at 7% and is payable in monthly principal payments of
$2,000, with the outstanding balance due and payable on February 2011.
Subsequent to year-end, the note was paid in full in conjunction with the
acquisition (see Note 11).
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Equipment................................................... $3,309,099 $3,733,266
Leasehold improvements...................................... 804,044 739,278
Furniture and fixtures...................................... 212,051 87,489
---------- ----------
Total property and equipment...................... 4,325,194 4,560,033
Less -- Accumulated depreciation and amortization........... (2,656,353) (2,952,344)
---------- ----------
Property and equipment, net................................. $1,668,841 $1,607,689
========== ==========
</TABLE>
F-37
<PAGE> 115
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
5. NOTES PAYABLE:
Notes payable consist of the following as of December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Note payable to bank, due in 1998, payable in monthly
installments, bearing interest at 8.13%, secured by
substantially all assets of the combined group.............. $ 378,243 $ 268,256
Note payable to bank, due in 2000, payable in monthly
installments beginning in 1995, bearing interest at 9.125%,
secured by substantially all assets of the combined
group....................................................... -- 191,593
Note payable to bank, due in 2001, payable in monthly
installments beginning in 1995, bearing interest at 9%,
secured by substantially all assets of the combined
group....................................................... 828,900 712,539
Other notes payable due to various parties, due in 1998
through 1999, bearing interest at rates from 8.0-9.1%,
secured by substantially all assets of the combined
group....................................................... 7,999 58,783
---------- ----------
Total..................................................... 1,215,142 1,231,171
Less -- Current maturities................................ (237,789) (270,142)
---------- ----------
Notes payable, net........................................ $ 977,353 $ 961,029
========== ==========
</TABLE>
The maturities of notes payable at December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996.................................... $ 270,142
1997.................................... 294,735
1998.................................... 251,564
1999.................................... 215,095
2000.................................... 171,576
Thereafter.............................. 28,059
----------
Total......................... $1,231,171
==========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Operating and Capital Leases
The Company has operating leases for all of its facilities including the
clinics and the business office, extending through 2010. Rent expense totaled
$846,613 and $919,344 for the years ended December 31, 1994 and 1995,
respectively.
F-38
<PAGE> 116
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of December
31, 1995:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1996.................................... $ 514,483 $182,049
1997.................................... 428,810 90,140
1998.................................... 318,008 12,065
1999.................................... 167,806 --
2000.................................... 157,234 --
Thereafter.............................. 1,236,731 --
---------- --------
Total minimum lease obligation........ $2,823,072 284,254
==========
Less- Amounts representing interest... (24,170)
--------
Present value of minimum lease
obligations........................ 260,084
Less- Current maturities.............. (163,796)
--------
Capital lease obligations, net........ $ 96,288
========
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to its
normal business activities. Management does not believe the resolution of such
matters will have a material adverse effect on the Company's financial position,
results of operations or liquidity.
7. INCOME TAXES:
The income tax benefit for the years ended December 31, 1994 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Current benefit:
Federal............................... $46,321 39,667
State................................. 6,617 5,667
Deferred -- primarily Federal........... (9,617) (26,874)
------- --------
Total benefit................. $43,321 $ 18,460
======= ========
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards
and tax benefits totaling approximately $457,000 and $29,000, respectively, for
income tax purposes. These carryforwards expire in 2008 and 2009.
The effective tax rate differs from the statutory rate primarily because of
the income tax benefit related to the net operating loss carryforward.
Deferred tax assets and liabilities are classified as current and
noncurrent on the basis of the classification of the related asset or liability
for financial reporting purposes. Deferred income taxes are recorded for
temporary differences between the basis of assets and liabilities for financial
reporting purposes and tax purposes.
F-39
<PAGE> 117
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
Temporary differences comprising the deferred tax assets and liabilities on
the combined balance sheets are as follows:
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
CURRENT:
Prepaids and cash to accrual
adjustment......................... $ -- $ 16,000 $ -- $ 35,000
Allowance for doubtful accounts....... 13,000 -- 14,000 --
Accruals.............................. 15,000 -- 39,000 --
------- --------- ------- ---------
$28,000 $ 16,000 $53,000 $ 35,000
======= ========= ======= =========
NONCURRENT:
Accelerated depreciation.............. $ 323,000 $ 362,000
Tax loss carryforwards................ (191,000) (212,000)
Cash to accrual basis accounting
change............................. 50,000 17,000
--------- ---------
$ 182,000 $ 167,000
========= =========
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
The Company leases several of its facilities from affiliated companies who
have owners in common with the Company. Total rent expense to related parties
for the years ended December 31, 1994 and 1995, was $274,000 and $242,000,
respectively.
Additionally, included in accounts receivable as of December 31, 1994 and
1995, is $72,855 and $499, respectively, which is due from related parties.
Revenues recorded from related parties are approximately $304,529 and $342,590
for the years ended December 31, 1994 and 1995, respectively.
During 1994, the owners contributed their $286,933 subordinated debt to the
Company. This amount has been reflected as a capital contribution in the
accompanying combined financial statements.
9. BENEFIT PLANS:
401(k) Plan
The Company maintains a defined contribution plan which conforms to IRS
provisions for 401(k) plans. Employees are eligible to participate in the plan
provided they have attained the age of 21, have completed 1,000 hours of
service, and have been employed for at least one year. Employer matching
contribution percentages as well as additional contributions are determined
annually by the Company's Board of Directors. Total contributions by the Company
were $38,500 and $47,250 for the years ended December 31, 1994 and 1995,
respectively.
Health and Welfare Benefit Plan
The Company uses a partially self-funded health and welfare benefit plan to
provide these benefits to full-time employees. The plan maintains stop-loss
insurance coverage whereby if total annual plan claims exceed $240,000 or if an
individual's insured claims exceed $20,000 annually, these excess amounts are
covered by the stop-loss policy. Monthly contribution amounts are determined
annually by the plan administrator based on funding requirements and plan
experience. Amounts contributed by the Company are adjusted to reflect employee
contributions which are also subject to revision
F-40
<PAGE> 118
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 1995
annually. There were no contributions for the year ended December 31, 1994.
Total contributions by the Company were $18,100 for the year ended December 31,
1995.
10. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all financial instruments (including
cash and cash equivalents, accounts receivable, due from officer, accounts
payable, accrued liabilities, notes payable and capital lease obligations)
approximate fair value as of December 31, 1994 and 1995.
11. SUBSEQUENT EVENT:
Effective September 1, 1996, Sheboygan and Mondovi were acquired by Monarch
Dental Corporation in a stock purchase transaction and ADM was acquired in an
asset purchase transaction.
F-41
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of
United Dental Care:
We have audited the accompanying combined balance sheets of United Dental
Care Tom Harris D.D.S. and Associates (an Arkansas corporation) and William T.
Harris ("Tom") and Associates a Professional Dental Corporation (a Louisiana
corporation), collectively referred to as "United Dental Care", as of December
31, 1995 and 1996, and the related combined statements of operations,
stockholder's equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United Dental Care as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 30, 1997
F-42
<PAGE> 120
UNITED DENTAL CARE
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.................................................. $ 214 $ 155,225 $276,791
Accounts receivable -- net of allowances of $42,724,
$53,319 and $51,620, respectively.................. 72,354 134,173 120,910
Other current assets.................................. 3,123 -- 5,216
--------- --------- --------
Total current assets............................... 75,691 289,398 402,917
Property and equipment, net............................. 308,784 322,701 336,985
Other assets............................................ -- 116,380 114,338
--------- --------- --------
Total assets.................................. $ 384,475 $ 728,479 $854,240
========= ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................... $ 75,087 $ 12,877 $ 85,731
Accrued payroll....................................... 59,983 75,064 38,097
Accrued liabilities................................... 8,317 14,886 29,002
Current maturities of notes payable................... 239,841 252,927 242,694
Current capital lease obligations..................... 20,153 21,382 21,975
--------- --------- --------
Total current liabilities..................... 403,381 377,136 417,499
Notes payable........................................... 23,563 161,387 149,990
Capital lease obligations............................... 58,727 36,343 30,675
--------- --------- --------
Total liabilities............................. 485,671 574,866 598,164
Commitments and contingencies
Stockholder's equity (deficit).......................... (101,196) 153,613 256,076
--------- --------- --------
Total liabilities and stockholder's equity
(deficit)................................... $ 384,475 $ 728,479 $854,240
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE> 121
UNITED DENTAL CARE
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- -------------------------
1995 1996 1996 1997
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................... $3,189,193 $4,161,773 $ 861,082 $1,091,377
Operating expenses:
Salaries and benefits........................ 1,886,205 2,181,186 499,428 624,161
Dental supplies.............................. 222,059 222,716 51,665 50,778
Laboratory fees.............................. 110,998 113,424 25,832 53,916
Depreciation and amortization................ 81,848 110,066 22,388 26,867
General and administrative................... 948,967 769,655 158,439 183,657
---------- ---------- ---------- ----------
Operating income (loss).............. (60,884) 764,726 103,330 151,998
Other income (expense):
Interest expense, net........................ (25,639) (44,263) (9,303) (13,168)
Other income................................. -- 12,268 -- --
---------- ---------- ---------- ----------
Net income (loss).............................. $ (86,523) $ 732,731 $ 94,027 $ 138,830
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-44
<PAGE> 122
UNITED DENTAL CARE
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<S> <C>
BALANCE, December 31, 1994.................................. $ 38,035
Net loss.................................................. (86,523)
Distributions............................................. (79,240)
Capital contributions..................................... 26,532
--------
BALANCE, December 31, 1995.................................. (101,196)
Net income................................................ 732,731
Distributions............................................. (519,465)
Capital contributions..................................... 41,543
--------
BALANCE, December 31, 1996.................................. 153,613
Net income................................................ 138,830
Distributions............................................. (36,367)
--------
BALANCE, March 31, 1997 (unaudited)......................... $256,076
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-45
<PAGE> 123
UNITED DENTAL CARE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- -------------------------
1995 1996 1996 1997
-------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $(86,523) $ 732,731 $ 94,027 $138,830
Adjustments to reconcile net income (loss) to
net cash provided by operating
activities --
Depreciation and amortization............. 81,848 110,066 22,388 26,867
Changes in assets and liabilities --
Accounts receivable, net.................. (72,179) (39,319) (16,817) 13,263
Other current assets.................... (3,123) 3,123 (1,877) (5,216)
Other noncurrent assets................. 42,360 6,120 -- 72,854
Accounts payable and accrued expenses... 78,938 (40,560) (10,140) (22,851)
-------- --------- -------- --------
Net cash provided by operating
activities......................... 41,321 772,161 87,581 223,747
-------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net..... (81,851) (33,983) (31,464) (39,109)
Cash paid for dental group practices......... (31,000) (25,000) -- --
-------- --------- -------- --------
Net cash used in investing
activities......................... (112,851) (58,983) (31,464) (39,109)
-------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................. 218,622 40,077 48,019 --
Payments on long-term debt................... (143,103) (75,517) (11,575) (26,705)
Payment on capital lease..................... (12,581) (21,155) (4,312) --
Distributions to stockholder................. (79,240) (519,465) -- (36,367)
Capital contributions........................ 26,532 17,893 -- --
-------- --------- -------- --------
Net cash provided by (used in)
financing activities............... 10,230 (558,167) 32,132 (63,072)
-------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH................ (61,300) 155,011 88,249 121,566
CASH, beginning of year........................ 61,514 214 214 155,225
-------- --------- -------- --------
CASH, end of year.............................. $ 214 $ 155,225 $ 88,463 $276,791
======== ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest....................... $ 25,639 $ 44,263 $ 9,582 $ 12,345
Contribution of subordinated debt by
stockholder............................... -- 23,650 -- --
-------- --------- -------- --------
$ 25,639 $ 67,913 $ 9,582 $ 12,345
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-46
<PAGE> 124
UNITED DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. DESCRIPTION OF BUSINESS:
United Dental Care (the "Company") operates a total of nine dental offices
primarily in Arkansas, with one dental office each in Oklahoma and Louisiana.
The Arkansas and Oklahoma dental offices are owned by an Arkansas corporation.
The Louisiana dental office is owned by a Louisiana corporation. Both legal
entities are affiliated entities under common control. Accordingly, their
financial position and results of operations have been combined for financial
reporting purposes. All significant intercompany transactions have been
eliminated in the accompanying combined financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying combined financial statements have been prepared on the
accrual basis of accounting.
Basis of Presentation -- Interim Financial Statements
The financial statements for the three months ended March 31, 1996 and
1997, have been prepared by the Company, without audit, pursuant to Accounting
Principles Board (APB) Opinion No. 28, "Interim Financial Reporting." Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to APB Opinion No. 28; nevertheless,
management of the Company believes that the disclosures herein are adequate to
prevent the information presented from being misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of its operations for the three months
ended March 31, 1996 and 1997 have been included herein. The results of
operations for the three-month period are not necessarily indicative of the
results for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements.
Management does not believe these receivables represent any concentrated credit
risk. Furthermore, management continually monitors and adjusts its allowances
associated with these receivables.
F-47
<PAGE> 125
UNITED DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----------------------
<S> <C>
Vehicles.................................................... 5
Furniture and fixtures...................................... 7
Computer equipment.......................................... 5
Equipment................................................... 7
Leasehold improvements...................................... Remaining life of lease
</TABLE>
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and patients for services rendered, net of contractual and
other adjustments. Premiums received from managed care payors are due monthly
and are recognized as revenue during the period in which the services are
provided to the members.
Goodwill
Goodwill represents the excess of the cost of a dental practice acquired
over the fair value of their net assets at the date of acquisition and is being
amortized on a straight-line basis over 15 years. Goodwill is included in other
assets in the accompanying combined balance sheets.
S Corporation -- Income Tax Status
The Company, with the consent of its stockholder, has elected to be taxed
as an S corporation under the Internal Revenue Code. In lieu of corporation
income taxes, the stockholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in the accompanying
combined financial statements.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Equipment................................................... $ 300,442 $ 415,821
Computer equipment.......................................... 94,462 94,462
Leasehold improvements...................................... 83,888 86,372
Furniture and fixtures...................................... 38,351 38,351
Automobiles................................................. 24,637 24,637
--------- ---------
Total property and equipment...................... 541,780 659,643
Less -- Accumulated depreciation and amortization........... (232,996) (336,942)
--------- ---------
Property and equipment, net................................. $ 308,784 $ 332,701
========= =========
</TABLE>
F-48
<PAGE> 126
UNITED DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE:
Notes payable consist of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
$117,000 line of credit payable to bank, with interest due
monthly at a rate of 10%, due February 10, 1997, secured
by various assets of the Company......................... $ 115,496 $ 116,846
Note payable to bank, with interest due monthly at a rate
of 9.25%, due March 6, 1997, secured by various assets of
the Company.............................................. 72,195 52,867
Deferred purchase price payable to MidAmerica Denture and
Dental Care, Limited Partnership, with interest at a rate
of 9%, due April 10, 2001, unsecured..................... -- 189,361
Notes payable to various parties, with interest rates
ranging from 3.8% to 10%, due through 1999, secured by
various assets of the Company............................ 75,713 55,240
--------- ---------
Total............................................ 263,404 414,314
Less -- Current maturities................................. (239,841) (252,927)
--------- ---------
Notes payable, net......................................... $ 23,563 $ 161,387
--------- ---------
</TABLE>
The maturities of notes payable at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997...................................................... $252,927
1998...................................................... 46,698
1999...................................................... 48,412
2000...................................................... 48,955
2001...................................................... 17,322
--------
Total........................................... $414,314
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Operating and Capital Leases
The Company has operating leases for all of its facilities including the
dental offices and the business office, extending through 2001. Rent expense
totaled $176,566 and $202,386 for the years ended December 31, 1995 and 1996,
respectively.
F-49
<PAGE> 127
UNITED DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease commitments under capital and noncancelable operating
leases with remaining terms of one or more years are as follows as of December
31, 1996:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1997........................................................ $132,323 $26,832
1998........................................................ 98,175 23,312
1999........................................................ 47,756 16,272
2000........................................................ 18,000 2,080
Thereafter.................................................. 4,500 --
-------- -------
Total minimum lease obligations............................. $300,754 68,496
========
Less -- Amounts representing interest....................... (10,771)
-------
Present value of minimum lease obligations.................. 57,725
Less -- Current maturities.................................. (21,382)
-------
Capital lease obligations -- net............................ $36,343
=======
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to its
normal business activities. Management of the Company does not believe the
resolution of such matters will have a material adverse effect on the Company's
financial position, results of operations, or liquidity.
6. RELATED-PARTY TRANSACTIONS:
The Company has set up an entity owned by its sole stockholder to act as an
advertising agency. The Company purchased advertising services from this entity
of approximately $144,000 and $142,000 in 1995 and 1996, respectively.
The Company leases two clinic facilities from its sole stockholder. The
lease terms are for one year, expiring March 1, 1997 and May 31, 1997,
respectively, and each provides for a fixed rental of $2,480 per month. Rent
expense paid to the stockholder totaled $29,777 and $29,844 in 1995 and 1996,
respectively.
7. ACQUISITION:
In April 1996, the Company acquired a dental practice for a total purchase
price of $237,500. The transaction was accounted for using the purchase method
of accounting.
8. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all financial instruments (including
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, notes payable and capital lease obligations) approximate fair value
as of December 31, 1995 and 1996.
9. SUBSEQUENT EVENT:
Effective April 1, 1997, the Company was acquired by Monarch Dental
Corporation in an asset purchase transaction.
F-50
<PAGE> 128
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Dental Centers of Indiana:
We have audited the accompanying combined balance sheet of Dental Centers
of Indiana, Inc., Drs. Johnson, Terry & Associates, and DCI-Lee (an Indiana
corporation -- collectively referred to as "Dental Centers of Indiana") as of
December 31, 1996, and the related combined statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dental Centers of Indiana as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 9, 1997, except as to
Note 8, for which the
date is June 19, 1997
F-51
<PAGE> 129
DENTAL CENTERS OF INDIANA
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $198,378 $318,920
Accounts receivable -- net of allowances of $345,924 and
$357,715, respectively................................. 184,690 195,215
-------- --------
Total current assets.............................. 383,068 514,135
Property and equipment, net................................. 273,602 249,298
Other assets................................................ 1,000 1,000
-------- --------
Total assets...................................... $657,670 $764,433
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued payroll........................................... $ 73,603 $ 54,341
Accrued liabilities....................................... 29,597 56,655
Current maturities of notes payable....................... 16,450 12,338
-------- --------
Total current liabilities......................... 119,650 123,334
Notes payable............................................... 41,360 40,584
-------- --------
Total liabilities................................. 161,010 163,918
Commitments and contingencies
Minority interests in combined subsidiaries................. 53,725 84,887
Stockholders' equity........................................ 442,935 515,628
-------- --------
Total liabilities and stockholders' equity........ $657,670 $764,433
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 130
DENTAL CENTERS OF INDIANA
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $3,572,107 $1,041,130
Operating expenses:
Salaries and benefits..................................... 2,129,514 555,360
Dental supplies........................................... 251,911 65,043
Laboratory fees........................................... 181,753 51,911
Payroll taxes............................................. 119,460 36,854
Depreciation and amortization............................. 79,717 24,304
General and administrative................................ 555,488 150,507
---------- ----------
3,317,843 883,979
---------- ----------
Operating income.................................. 254,264 157,151
Interest expense, net....................................... 5,193 1,310
---------- ----------
Net income before minority interest......................... 249,071 155,841
Minority interests in income of combined subsidiaries....... 53,043 31,162
---------- ----------
Net income.................................................. $ 196,028 $ 124,679
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 131
DENTAL CENTERS OF INDIANA
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, December 31, 1995.................................. $ 389,650
Net income................................................ 196,028
Distributions to stockholders............................. (142,743)
---------
BALANCE, December 31, 1996.................................. 442,935
Net income................................................ 124,679
Distributions to stockholders............................. (51,986)
---------
BALANCE, March 31, 1997 (unaudited)......................... $ 515,628
=========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-54
<PAGE> 132
DENTAL CENTERS OF INDIANA
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 196,028 $ 124,679
Adjustments to reconcile net income to net cash provided
by operating activities --
Minority interest...................................... 53,043 31,162
Depreciation and amortization.......................... 79,717 24,304
Changes in assets and liabilities
Accounts receivable, net............................. (1,145) (10,525)
Other current assets................................. 2,300 --
Other noncurrent assets.............................. 31,488 --
Accrued expenses and other current liabilities....... 32,792 7,796
--------- ---------
Net cash provided by operating activities......... 394,223 177,416
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (92,266) --
--------- ---------
Net cash used in investing activities............. (92,266) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 10,000 --
Payments on long-term debt................................ (20,283) (4,888)
Distributions to stockholders and minority interest
holders................................................ (220,743) (51,986)
--------- ---------
Net cash used in financing activities............. (231,026) (56,874)
--------- ---------
NET INCREASE IN CASH........................................ 70,931 120,542
CASH, beginning of period................................... 127,447 198,378
--------- ---------
CASH, end of period......................................... $ 198,378 $ 318,920
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 5,700 $ 1,368
========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE> 133
DENTAL CENTERS OF INDIANA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS:
Dental Centers of Indiana, Inc. is an Indiana-based corporation. The
combined financial statements include the accounts of Dental Centers of Indiana,
Inc. and its 50% owned subsidiaries, Drs. Johnson, Terry & Associates, and
DCI-LEE (collectively referred to as "Dental Centers of Indiana" or the
"Company"). All significant intercompany transactions have been eliminated in
the accompanying financial statements.
The combined operations of the Company include management and dental
services. The Company's operations are located throughout Indiana, representing
a total of 11 dental offices.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements have been prepared on the accrual
basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements.
Management does not believe these receivables represent any concentrated credit
risk. Furthermore, management continually monitors and adjusts its reserves and
allowances associated with these receivables.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated using the straight-line
method over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 5-7
Equipment................................................... 5
Leasehold improvements...................................... 39
</TABLE>
Revenue Recognition
Revenue is recorded at estimated net amounts to be received from
third-party payors and patients for services rendered, net of contractual and
other adjustments. Premiums received from third-party payors under dental plans
are due monthly and are recognized as revenue during the period in which the
services are provided to the members.
S Corporation -- Income Tax Status
The Company, with the consent of its stockholders, has elected to be taxed
as an S corporation under the Internal Revenue Code. In lieu of corporation
income taxes, the stockholders of an S
F-56
<PAGE> 134
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision or liability for federal income taxes has been
included in the accompanying combined financial statements.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31, 1996:
<TABLE>
<S> <C>
Equipment................................................ $ 393,280
Leasehold improvements................................... 66,579
Furniture and fixtures................................... 14,226
---------
474,085
Less -- Accumulated depreciation and amortization........ (200,483)
---------
Property and equipment, net.............................. $ 273,602
=========
</TABLE>
4. NOTES PAYABLE:
Notes payable consists of the following as of December 31, 1996:
<TABLE>
<S> <C>
Note payable to bank, with interest due monthly at a rate
of 9.625%, due March 2002, secured by various assets of
the Company............................................. $ 38,383
Notes payable to various parties, with interest rates
ranging from 8.0-9.25%, due through July 1999, secured
by various assets of the Company........................ 19,427
--------
57,810
Less -- current maturities.............................. (16,450)
--------
Notes payable........................................... $ 41,360
========
</TABLE>
The maturities of notes payable at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997....................................................... $16,450
1998....................................................... 14,160
1999....................................................... 10,741
2000....................................................... 7,308
2001....................................................... 7,308
2002....................................................... 1,843
-------
Total............................................ $57,810
=======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company has operating leases for all of its facilities including the
dental offices and the business office, extending through 2001. Rent expense
totaled approximately $144,000 for the year ended December 31, 1996.
F-57
<PAGE> 135
Future minimum lease commitments under noncancelable operating leases with
remaining terms of one or more years are as follows as of December 31, 1996:
<TABLE>
<S> <C>
1997........................................................ $ 90,908
1998........................................................ 80,908
1999........................................................ 79,783
2000........................................................ 63,707
2001........................................................ 27,966
Thereafter.................................................. 20,160
--------
Total minimum lease obligations................... $363,432
========
</TABLE>
Litigation, Claims, and Assessments
The Company is engaged in various legal proceedings incidental to their
normal business activities. Management of the Company does not believe the
resolution of such matters will have a material adverse effect on the Company's
financial position, future results of operations, and liquidity.
6. RELATED-PARTY TRANSACTIONS:
The Company leases five clinic facilities and the administrative office
from a related entity owned by its stockholders. The Company pays monthly rental
amounts and has no commitment which requires future payments to the owners. Rent
expense paid to stockholders totaled approximately $60,000 in 1996.
7. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure about the fair value of
financial instruments. Carrying amounts for all financial instruments
approximate fair value as of December 31, 1996.
8. SUBSEQUENT EVENT:
On June 19, 1997, the Company signed a definitive agreement with Monarch
Dental Corporation ("Monarch") under which Monarch has agreed to acquire the
Company pursuant to a merger transaction. The acquisition is expected to be
effective upon completion of an initial public offering by Monarch.
F-58
<PAGE> 136
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 3
Risk Factors....................... 7
The Company........................ 17
Use of Proceeds.................... 18
Dividend Policy.................... 18
Capitalization..................... 19
Dilution........................... 20
Pro Forma Consolidated Financial
Information................... 21
Selected Consolidated Financial
Information................... 28
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.................... 29
Business........................... 43
Management......................... 57
Certain Transactions............... 64
Principal Stockholders............. 67
Description of Capital Stock....... 69
Shares Eligible for Future Sale.... 72
Underwriting....................... 74
Legal Matters...................... 75
Experts............................ 76
Index to Financial Statements...... F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
2,750,000 SHARES
[MONARCH DENTAL CORPORATION LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
SALOMON BROTHERS INC
, 1997
================================================================================
<PAGE> 137
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the estimated expenses payable by the
Company in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC Registration Fee........................................ $ 11,500
NASD Filing Fee............................................. 3,395
Nasdaq Listing Fee.......................................... 41,147
Accounting Fees and Expenses................................ 250,000
Legal Fees and Expenses..................................... 325,000
Printing Expenses........................................... 125,000
Blue Sky Qualification Fees and Expenses.................... 3,000
Transfer Agent's Fee........................................ 10,000
Miscellaneous............................................... 130,958
--------
TOTAL............................................. $900,000
========
</TABLE>
- ---------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the General Corporation Law of the State
of Delaware, Article VII of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") provides that no director of the Company shall
be personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, or (iv) for any transaction from which the
director derived an improper personal benefit. In addition, the Certificate
provides that if the Delaware General Corporation Law is amended to authorize
the further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
Article V of the Company's Amended and Restated By-laws provide for
indemnification by the Company of its officers and certain non-officer employees
under certain circumstances against expenses (including attorneys fees,
judgments, fines and amounts paid in settlement) reasonably incurred in
connection with the defense or settlement of any threatened, pending or
completed legal proceeding in which any such person is involved by reason of the
fact that such person is or was an officer or employee of the Company if such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
criminal actions or proceedings, if such person had no reasonable cause to
believe his or her conduct was unlawful.
The Stock Purchase Agreement, filed as Exhibit 10.5 hereto, provides for
indemnification by the Company of certain of its existing principal stockholders
and the controlling persons of such stockholders (one of whom is a director of
the Company) against claims and liabilities, including claims and liabilities
arising under the securities laws.
II-1
<PAGE> 138
The Company has entered into indemnification agreements with each of its
directors reflecting the foregoing provisions of its By-laws and requiring the
advancement of expenses in proceedings involving the directors in most
circumstances.
Under Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto,
the Underwriters have agreed to indemnify, under certain conditions, the
Company, its directors, certain officers and persons who control the Company
within the meaning of the Securities Act of 1933 against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common Stock issued, and the number of options granted, by the
Registrant since its incorporation in 1994. Further included is the
consideration, if any, received by the Registrant for such shares and options,
and information relating to the section of the Securities Act of 1933, as
amended (the "Securities Act"), or rule of the Securities and Exchange
Commission under which exemption from registration was claimed. The following
transactions give effect to the Company's 1-for-2 reverse stock split of its
Common Stock and Class A Common Stock effective in May 1997.
(1) In December 1994, the Company sold 28,040,223 shares of the Company's
Common Stock for an aggregate purchase price of $3,000 to Dr. Warren F.
Melamed in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
(2) In February 1996, pursuant to a Stock Purchase Agreement, the Company
sold an aggregate of 4,800,000 shares of the Company's Convertible
Participating Preferred Stock for an aggregate purchase price of
$10,000,320 to Advent VII L.P., Advent Atlantic and Pacific II L.P.,
Advent New York L.P., TA Venture Investors Limited Partnership and
eight other accredited investors in reliance upon the exemption from
registration under Regulation D promulgated under the Securities Act.
(3) In February 1996, pursuant to an Asset Contribution Agreement, the
Company issued 700,000 shares of Common Stock to Shears Vanguard Ltd.
in partial consideration for the MacGregor Dental Centers business in
reliance upon the exemption from registration under Regulation D
promulgated under the Securities Act.
(4) In February 1996, pursuant to an Asset Contribution Agreement, the
Company issued an aggregate of 394,240 shares of Common Stock to Dr.
Warren F. Melamed and Dr. Roy D. Smith, III in partial consideration of
their interests in dental practices in reliance upon the exemption from
registration under Regulation D promulgated under the Securities Act.
(5) In April 1996, pursuant to a Restricted Stock Agreement, the Company
sold 150,000 shares of the Company's Class A Common Stock for a
purchase price of $31,800 to Dr. Warren F. Melamed in reliance upon the
exemption from registration under Rule 701 promulgated under the
Securities Act.
(6) In April 1996, pursuant to Restricted Stock Agreements, the Company
sold an aggregate of 133,750 shares of the Company's Class A Common
Stock for an aggregate purchase price of $28,355 to members of
management and key employees of the Company in reliance upon the
exemption from registration under Rule 701 promulgated under the
Securities Act.
(7) In June 1996, pursuant to Restricted Stock Agreements, the Company sold
an aggregate of 20,000 shares of the Company's Class A Common Stock for
an aggregate purchase price of $4,240 to John W. Fehmer and Philip
Hertik in reliance upon the exemption from registration under Rule 701
promulgated under the Securities Act.
(8) In August 1996, pursuant to a Restricted Stock Agreement, the Company
sold 10,000 shares of the Company's Class A Common Stock for a purchase
price of $2,120 to Glenn E. Hemmerle in reliance upon the exemption
from registration under Rule 701 promulgated under the Securities Act.
II-2
<PAGE> 139
(9) In August 1996, pursuant to a Stock Purchase Agreement, the Company
issued 350,000 shares of Common Stock in partial consideration for the
sale of the outstanding voting common stock and outstanding non-voting
common stock of Midwest Dental Care, Mondovi, Inc. and Midwest Dental
Care, Sheboygan, Inc., and agreed to grant options to acquire up to
80,000 shares of Common Stock upon the achievement by Midwest of
specified financial performance goals in reliance upon the exemption
from registration under Regulation D promulgated under the Securities
Act.
(10) In October 1996, pursuant to an Asset Purchase Agreement, the Company
issued 5,000 shares of the Company's Common Stock to Dr. John H. Davis
in partial consideration for the sale of the assets of Dr. Davis'
dental practice in reliance upon the exemption from registration under
Regulation D promulgated under the Securities Act.
(11) In October 1996, pursuant to Restricted Stock Agreements, the Company
sold an aggregate of 40,000 shares of the Company's Class A Common
Stock for an aggregate purchase price of $8,480 to certain key
employees of the Company in reliance upon the exemption from
registration under Rule 701 promulgated under the Securities Act.
(12) In November 1996 pursuant to a Stock Option Agreement, the Company
granted an option to purchase 25,000 shares of Class A Common Stock to
Gary W. Cage in reliance upon the exemption from registration under
Rule 701 promulgated under the Securities Act.
(13) In January 1997, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 30,000 shares of Common Stock to Dr. Ronald K.
Girlinghouse and Dr. Debra A. Girlinghouse in partial consideration
for the sale of outstanding capital stock of Convenient Dental Care,
Inc. and agreed to grant options to acquire up to 5,000 shares of
Common Stock upon the achievement by Convenient of specified financial
performance goals in reliance upon the exemption from registration
under Regulation D promulgated under the Securities Act.
(14) In January 1997, pursuant to a Stock Purchase Agreement, the Company
issued an aggregate of 57,500 shares of Common Stock to Dr. Sam L.
Beavers, Dr. W. Gene Howard, Dr. William M. Lee and Dr. Jeffrey M.
Moore in partial consideration for the sale of the outstanding capital
stock of Arkansas Dental Health and agreed to grant options to acquire
up to 7,500 shares of Common Stock upon the achievement by Arkansas
Dental Health of specified financial performance goals in reliance
upon the exemption from registration under Section 4(2) of the
Securities Act.
(15) In December 1996 and January 1997, pursuant to an Amended and Restated
Stockholders' Agreement, the Company sold an aggregate of 1,704,550
shares of the Company's Series A Convertible Junior Preferred Stock
for an aggregate purchase price of $3,000,008 to existing stockholders
of the Company in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
(16) In February 1997, under the 1996 Stock Plan, the Company granted
options to purchase an aggregate of 7,500 shares of Class A Common
Stock to William R. Veno and Gail R. Stockrahm in reliance upon the
exemption from registration under Rule 701 promulgated under the
Securities Act.
(17) In March 1997, pursuant to a Stock Option Agreement, the Company
granted an option to purchase 25,000 shares of Class A Common Stock to
Gary W. Cage in reliance upon the exemption from registration under
Rule 701 promulgated under the Securities Act.
(18) In April 1997, pursuant to an Asset Purchase Agreement, the Company
issued 68,750 shares of Common Stock to Dr. William T. Harris III in
partial consideration for the sale of substantially all the assets of
United Dental in reliance upon the exemption from registration under
Regulation D promulgated under the Securities Act.
II-3
<PAGE> 140
(19) In May 1997, pursuant to Stock Option Agreements, the Company granted
options to purchase an aggregate of 378,250 shares of Class A Common
Stock to certain members of management and key employees of the
Company in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
Prior to February 1996, the Company's Dental Offices were owned and
operated by 13 limited partnerships. The Company was the sole limited partner of
12 of these 13 limited partnerships and Oral Health Concepts, Inc., a
corporation wholly-owned by Dr. Melamed, was the sole general partner. Oral
Health Concepts, Inc. also was the sole general partner of the remaining limited
partnership and Dr. Smith and Partners Dental Corporation, a corporation owned
by Drs. Melamed and Smith, were the only limited partners of the remaining
limited partnership. In February 1996, (i) Dr. Smith contributed his limited
partnership interest in the remaining limited partnership to the Company, (ii)
Drs. Melamed and Smith contributed all of the capital stock of Partners Dental
Corporation to the Company, (iii) Dr. Melamed contributed all of the capital
stock of Oral Health Concepts, Inc. to the Company, (iv) each of the 13 limited
partnerships was merged into Monarch Dental Associates, L.P., a limited
partnership whose sole general partner was Oral Health Concepts, Inc. and whose
sole limited partner was the Company, and (v) the Company transferred its
limited partnership interest in Monarch Dental Associates, L.P. to Partners
Dental Corporation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <S>
+1.1 -- Form of Underwriting Agreement
+2.1 -- Stock Redemption Agreement dated as of February 5, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S. (excluding schedules, which the Registrant agrees
to furnish supplementally to the Commission upon request)
+2.2 -- Stock Purchase Agreement dated as of February 5, 1996 by
and among the Registrant and the investors named therein
(excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request)
+2.3 -- Asset Contribution Agreement dated as of January 31, 1996
by and among the Registrant, Shears Vanguard Ltd., Shears
Vanguard Inc., MDC Dental, Inc., Shears Vanguard SMI
Inc., Shears Vanguard General, Inc. and Charles G.
Shears, D.D.S. (excluding schedules, which the Registrant
agrees to furnish supplementally to the Commission upon
request)
+2.4 -- Asset Contribution Agreement dated as of February 5, 1996
by and among the Registrant, Warren F. Melamed, D.D.S.
and Roy D. Smith, III, D.D.S. (excluding schedules, which
the Registrant agrees to furnish supplementally to the
Commission upon request)
+2.5 -- Stock Purchase Agreement dated as of August 29, 1996 by
and between the Registrant and David L. Hehli, D.D.S.
(excluding exhibit, which the Registrant agrees to
furnish supplementally to the Commission upon request)
*2.6 -- Agreement and Plan of Merger dated as of June 19, 1997 by
and among the Registrant, Dental Centers of Indiana
(Monarch), Inc., Dental Centers of Indiana, Inc., James
W. Willis, Mark R. Johnson and Thurman H. Brown II
+3.1 -- Amended and Restated Certificate of Incorporation
+3.2 -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation
</TABLE>
II-4
<PAGE> 141
<TABLE>
<CAPTION>
<S> <C>
+3.3 -- Form of Restated Certificate of Incorporation (to be
filed upon the closing of the offering referred to in the
Registration Statement)
+3.4 -- Amended and Restated By-Laws
+3.5 -- Form of Second Amended and Restated By-laws (to be
effective upon the closing of the offering referred to in
the Registration Statement)
4.1 -- Specimen certificate for shares of Common Stock, $.01 par
value, of the Registrant
+5.1 -- Opinion of Goodwin, Procter & Hoar LLP as to the validity
of the securities being offered
++10.1 -- Monarch Dental Corporation 1996 Stock Option and
Incentive Plan, as amended
+10.2 -- Monarch Dental Corporation 1997 Employee Stock Purchase
Plan
10.3 -- Monarch Dental Corporation 1996 Equity Acquisition Option
Plan
10.4 -- Amended and Restated Stockholders' Agreement dated as of
August 29, 1996 by and among the Registrant, the TA
Investors (as defined), the MacGregor Investors (as
defined), the Monarch Investors (as defined) and the
Hehli Investors (as defined)
+10.5 -- Employment Agreement dated as of February 5, 1996 by and
among the Registrant, Monarch Dental Associates, L.P. and
Warren F. Melamed, D.D.S.
+10.6 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Warren F. Melamed, D.D.S.
10.7 -- Management Agreement by and between Modern Dental
Professionals, P.C. and Monarch Dental Associates, L.P.
10.8 -- Management Agreement by and between Modern Dental
Professionals, P.C. and MacGregor Dental Associates, L.P.
10.9 -- Management Agreement by and between Modern Dental
Professionals -- Girlinghouse, P.A. and Convenient Dental
Care, Inc.
10.10 -- Management Agreement by and between Modern Dental
Professionals -- Beavers, P.A. and Arkansas Dental Health
Associates, Inc.
10.11 -- Management Agreement by and between Modern Dental
Professionals/UDC -- Girlinghouse, P.A. and United Dental
Care, Inc.
10.12 -- Management Agreement by and between William T. Harris and
Associates, a Professional Dental Corporation and United
Dental Care, Inc.
10.13 -- Management Agreement by and between United Dental Care
Tom Harris D.D.S. & Associates and United Dental Care,
Inc.
+10.14 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Charles G. Shears, D.D.S.
+10.15 -- Restricted Stock Agreement dated as of February 6, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S.
+10.16 -- Employment Agreement dated as of August 29, 1996 by and
among the Registrant, David L. Hehli, D.D.S. and Midwest
Dental Management, Inc.
+10.17 -- Non-Competition Agreement dated as of August 29, 1996 by
and among the Registrant, David L. Hehli, D.D.S., Advance
Dental Management, Inc. and Midwest Dental Plan, Ltd.
</TABLE>
II-5
<PAGE> 142
<TABLE>
<CAPTION>
<S> <C>
++10.18 -- Primary Care Dentist Agreement effective April 1, 1997 by
and between Prudential Dental Maintenance Organization,
Inc. and Modern Dental Professionals, P.C. and Monarch
Dental Associates, L.P. (excluding certain portions which
have been omitted as indicated based upon a request for
confidential treatment, but which have been separately
filed with the Commission)
++10.19 -- Dental Service Agreement dated January 1, 1995 by and
between Compcare Health Services Insurance Corporation
and Advance Dental Management, Inc. (excluding certain
portions which have been omitted as indicated based upon
a request for confidential treatment, but which have been
separately filed with the Commission)
+10.20 -- Form of Director Indemnification Agreement
+10.21 -- Sublease Agreement dated as of March 7, 1996 by and
between Old American Country Mutual Fire Insurance
Company and Oral Health Concepts Inc.
+10.22 -- Office Lease Agreement dated as of September 6, 1996 by
and between Government Employees Insurance Company and
Monarch Dental Associates, L.P.
++11.1 -- Unaudited net income per common equivalent share
+21.1 -- Subsidiaries of the Registrant
+23.1 -- Consent of Goodwin, Procter & Hoar LLP (included in
Exhibit 5.1 hereto)
23.2 -- Consent of Arthur Andersen LLP
+24.1 -- Powers of Attorney
+27.1 -- Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed.
++ Updated version filed herewith.
* To be filed by amendment to this Registration Statement.
(b) The following is a list of financial statement schedules furnished:
Schedule II Valuation and qualifying accounts for the years ended
December 31, 1996, 1995 and 1994.
Schedules not listed above have been omitted because they are not
applicable or because required information is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
II-6
<PAGE> 143
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 144
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Dallas, Texas, on
June 23, 1997.
MONARCH DENTAL CORPORATION
By: /s/ GARY W. CAGE
----------------------------------
Gary W. Cage
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, President, June 23, 1997
- ----------------------------------------------------- Chief Dental Officer and Director
Warren F. Melamed
/s/ GARY W. CAGE Chief Executive Officer and Director June 23, 1997
- -----------------------------------------------------
Gary W. Cage
* Executive Vice President and Director June 23, 1997
- -----------------------------------------------------
Charles G. Shears
* Chief Financial Officer (principal June 23, 1997
- ----------------------------------------------------- accounting officer)
Steven G. Peterson
* Director June 23, 1997
- -----------------------------------------------------
Glenn E. Hemmerle
* Director June 23, 1997
- -----------------------------------------------------
Roger B. Kafker
*By /s/ GARY W. CAGE
-------------------------------------------------
Gary W. Cage
Attorney-in-fact
</TABLE>
II-8
<PAGE> 145
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Monarch Dental Corporation and
subsidiaries included in this Form 10-K and have issued our report dated
February 28, 1997.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements and financial statement schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 17, 1997
S-1
<PAGE> 146
SCHEDULE II
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO FROM BALANCE
BEGINNING COSTS AND ACQUIRED AT END
CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS OF PERIOD
-------------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Allowance for Doubtful Accounts...... $385 $1,324 $851 $ (884)(b) $1,676
Accumulated Amortization of
Intangible Assets................. -- 573 -- -- 573
---- ------ ---- ------- ------
Total Reserves and
Allowances................. $385 $1,897 $851 $ (884) $2,249
==== ====== ==== ======= ======
December 31, 1995:
Allowance for Doubtful Accounts...... $212 $ 409 $ -- $ (236)(b) $ 385
Accumulated Amortization of
Intangible Assets................. -- -- -- -- --
---- ------ ---- ------- ------
Total Reserves and
Allowances................. $212 $ 409 $ -- $ (236) $ 385
==== ====== ==== ======= ======
December 31, 1994:
Allowance for Doubtful Accounts...... $199 $ 219 $ -- $ (206)(b) $ 212
Accumulated Amortization of
Intangible Assets................. -- -- -- -- --
---- ------ ---- ------- ------
Total Reserves and
Allowances................. $199 $ 219 $ -- $ (206) $ 212
==== ====== ==== ======= ======
</TABLE>
- ---------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(b) Write off of uncollectible receivables net of recoveries of bad debt
write-offs.
S-2
<PAGE> 147
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
+1.1 -- Form of Underwriting Agreement
+2.1 -- Stock Redemption Agreement dated as of February 5, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S. (excluding schedules, which the Registrant agrees
to furnish supplementally to the Commission upon request)
+2.2 -- Stock Purchase Agreement dated as of February 5, 1996 by
and among the Registrant and the investors named therein
(excluding schedules, which the Registrant agrees to
furnish supplementally to the Commission upon request)
+2.3 -- Asset Contribution Agreement dated as of January 31, 1996
by and among the Registrant, Shears Vanguard Ltd., Shears
Vanguard Inc., MDC Dental, Inc., Shears Vanguard SMI
Inc., Shears Vanguard General, Inc. and Charles G.
Shears, D.D.S. (excluding schedules, which the Registrant
agrees to furnish supplementally to the Commission upon
request)
+2.4 -- Asset Contribution Agreement dated as of February 5, 1996
by and among the Registrant, Warren F. Melamed, D.D.S.
and Roy D. Smith, III, D.D.S. (excluding schedules, which
the Registrant agrees to furnish supplementally to the
Commission upon request)
+2.5 -- Stock Purchase Agreement dated as of August 29, 1996 by
and between the Registrant and David L. Hehli, D.D.S.
(excluding exhibit, which the Registrant agrees to
furnish supplementally to the Commission upon request)
*2.6 -- Agreement and Plan of Merger dated as of June 19, 1997 by
and among the Registrant, Dental Centers of Indiana
(Monarch), Inc., Dental Centers of Indiana, Inc., James
W. Willis, Mark R. Johnson and Thurman H. Brown II.
+3.1 -- Amended and Restated Certificate of Incorporation
+3.2 -- Certificate of Amendment of Amended and Restated
Certificate of Incorporation
+3.3 -- Form of Restated Certificate of Incorporation (to be
filed upon the closing of the offering referred to in the
Registration Statement)
+3.4 -- Amended and Restated By-Laws
+3.5 -- Form of Second Amended and Restated By-laws (to be
effective upon the closing of the offering referred to in
the Registration Statement)
4.1 -- Specimen certificate for shares of Common Stock, $.01 par
value, of the Registrant
+5.1 -- Opinion of Goodwin, Procter & Hoar LLP as to the validity
of the securities being offered
++10.1 -- Monarch Dental Corporation 1996 Stock Option and
Incentive Plan, as amended
+10.2 -- Monarch Dental Corporation 1997 Employee Stock Purchase
Plan
10.3 -- Monarch Dental Corporation 1996 Equity Acquisition Option
Plan
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.4 -- Amended and Restated Stockholders' Agreement dated as of
August 29, 1996 by and among the Registrant, the TA
Investors (as defined), the MacGregor Investors (as
defined), the Monarch Investors (as defined) and the
Hehli Investors (as defined)
+10.5 -- Employment Agreement dated as of February 5, 1996 by and
among the Registrant, Monarch Dental Associates, L.P. and
Warren F. Melamed, D.D.S.
+10.6 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Warren F. Melamed, D.D.S.
10.7 -- Management Agreement by and between Modern Dental
Professionals, P.C. and Monarch Dental Associates, L.P.
10.8 -- Management Agreement by and between Modern Dental
Professionals, P.C. and MacGregor Dental Associates, L.P.
10.9 -- Management Agreement by and between Modern Dental
Professionals -- Girlinghouse, P.A. and Convenient Dental
Care, Inc.
10.10 -- Management Agreement by and between Modern Dental
Professionals -- Beavers, P.A. and Arkansas Dental Health
Associates, Inc.
10.11 -- Management Agreement by and between Modern Dental
Professionals/UDC -- Girlinghouse, P.A. and United Dental
Care, Inc.
10.12 -- Management Agreement by and between William T. Harris and
Associates, a Professional Dental Corporation and United
Dental Care, Inc.
10.13 -- Management Agreement by and between United Dental Care
Tom Harris D.D.S. & Associates and United Dental Care,
Inc.
+10.14 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Charles G. Shears, D.D.S.
+10.15 -- Restricted Stock Agreement dated as of February 6, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S.
+10.16 -- Employment Agreement dated as of August 29, 1996 by and
among the Registrant, David L. Hehli, D.D.S. and Midwest
Dental Management, Inc.
+10.17 -- Non-Competition Agreement dated as of August 29, 1996 by
and among the Registrant, David L. Hehli, D.D.S., Advance
Dental Management, Inc. and Midwest Dental Plan, Ltd.
++10.18 -- Primary Care Dentist Agreement effective April 1, 1997 by
and between Prudential Dental Maintenance Organization,
Inc. and Modern Dental Professionals, P.C. and Monarch
Dental Associates, L.P. (excluding certain portions which
have been omitted as indicated based upon a request for
confidential treatment, but which have been separately
filed with the Commission)
++10.19 -- Dental Service Agreement dated January 1, 1995 by and
between Compcare Health Services Insurance Corporation
and Advance Dental Management, Inc. (excluding certain
portions which have been omitted as indicated based upon
a request for confidential treatment, but which have been
separately filed with the Commission)
+10.20 -- Form of Director Indemnification Agreement
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
+10.21 -- Sublease Agreement dated as of March 7, 1996 by and
between Old American Country Mutual Fire Insurance
Company and Oral Health Concepts Inc.
+10.22 -- Office Lease Agreement dated as of September 6, 1996 by
and between Government Employees Insurance Company and
Monarch Dental Associates, L.P.
++11.1 -- Unaudited net income per common equivalent share
+21.1 -- Subsidiaries of the Registrant
+23.1 -- Consent of Goodwin, Procter & Hoar LLP (included in
Exhibit 5.1 hereto)
23.2 -- Consent of Arthur Andersen LLP
+24.1 -- Powers of Attorney
+27.1 -- Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed.
++ Updated version filed herewith.
* To be filed by amendment to this Registration Statement.
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER MONARCH DENTAL CORPORATION SHARES
C
SEE REVERSE FOR
STATEMENTS RELATING TO
RIGHTS, PREFERENCES AND
PRIVILEGES, IF ANY
INCORPORATED UNDER THE CUSIP 609044 10 2
LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.01 PAR VALUE, OF
MONARCH DENTAL CORPORATION
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued under
and subject to the laws of the State of Delaware and to the Certificate of
Incorporation and By-Laws of the Corporation, all as in effect from time to
time. This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of the duly authorized officers of the Corporation.
Dated:
/s/ WARREN F. MELAMED COUNTERSIGNED AND REGISTERED:
PRESIDENT CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
[MONARCH DENTAL CORPORATION CORPORATE SEAL]
/S/ STEVEN G. PETERSON BY
SECRETARY AUTHORIZED SIGNATURE
<PAGE> 2
MONARCH DENTAL CORPORATION
The Corporation is authorized to issue more than one class of stock. The
Corporation will furnish without charge to each stockholder who so requests a
copy of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the ------ --------
entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to
right of survivorship Minors
and not as tenants Act
in common ------------------
(State)
UNIF TRF MIN ACT - Custodian
(until age )
------ --------
(Cust)
under Uniform
Transfers
--------
(Minor)
to Minors Act
----------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
--------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shares
----------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
--------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
---------------------------------
X
-------------------------------------------
X
-------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
BY
--------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.1
MONARCH DENTAL CORPORATION
1996 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Monarch Dental Corporation 1996 Stock Option
and Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and
enable the officers, employees, Directors, advisors, consultants and key
persons of Monarch Dental Corporation (the "Company") and its Subsidiaries upon
whose judgment, initiative and efforts the Company largely depends for the
successful conduct of its business to acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in
the Company's welfare will assure a closer identification of their interests
with those of the Company, thereby stimulating their efforts on the Company's
behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified
Stock Options, Restricted Stock Awards, Unrestricted Stock Awards, Performance
Share Awards and Dividend Equivalent Rights.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" has the meaning specified in Section 2.
"Dividend Equivalent Right" means Awards granted pursuant to Section 9.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 15.
"Fair Market Value" of the Stock on any given date means the fair market
value of the Stock determined in good faith by the Committee; provided,
however, that (i) if the Stock is admitted to quotation on the National
Association of Securities Dealers
<PAGE> 2
Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date
shall not be less than the average of the highest bid and lowest asked prices
of the Stock reported for such date or, if no bid and asked prices were
reported for such date, for the last day preceding such date for which such
prices were reported, or (ii) if the Stock is admitted to trading on a national
securities exchange or the NASDAQ National Market System, the Fair Market Value
on any date shall not be less than the closing price reported for the Stock on
such exchange or system for such date or, if no sales were reported for such
date, for the last date preceding the date for such a sale was reported.
"Incentive Stock Option" means any Stock Option designated and qualified
as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not also an
employee or officer of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Share Award" means Awards granted pursuant to Section 8.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
"Stock" means the Common Stock, par value $.01 per share, of the
Company, subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section
7.
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by the Board of
Directors of the Company, or at the discretion of the Board, by a committee of
the Board consisting
2
<PAGE> 3
of not less than two Independent Directors. On and after the date the Company
becomes subject to the Act, each member of the Committee shall be a "Non-
Employee Director" within the meaning of Rule 16b-3(a)(3) promulgated under the
Act, or any successor definition under said rule. On and after the date grants
made under this Plan become subject to Section 162(m) of the Code, each member
of the Committee shall be an "Outside Director" within the meaning of Section
162(m) of the Code and the regulations promulgated thereunder. All references
herein to the Committee shall be deemed to refer to the entity then responsible
for administration of the Plan at the relevant time (i.e., either the Board of
Directors or a committee of the Board, as applicable).
(b) Powers of Committee. The Committee shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the officers, employees, Independent Directors,
consultants, advisors and key persons of the Company and its
Subsidiaries to whom Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent,
if any, of Incentive Stock Options, Non-Qualified Stock Options,
Restricted Stock Awards, Unrestricted Stock Awards, Performance Share
Awards and Dividend Equivalent Rights, or any combination of the
foregoing, granted to any one or more participants;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of
the Plan, of any Award, which terms and conditions may differ among
individual Awards and participants, and to approve the form of written
instruments evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of
all or any portion of any Award and/or to include provisions in Awards
providing for such acceleration;
(vi) to impose any limitations on Awards granted under the
Plan, including limitations on transfers, repurchase provisions and the
like;
3
<PAGE> 4
(vii) subject to the provisions of Section 5(a)(iii), to extend
at any time the period in which Stock Options may be exercised;
(viii) to determine at any time whether, to what extent, and
under what circumstances Stock and other amounts payable with respect to
an Award shall be deferred either automatically or at the election of
the participant and whether and to what extent the Company shall pay or
credit amounts constituting interest (at rates determined by the
Committee) or dividends or deemed dividends on such deferrals; and
(ix) at any time to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms
and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and to otherwise supervise the administration of the
Plan.
All decisions and interpretations of the Committee shall be binding on
all persons, including the Company and Plan participants.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved
and available for issuance under the Plan shall be 1,376,250 shares of Stock.
For purposes of this limitation, the shares of Stock underlying any Awards
which are forfeited, cancelled, reacquired by the Company, satisfied without
the issuance of Stock or otherwise terminated (other than by exercise) shall be
added back to the shares of Stock available for issuance under the Plan.
Subject to such overall limitation, shares of Stock may be issued up to such
maximum number pursuant to any type or types of Award; provided, however, that
on and after the date the Company is subject to Section 162(m) of the Code,
Stock Options with respect to no more than 150,000 shares of Stock may be
granted to any one individual participant during any one calendar year period.
The shares available for issuance under the Plan may be authorized but unissued
shares of Stock or shares of Stock reacquired by the Company.
(b) Recapitalizations. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction, the outstanding shares
of Stock of either class are increased or decreased or are exchanged for a
different number or kind of shares or other securities of the Company, or
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of
4
<PAGE> 5
Stock or other securities, the Committee shall make an appropriate or
proportionate adjustment in (i) the maximum number of shares reserved for
issuance under the Plan, (ii) the number of Stock Options that can be granted
to any one individual participant, (iii) the number and kind of shares or other
securities subject to any then outstanding Awards under the Plan, and (iv) the
price for each share subject to any then outstanding Stock Options under the
Plan, without changing the aggregate exercise price (i.e., the exercise price
multiplied by the number of Stock Options) as to which such Stock Options
remain exercisable. The adjustment by the Committee shall be final, binding
and conclusive. No fractional shares of Stock shall be issued under the Plan
resulting from any such adjustment, but the Committee in its discretion may
make a cash payment in lieu of fractional shares.
(c) Mergers and Other Transactions. In the case of (i) the
dissolution or liquidation of the Company, (ii) a merger, reorganization or
consolidation in which the Company is acquired by another person or entity
(other than a holding company formed by the Company and other than a merger,
reorganization or consolidation where shareholders of the Company immediately
prior to the transaction continue immediately after the transaction, to own
shares representing in the aggregate 50 percent or more of the voting shares of
the corporation issuing cash or securities in the merger, reorganization or
consolidation), (iii) the sale of all or substantially all of the assets of the
Company to an unrelated person or entity, or (iv) the sale of all of the Stock
of the Company to an unrelated person or entity, then unless otherwise provided
in the Award agreement the outstanding Options shall become fully vested. Upon
the effectiveness of any such transaction or event, the Plan and all Dividend
Equivalent Rights and Performance Share Awards ("Contractual Awards") granted
hereunder shall terminate, unless provision is made in connection with such
transaction for the assumption of Contractual Awards heretofore granted, or the
substitution of such Contractual Awards of new Contractual Awards of the
successor entity or parent thereof, with appropriate adjustment as to the
number and kind of shares and, if appropriate, the per share exercise prices,
as provided in Section 3(b) above. In the event of such termination, each
optionee shall be permitted to exercise for a period of at least 15 days prior
to the termination all outstanding vested Options. The treatment of Restricted
Stock Awards and Unrestricted Stock Awards in connection with any such
transaction shall be as specified in the relevant Award agreement.
(d) Substitute Awards. The Committee may grant Awards under the Plan
in substitution for stock and stock based awards held by employees of another
corporation who become employees of the Company or a Subsidiary as the result
of a merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Committee may direct that the
substitute awards be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.
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SECTION 4. ELIGIBILITY
Participants in the Plan will be such officers, and other employees,
advisors, consultants and key persons of the Company and its Subsidiaries who
are responsible for or contribute to the management, growth or profitability of
the Company and its Subsidiaries as are selected from time to time by the
Committee, in its sole discretion. Independent Directors are also eligible to
participate in the Plan.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be pursuant to a stock
option agreement which shall be in such form as the Committee may from time to
time approve. Option agreements need not be identical.
Stock Options granted under the Plan may be either Incentive Stock
Options or Non-Qualified Stock Options. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary that is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code. Non-Qualified
Stock Options may be granted to officers, employees, Independent Directors,
advisors, consultants and key persons of the Company and its Subsidiaries.
To the extent that any Option does not qualify as an Incentive Stock Option, it
shall be deemed a Non- Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after January
31, 2006.
(a) Terms of Stock Options. Stock Options granted under the Plan
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan,
as the Committee shall deem desirable:
(i) Exercise Price. The exercise price per share for the
Stock covered by a Stock Option shall be determined by the Committee at
the time of grant but shall not be less than 100% of the Fair Market
Value on the date of grant in the case of Incentive Stock Options. If
an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock
Option shall be not less than 110% of the Fair Market Value on the grant
date.
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(ii) Grant of Discount Options in Lieu of Cash Compensation.
Upon the request of an eligible participant and with the consent of the
Committee, such participant may elect each calendar year to receive a
Non-Qualified Stock Option in lieu of any cash bonus or other
compensation to which he may become entitled during the following
calendar year, but only if such participant makes an irrevocable
election to waive receipt of all or a portion of such cash compensation.
Such election shall be made on or before the date set by the Committee
which date shall be no later than 15 days (or such shorter period
permitted by the Committee) preceding January 1 of the calendar year for
which the cash compensation would otherwise be paid. A Non-Qualified
Stock Option shall be granted to each participant who made such an
irrevocable election on the date the waived cash compensation would
otherwise be paid. The exercise price per share shall be determined by
the Committee. The number of shares of Stock subject to the Stock
Option shall be determined by dividing the amount of the waived cash
compensation by the difference between the Fair Market Value of the
Stock on the date the Stock Option is granted and the exercise price per
Stock Option. The Stock Option shall be granted for whole number of
shares so determined; the value of any fractional share shall be paid in
cash. A participant may revoke his election under this Section 5(a)(ii)
on a prospective basis at any time.
(iii) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Incentive Stock Option shall be exercisable
more than ten years after the date the option is granted. If an
employee owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than 10% of the combined voting power
of all classes of stock of the Company or any Subsidiary or parent
corporation and an Incentive Stock Option is granted to such employee,
the term of such option shall be no more than five years from the date
of grant.
(iv) Exercisability; Rights of a Stockholder. Stock Options
shall become vested and exercisable at such time or times, whether or
not in installments, as shall be determined by the Committee at or after
the grant date; provided, however, that Stock Options granted in lieu of
cash compensation shall be exercisable in full as of the grant date.
The Committee may at any time accelerate the exercisability of all or
any portion of any Stock Option. An optionee shall have the rights of a
stockholder only as to shares acquired upon the exercise of a Stock
Option and not as to unexercised Stock Options.
(v) Method of Exercise. Stock Options may be exercised in
whole or in part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the
purchase price may be made by one or more of the following methods;
provided, however, that the
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methods set forth in subsections (B) and (C) below shall become
available only after the closing of the first underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Stock
to the public:
(A) In cash, by certified or bank check or other
instrument acceptable to the Committee;
(B) In the form of shares of Stock that are not then
subject to restrictions under any Company plan and that have been
held by the optionee for at least six months, if permitted by the
Committee in its discretion. Such surrendered shares shall be
valued at Fair Market Value on the exercise date; or
(C) By the optionee delivering to the Company a
properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash
or a check payable and acceptable to the Company to pay the
purchase price; provided that in the event the optionee chooses
to pay the purchase price as so provided, the optionee and the
broker shall comply with such procedures and enter into such
agreements of indemnity and other agreements as the Committee
shall prescribe as a condition of such payment procedure.
Payment instruments will be received subject to collection. The
delivery of certificates representing the shares of Stock to be
purchased pursuant to the exercise of a Stock Option will be contingent
upon receipt from the optionee (or a purchaser acting in his stead in
accordance with the provisions of the Stock Option) by the Company of
the full purchase price for such shares and the fulfillment of any other
requirements contained in the Stock Option or applicable provisions of
laws.
(vi) Termination. Unless otherwise provided in the option
agreement or determined by the Committee, upon the optionee's
termination of employment (or other business relationship) with the
Company and its Subsidiaries, the optionee's rights in his Stock Options
shall automatically terminate.
(vii) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of the
Code, the aggregate Fair Market Value (determined as of the time of
grant) of the shares of Stock with respect to which Incentive Stock
Options granted under this Plan and any other plan of the Company or its
parent and subsidiary corporations become exercisable for the first time
by an optionee during any calendar year shall not
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exceed $100,000. To the extent that any Stock Option exceeds this
limit, it shall constitute a Non-Qualified Stock Option.
(b) Reload Options. At the discretion of the Committee, Options
granted under Section 5(a) may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(v)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with the same expiration
date as the original Option being exercised, and with such other terms as the
Committee may provide) to purchase that number of shares of Stock equal to the
number delivered to exercise the original Option.
(c) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the
Committee may provide in an option agreement that the optionee may transfer,
without consideration for the transfer, his Non-Qualified Stock Options to
members of his immediate family, to trusts for the benefit of such family
members and to partnerships in which such family members are the only partners.
SECTION 6. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. The Committee may grant
Restricted Stock Awards to any officer, employee, Independent Director,
advisor, consultant or key person of the Company and its Subsidiaries. A
Restricted Stock Award is an Award entitling the recipient to acquire, at par
value or such other purchase price determined by the Committee, shares of Stock
subject to such restrictions and conditions as the Committee may determine at
the time of grant ("Restricted Stock"). Conditions may be based on continuing
employment (or other business relationship) and/or achievement of
pre-established performance goals and objectives.
(b) Rights as a Stockholder. Upon execution of a written instrument
setting forth the Restricted Stock Award and payment of any applicable purchase
price, a participant shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the Committee
shall otherwise determine, certificates evidencing the Restricted Stock shall
remain in the possession of the Company until such Restricted Stock is vested
as provided in Section 6(e) below.
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(c) Restrictions. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the written instrument evidencing the
Restricted Stock Award. If a participant's employment (or other business
relationship) with the Company and its Subsidiaries terminates for any reason,
the Company or its assigns shall have the right or shall agree, as may be
specified in the relevant restricted stock agreement, to repurchase Restricted
Stock with respect to which conditions have not lapsed at their purchase price
from the participant or the participant's legal representative.
(d) Vesting of Restricted Stock. The Committee at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which Restricted Stock
shall become vested, subject to such further rights of the Company or its
assigns as may be specified in the instrument evidencing the Restricted Stock
Award. Except as may otherwise be provided by the Committee at any time, a
participant's rights in any shares of Restricted Stock that have not vested
shall automatically terminate upon the participant's termination of employment
(or other business relationship) with the Company and its Subsidiaries and such
shares shall be subject to the Company's right or agreement to repurchase as
provided in Section 6(c) above.
(e) Waiver, Deferral and Reinvestment of Dividends. The written
instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
SECTION 7. UNRESTRICTED STOCK AWARDS
(a) Grant or Sale of Unrestricted Stock. The Committee may, in its
sole discretion, grant (or sell at a purchase price determined by the
Committee) an Unrestricted Stock Award to any officer, employee, Independent
Director, advisor, consultant or key person of the Company or its Subsidiaries,
pursuant to which such individual may receive shares of Stock free of any
vesting restrictions ("Unrestricted Stock") under the Plan. Unrestricted Stock
Awards may be granted or sold as described in the preceding sentence in respect
of past services or other valid consideration, or in lieu of any cash
compensation due to such individual.
(b) Elections to Receive Unrestricted Stock In Lieu of Compensation.
Upon the request of an officer, employee, advisor, consultant or a key person
of the Company and its Subsidiaries and with the consent of the Committee, each
such individual may, pursuant to an irrevocable written election delivered to
the Company no later than the date or dates specified by the Committee, receive
a portion of the cash compensation otherwise due to such individual in the form
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of shares of Unrestricted Stock (valued at Fair Market Value on the date or
dates the cash compensation would otherwise be paid).
(c) Elections to Receive Unrestricted Stock in Lieu of Director Fees.
Each Independent Director may, pursuant to an irrevocable written election
delivered to the Company, receive all or a portion of such Independent
Director's director fees in shares of Unrestricted Stock (valued at Fair Market
Value on the date or dates that the director fees would otherwise be paid in
cash).
(d) Deferral of Awards. Each participant who has made an election to
receive shares of Unrestricted Stock under this Section 7 will have the right
to defer receipt of up to 100% of such shares of Unrestricted Stock payable to
such participant in accordance with such rules and procedures as may from time
to time be established by the Company for that purpose. The deferred
Unrestricted Stock shall be entitled to receive Dividend Equivalent Rights
settled in shares of Stock.
(e) Restrictions on Transfers. The right to receive Unrestricted
Stock on a deferred basis may not be sold, assigned, transferred, pledged or
otherwise encumbered, other than by will or the laws of descent and
distribution.
SECTION 8. PERFORMANCE SHARE AWARDS
(a) Nature of Performance Share Awards. A Performance Share Award is
an Award entitling the recipient to acquire shares of Stock upon the attainment
of specified performance goals. The Committee may make Performance Share
Awards independent of or in connection with the granting of any other Award
under the Plan. Performance Share Awards may be granted under the Plan to any
officer, employee, Independent Director, advisor, consultant or key person of
the Company or its Subsidiaries, including those who qualify for awards under
other performance plans of the Company. The Committee in its sole discretion
shall determine whether and to whom Performance Share Awards shall be made, the
performance goals applicable under each such Award, the periods during which
performance is to be measured, and all other limitations and conditions
applicable to the awarded Performance Shares; provided, however, that the
Committee may rely on the performance goals and other standards applicable to
other performance unit plans of the Company in setting the standards for
Performance Share Awards under the Plan.
(b) Restrictions on Transfer. Performance Share Awards and all
rights with respect to such Awards may not be sold, assigned, transferred,
pledged or otherwise encumbered.
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(c) Rights as a Shareholder. A participant receiving a Performance
Share Award shall have the rights of a shareholder only as to shares actually
received by the participant under the Plan and not with respect to shares
subject to the Award but not actually received by the participant. A
participant shall be entitled to receive a stock certificate evidencing the
acquisition of shares of Stock under a Performance Share Award only upon
satisfaction of all conditions specified in the written instrument evidencing
the Performance Share Award (or in a performance plan adopted by the
Committee).
(d) Termination. Except as may otherwise be provided by the
Committee at any time, a participant's rights in all Performance Share Awards
shall automatically terminate upon the participant's termination of employment
(or business relationship) with the Company and its Subsidiaries for any
reason.
(e) Acceleration, Waiver, Etc. At any time prior to the
participant's termination of employment (or other business relationship) by the
Company and its Subsidiaries, the Committee may in its sole discretion
accelerate, waive or, subject to Section 12, amend any or all of the goals,
restrictions or conditions imposed under any Performance Share Award.
SECTION 9. DIVIDEND EQUIVALENT RIGHTS
(a) Dividend Equivalent Rights. A Dividend Equivalent Right is an
Award entitling the recipient to receive credits based on cash dividends that
would be paid on the shares of Stock specified in the Dividend Equivalent Right
(or other award to which it relates) if such shares were held by the recipient.
A Dividend Equivalent Right may be granted hereunder to any officer, employee,
Independent Director, advisor, consultant or key person, as a component of
another Award or as a freestanding award. The terms and conditions of Dividend
Equivalent Rights shall be specified in the grant. Dividend equivalents
credited to the holder of a Dividend Equivalent Right may be paid currently or
may be deemed to be reinvested in additional shares of Stock, which may
thereafter accrue additional equivalents. Any such reinvestment shall be at
Fair Market Value on the date of reinvestment or such other price as may then
apply under a dividend reinvestment plan sponsored by the Company, if any.
Dividend Equivalent Rights may be settled in cash or shares of Stock or a
combination thereof, in a single installment or installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement, or
payment of, or lapse of restrictions on, such other award, and that such
Dividend Equivalent Right shall expire or be forfeited or annulled under the
same conditions as such other award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other award.
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(b) Interest Equivalents. Any Award under this Plan that is settled
in whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment.
Interest equivalents may be compounded and shall be paid upon such terms and
conditions as may be specified by the grant.
SECTION 10. TAX WITHHOLDING
Each participant shall, no later than the date as of which the value of
an Award or of any Stock or other amounts received thereunder first becomes
includable in the gross income of the participant for Federal income tax
purposes, pay to the Company, or make arrangements satisfactory to the
Committee regarding payment of, any Federal, state, or local taxes of any kind
required by law to be withheld with respect to such income. The Company and
its Subsidiaries shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
participant.
SECTION 11. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or
from the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Company, if the employee's right to re-
employment is guaranteed either by a statute or by contract or under the policy
pursuant to which the leave of absence was granted or if the Committee
otherwise so provides in writing.
SECTION 12. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Committee may, at any time, amend or cancel any outstanding Award (or provide
substitute Awards at the same or reduced exercise or purchase price or with no
exercise or purchase price in a manner not inconsistent with the terms of the
Plan), but such price, if any, must satisfy the requirements which would apply
to the substitute or amended Award if it were then initially granted under this
Plan for the purpose of satisfying changes in law or for any other lawful
purpose, but no such action shall adversely affect rights under any outstanding
Award without the holder's consent. If and to the extent determined by the
Committee to be required by the Act to ensure that Incentive Stock Options
granted under the Plan are qualified under Section 422 of the Code, Plan
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amendments shall be subject to approval by the Company stockholders who are
eligible to vote at a meeting of stockholders.
SECTION 13. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised
and any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet
the Company's obligations to deliver Stock or make payments with respect to
Awards hereunder, provided that the existence of such trusts or other
arrangements is consistent with the foregoing sentence.
SECTION 14. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The
Committee may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Committee may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards
as it deems appropriate.
(b) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements, including trusts, and such arrangements
may be either generally applicable or applicable only in specific cases. The
adoption of this Plan and the grant of Awards do not confer upon any employee
any right to continued employment with the Company or any Subsidiary.
SECTION 15. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a
majority of the shares of Stock of the Company present or represented and
entitled to vote at a meeting of stockholders. Subject to such approval by the
stockholders and to the requirement that no Stock may be issued hereunder prior
to such approval, Stock Options and other Awards may be granted hereunder on
and after adoption of this Plan by the Board.
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SECTION 16. GOVERNING LAW
This Plan shall be governed by Delaware law except to the extent such
law is preempted by federal law.
Adopted and Effective: February 5, 1996
Amended and Restated Effective as of: June , 1997
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EXHIBIT 10.3
MONARCH DENTAL CORPORATION
1996 EQUITY ACQUISITION OPTION PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Monarch Dental Corporation 1996 Equity
Acquisition Option Plan (the "Plan"). The purpose of the Plan is to enable
investors in Monarch Dental Corporation (the "Company") or its Subsidiaries, or
persons or entities that are part of a transaction involving the sale of stock
or assets to the Company or any of its Subsidiaries to acquire a proprietary
interest in the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Stock Options, Restricted Stock Awards,
Unrestricted Stock Awards, Performance Share Awards and Dividend Equivalent
Rights.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means the Committee of the Board referred to in Section 2.
"Disinterested Person" means a "Non-Employee Director" who qualifies as
such under Rule 16b-3(c)(3) promulgated under the Act, or any successor
definition under said Rule. If Rule 16b-3(c)(3) is amended and such definition
no longer exists, the requirement set forth in Section 2(a) hereof that each
member of the Committee be a Disinterested Person shall cease to apply.
"Dividend Equivalent Right" means Awards granted pursuant to Section 9.
"Effective Date" means the date on which the Plan is approved by the
Board as set forth in Section 14.
"Fair Market Value" of the Stock on any given date means the fair market
value of the Stock determined in good faith by the Committee; provided,
however, that (i) if the Stock is admitted to quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), the
Fair Market Value on any given date shall not be less than the average of the
highest bid and lowest asked prices of the Stock reported for such date or, if
no bid and asked prices were reported for such date, for the last day preceding
such date for which such prices were reported, or (ii) if the Stock is admitted
to trading on a national securities exchange
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or the NASDAQ National Market System, the Fair Market Value on any date shall
not be less than the closing price reported for the Stock on such exchange or
system for such date or, if no sales were reported for such date, for the last
date preceding the date for such a sale was reported.
"Independent Director" means a member of the Board who is not also an
employee or officer of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option as defined in Section 422 of the Code.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Participant" means any person or entity to whom an Award is granted
under this Plan.
"Performance Share Award" means Awards granted pursuant to Section 8.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
"Stock" means the Common Stock, par value $.01 per share, of the
Company, subject to adjustments pursuant to Section 3.
"Subsidiary" or "Subsidiaries" means any corporation or other entity
(other than the Company) in any unbroken chain of corporations or other
entities, beginning with the Company if each of the corporations or entities
(other than the last corporation or entity in the unbroken chain) owns stock or
other interests possessing 50% or more of the economic interest or the total
combined voting power of all classes of stock or other interests in one of the
other corporations or entities in the chain.
"Unrestricted Stock Award" means any Awards granted pursuant to Section
7.
SECTION 2. ADMINISTRATION OF PLAN: COMMITTEE AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by all of the
Independent Director members of the Compensation Committee of the Board, or any
other committee of not less than two Independent Directors performing similar
functions as appointed by the Board from time to time. On and after the date
the Company becomes a reporting company subject to the Act, each member of the
Committee shall be a Disinterested Person if any Participants are directors,
officers or more than ten percent (10%) stockholders of the Company, as
determined under the rules promulgated under Section 16 of the Act. On and
after the date the Company becomes subject to Section 162(m) of the Code, each
member of the Committee shall be an "outside director" within the meaning of
Section 162(m) of the Code and the regulations promulgated thereunder if
Section 162(m) of the Code could limit the Company's federal income tax
deduction of compensation paid by the Company to a Participant.
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(b) Powers of Committee. The Committee shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the Participants to whom Awards may from time to
time be granted;
(ii) to determine the time or times of grant, and the extent,
if any, of Stock Options, Restricted Stock Awards, Unrestricted Stock
Awards, Performance Share Awards and Dividend Equivalent Rights, or any
combination of the foregoing, granted to any one or more Participants;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of
the Plan, of any Award, which terms and conditions may differ among
individual Awards and participants, and to approve the form of written
instruments evidencing the Awards;
(v) to accelerate at any time the vesting of all or any
portion of any Award and/or to include provisions in Awards providing
for such acceleration;
(vi) to impose any limitations on Awards granted under the
Plan, including limitations on transfers, repurchase provisions and the
like;
(vii) subject to the provisions of Section 5(a)(iii), to extend
at any time the period in which Stock Options may be exercised;
(viii) to determine at any time whether, to what extent, and
under what circumstances Stock and other amounts payable with respect to
an Award shall be deferred either automatically or at the election of
the Participant and whether and to what extent the Company shall pay or
credit amounts constituting interest (at rates determined by the
Committee) or dividends or deemed dividends on such deferrals; and
(ix) at any time to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms
and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and to otherwise supervise the administration of the
Plan.
All decisions and interpretations of the Committee shall be binding on
all persons, including the Company and Plan Participants.
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SECTION 3. STOCK ISSUABLE UNDER THE PLAN: MERGERS: SUBSTITUTION
(a) Stock Issuable. Subject to adjustment as provided herein, the
maximum number of shares of Stock that may be delivered pursuant to Awards
granted under the Plan is (a) one million (1,000,000) shares; plus (b) shares
of Stock previously subject to Awards which are forfeited, terminated, settled
in cash in lieu of Stock, or exchanged for Awards that do not involve Stock, or
expired unexercised; plus (c) without duplication for shares counted under the
immediately preceding clause, a number of shares of Stock equal to the number
of shares repurchased by the Company in the open market or otherwise and having
an aggregate repurchase price no greater than the amount of cash proceeds
received by the Company from the sale of shares of Stock under the Plan; plus
(d) any shares of Stock surrendered to the Company in payment of the exercise
price of options issued under the Plan.
Shares to be issued may be made available from authorized but unissued
Stock, Stock held by the Company in its treasury, or Stock purchased by the
Company on the open market or otherwise. During the term of this Plan, the
Company will at all times reserve and keep available the number of shares of
Stock that shall be sufficient to satisfy the requirements of this Plan.
(b) Recapitalizations. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction, the outstanding shares
of Stock of either class are increased or decreased or are exchanged for a
different number or kind of shares or other securities of the Company, or
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of Stock
or other securities, the Committee shall make an appropriate or proportionate
adjustment in (i) the maximum number of shares reserved for issuance under the
Plan, (ii) the number of Stock Options that can be granted to any one
individual Participant, (iii) the number and kind of shares or other securities
subject to any then outstanding Awards under the Plan, and (iv) the price for
each share subject to any then outstanding Stock Options under the Plan,
without changing the aggregate exercise price (i.e., the exercise price
multiplied by the number of Stock Options) as to which such Stock Options
remain exercisable. The adjustment by the Committee shall be final, binding
and conclusive. No fractional shares of Stock shall be issued under the Plan
resulting from any such adjustment, but the Committee in its discretion may
make a cash payment in lieu of fractional shares.
(c) Mergers and Other Transactions. In the case of (i) the
dissolution or liquidation of the Company, (ii) a merger, reorganization or
consolidation in which the Company is acquired by another person or entity
(other than a holding company or wholly-owned subsidiary formed by the
Company), (iii) the sale of all or substantially all of the assets of the
Company to an unrelated person or entity, or (iv) the sale of all of the Stock
of the Company to an unrelated person or entity, the outstanding Awards shall
become fully vested. Upon the effectiveness of any such transaction or event,
the Plan and all Awards granted hereunder shall terminate, unless provision is
made in connection with such transaction for the assumption of Awards
heretofore granted, or the substitution of such Awards of new Awards of the
successor entity or parent thereof, with appropriate adjustment as to the
number and kind of shares and, if appropriate, the per share exercise prices,
as provided in Section 3(b) above. In the event of such termination, all
Awards, other than
4
<PAGE> 5
Options, shall be fully settled in shares of Stock or cash, and each Optionee
shall be permitted to exercise for a period of at least 15 days prior to the
termination all outstanding Options then held by the Optionee.
(d) Substitute Awards. The Committee may grant Awards under the Plan
in substitution for stock and stock based awards in other corporations that are
owned by a Participant. The Committee may direct that the substitute awards be
granted on such terms and conditions as the Committee considers appropriate in
the circumstances.
SECTION 4. ELIGIBILITY
Participants in the Plan will be investors in the Company or its
Subsidiaries or persons or entities that have sold stock or assets to the
Company or its Subsidiaries who are selected from time to time by the
Committee, in its sole discretion.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be pursuant to a stock
option agreement which shall be in such form as the Committee may from time to
time approve. Option agreements need not be identical. All Stock Options
granted under the Plan shall be Non-Qualified Stock Options.
(a) Terms of Stock Options. Stock Options granted under the Plan
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan,
as the Committee shall deem desirable:
(i) Exercise Price. The exercise price per share for the
Stock covered by a Stock Option shall be determined by the Committee at
the time of grant but shall not be less than the par value per share of
the Stock.
(ii) Option Term. Subject to the other terms of this Plan, the
term of each Stock Option shall be fixed by the Committee.
(iii) Exercisability; Rights of a Stockholder. Stock Options
shall become vested and exercisable at such time or times, whether or
not in installments, as shall be determined by the Committee at or after
the grant date. The Committee may at any time accelerate the
exercisability of all or any portion of any Stock Option. An optionee
shall have the rights of a stockholder only as to shares acquired upon
the exercise of a Stock Option and not as to unexercised Stock Options.
(iv) Method of Exercise. Stock Options may be exercised in
whole or in part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the
purchase price may be made by one or more of the following methods;
provided, however, that the methods set forth in subsections (B) and (C)
below shall become available only after the closing of the first
underwritten public offering
5
<PAGE> 6
pursuant to an effective registration statement under the Securities Act
of 1933, as amended, covering the offer and sale of Stock to the public:
(A) In cash, by certified or bank check, or other
instrument acceptable to the Company;
(B) In the form of shares of Stock that are not then
subject to restrictions under any Company plan and that have been
held by the optionee for at least six months, if permitted by the
Company in its discretion. Such surrendered shares shall be
valued at Fair Market Value on the exercise date;
(C) By the optionee delivering to the Company a
properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash
or a check payable and acceptable to the Company to pay the
purchase price; provided that in the event the optionee chooses
to pay the purchase price as so provided, the optionee and the
broker shall comply with such procedures and enter into such
agreements of indemnity and other agreements as the Committee
shall prescribe as a condition of such payment procedure; or
(D) In any other form of valid consideration that is
acceptable to the Committee in its sole discretion.
Payment instruments will be received subject to collection. The
delivery of certificates representing the shares of Stock to be
purchased pursuant to the exercise of a Stock Option will be contingent
upon receipt from the optionee (or a purchaser acting in his stead in
accordance with the provisions of the Stock Option) by the Company of
the full purchase price for such shares and the fulfillment of any other
requirements contained in the Stock Option or applicable provisions of
laws.
(b) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution and Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee. Notwithstanding the
foregoing, the Committee may provide in an option agreement that the
optionee may transfer, without consideration for the transfer, his Stock
Options to members of his immediate family, to trusts for the benefit of
such family members and to partnerships in which such family members are
the only partners. Following transfer, any Stock Option shall continue
to be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that for purposes of the Plan,
the term "Participant" shall be deemed to include the transferee.
SECTION 6. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. The Committee may grant
Restricted Stock Awards to any Participant under the Plan. A Restricted Stock
Award is an Award entitling the recipient to acquire, at par value or such
other purchase price determined by the Committee, shares
6
<PAGE> 7
of Stock subject to such restrictions and conditions as the Committee may
determine at the time of grant ("Restricted Stock"). Conditions may be based
on, among other things, achievement of pre-established performance goals and
objectives.
(b) Rights as a Stockholder. Upon execution of a written instrument
setting forth the Restricted Stock Award and paying any applicable purchase
price, a Participant shall have the rights of a stockholder with respect to
the voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the Committee
shall otherwise determine, certificates evidencing the Restricted Stock shall
remain in the possession of the Company until such Restricted Stock is vested
as provided in Section 6(d) below.
(c) Restrictions. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the written instrument evidencing the
Restricted Stock Award.
(d) Vesting of Restricted Stock. The Committee at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which Restricted Stock
shall become vested, subject to such further rights of the Company or its
assigns as may be specified in the instrument evidencing the Restricted Stock
Award.
(e) Waiver, Deferral and Reinvestment of Dividends. The written
instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
SECTION 7. UNRESTRICTED STOCK AWARDS
The Committee may, in its sole discretion, grant (or sell at a purchase
price determined by the Committee) an Unrestricted Stock Award to any
Participant pursuant to which such individual may receive shares of Stock free
of any vesting restrictions ("Unrestricted Stock") under the Plan.
Unrestricted Stock Awards may be granted or sold as described in the preceding
sentence in respect of any valid consideration, or in lieu of any cash
compensation due to such individual.
SECTION 8. PERFORMANCE SHARE AWARDS
(a) Nature of Performance Share Awards. A Performance Share Award is
an Award entitling the recipient to acquire shares of Stock upon the attainment
of specified performance goals. The Committee may make Performance Share
Awards independent of or in connection with the granting of any other Award
under the Plan. Performance Share Awards may be granted under the Plan to any
Participant. The Committee in its sole discretion shall determine whether and
to whom Performance Share Awards shall be made, the performance goals
applicable under each such Award, the periods during which performance is to
be measured, and all other limitations and conditions applicable to the awarded
Performance Shares; provided, however, that the Committee may rely on the
performance goals and other standards applicable to other performance unit
plans of the Company in setting the standards for Performance Share Awards
under the Plan.
7
<PAGE> 8
(b) Restrictions on Transfer. Performance Share Awards and all
rights with respect to such Awards may not be sold, assigned, transferred,
pledged or otherwise encumbered.
(c) Rights as a Shareholder. A Participant receiving a Performance
Share Award shall have the rights of a shareholder only as to shares actually
received by the Participant under the Plan and not with respect to shares
subject to the Award but not actually received by the Participant. A
Participant shall be entitled to receive a stock certificate evidencing the
acquisition of shares of Stock under a Performance Share Award only upon
satisfaction of all conditions specified in the written instrument evidencing
the Performance Share Award (or in a performance plan adopted by the
Committee).
(d) Acceleration, Waiver, Etc. At any time prior to the
Participant's termination of his business relationship by the Company and its
Subsidiaries, the Committee may in its sole discretion accelerate, waive or,
subject to Section 11, amend any or all of the goals, restrictions or
conditions imposed under any Performance Share Award.
SECTION 9. DIVIDEND EQUIVALENT RIGHTS
(a) Dividend Equivalent Rights. A Dividend Equivalent Right is an
Award entitling the recipient to receive credits based on cash dividends that
would be paid on the shares of Stock specified in the Dividend Equivalent Right
(or other award to which it relates) if such shares were held by the recipient.
A Dividend Equivalent Right may be granted hereunder to any Participant as a
component of another Award or as a freestanding award. The terms and
conditions of Dividend Equivalent Rights shall be specified in the grant.
Dividend equivalents credited to the holder of a Dividend Equivalent Right may
be paid currently or may be deemed to be reinvested in additional shares of
Stock, which may thereafter accrue additional equivalents. Any such
reinvestment shall be at Fair Market Value on the date of reinvestment or such
other price as may then apply under a dividend reinvestment plan sponsored by
the Company, if any. Dividend Equivalent Rights may be settled in cash or
shares of Stock or a combination thereof, in a single installment or
installments. A Dividend Equivalent Right granted as a component of another
Award may provide that such Dividend Equivalent Right shall be settled upon
exercise, settlement, or payment of, or lapse of restrictions on, such other
award, and that such Dividend Equivalent Right shall expire or be forfeited or
annulled under the same conditions as such other award. A Dividend Equivalent
Right granted as a component of another Award may also contain terms and
conditions different from such other award.
(b) Interest Equivalents. Any Award under this Plan that is settled
in whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment.
Interest equivalents may be compounded and shall be paid upon such terms and
conditions as may be specified by the grant.
SECTION 10. TAX WITHHOLDING
Each Participant shall, no later than the date as of which the value of
an Award or of any Stock or other amounts received thereunder first becomes
includable in the gross income of the
8
<PAGE> 9
Participant for federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any federal,
state, or local taxes of any kind required by law to be withheld with respect
to such income. Such payment may be made in cash, by check, or through the
delivery of shares of Stock owned by the Participant (which may be effected by
the actual delivery of shares of Stock by the Participant or by the Company's
withholding a number of shares to be issued upon the exercise of a Stock
Option, if applicable), which shares have an aggregate Fair Market Value equal
to the required minimum withholding payment, or any combination thereof. The
Company and its Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
the Participant.
SECTION 11. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Committee may, at any time, amend or cancel any outstanding Award (or provide
substitute Awards at the same or reduced exercise or purchase price or with no
exercise or purchase price in a manner not inconsistent with the terms of the
Plan), but such price, if any, must satisfy the requirements which would apply
to the substitute or amended Award if it were then initially granted under this
Plan) for the purpose of satisfying changes in law or for any other lawful
purpose, but no such action shall adversely affect rights under any outstanding
Award without the holder's consent. If and to the extent determined by the
Committee to be required by the Act or the Code to ensure that Awards granted
under the Plan are exempt under Rule 16b-3 promulgated under the Act and under
Section 162(m) of the Code if Section 162(m) of the Code could limit the
Company's federal income tax deduction of compensation paid by the Company to a
Participant, Plan amendments shall be subject to approval by the Company
stockholders who are eligible to vote at a meeting of stockholders.
SECTION 12. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised
and any payments in cash, Stock or other consideration not received by a
Participant, a Participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet
the Company's obligations to deliver Stock or make payments with respect to
Awards hereunder, provided that the existence of such trusts or other
arrangements is consistent with the foregoing sentence.
SECTION 13. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The
Committee may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Committee may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards
as it deems appropriate.
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<PAGE> 10
(b) Other Compensation Arrangements: No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements, including trusts, and such arrangements
may be either generally applicable or applicable only in specific cases. The
adoption of this Plan and the grant of Awards do not confer upon any
Participant any right to employment with the Company or any Subsidiary.
(c) Indemnification. No member of the Board or the Committee, nor
any officer or employee of the Company or any Subsidiary acting on behalf of
the Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to
the Plan, and all members of the Board or the Committee and each and any
officer or employee of the Company acting on their behalf shall, to the extent
permitted by law, be fully indemnified and protected by the Company in respect
of any such action, determination, or interpretation.
SECTION 14. EFFECTIVE DATE OF PLAN
This Plan shall become effective on August 23, 1996, which is the date
the Plan was approved and adopted by the Board.
SECTION 15. GOVERNING LAW
This Plan shall be governed by Delaware law except to the extent such
law is preempted by federal law.
10
<PAGE> 1
EXHIBIT 10.4
================================================================================
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
By and Among
MONARCH DENTAL CORPORATION,
The TA Investors
as defined herein and set forth
on the signature pages hereto,
The MacGregor Investors
as defined herein and set forth
on the signature pages hereto,
The Monarch Investors
as defined herein and set forth
on the signature pages hereto
and
The Hehli Investors
as defined herein and set forth
on the signature pages hereto
Dated as of August 29, 1996
================================================================================
<PAGE> 2
MONARCH DENTAL CORPORATION
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Construction of Terms . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II. TRANSFERS BY THE INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 General Restrictions on Transfer by Investors . . . . . . . . . . . . 4
2.2 Right of Last Refusal . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Right of Co-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.4 Sales by Investors . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.5 Contemporaneous Transfers . . . . . . . . . . . . . . . . . . . . . 10
2.6 Sales to Competitors . . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE III. RIGHTS TO PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Right to Participate in Certain Sales of Additional Securities . . . 10
3.2 Assignment of Rights . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE IV. REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Optional Registrations . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Demand Registrations . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 Registrable Securities . . . . . . . . . . . . . . . . . . . . . . . 14
4.4 Further Obligations of the Company . . . . . . . . . . . . . . . . . 14
4.5 Indemnification; Contribution . . . . . . . . . . . . . . . . . . . 16
4.6 Rule 144 Requirements . . . . . . . . . . . . . . . . . . . . . . . 18
4.7 Stand-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.8 Transfer of Registration Rights . . . . . . . . . . . . . . . . . . 19
ARTICLE V. ELECTION OF DIRECTORS; FINANCIAL INFORMATION . . . . . . . . . . . . . . . 19
5.1 Board Composition . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.2 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.3 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.4 Increase in Size of Board . . . . . . . . . . . . . . . . . . . . . 20
5.5 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.6 Financial Statements and Budgetary Information; Inspection . . . . . 20
5.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VI. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.1 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . 21
6.2 Assignability of Rights . . . . . . . . . . . . . . . . . . . . . . 21
6.3 Legend on Securities . . . . . . . . . . . . . . . . . . . . . . . . 21
6.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
6.5 Section Headings and Gender . . . . . . . . . . . . . . . . . . . . 22
6.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 Notices and Demands . . . . . . . . . . . . . . . . . . . . . . . . 22
6.8 Remedies; Severability . . . . . . . . . . . . . . . . . . . . . . . 22
6.9 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
1. LIST OF SCHEDULES AND EXHIBITS
Schedule 1.2(a) -- Amended and Restated Certificate of Incorporation
of the Company
Exhibit A -- Addendum Agreement
ii
<PAGE> 4
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
This Amended and Restated Stockholders' Agreement is made as of this
29th day of August, 1996, by and among MONARCH DENTAL CORPORATION, a Delaware
corporation (the "Company"), each of the TA Investors identified on the
signature pages hereto (together with any Permitted Transferee (as hereinafter
defined) or other assignee thereof as contemplated by the terms of this
Agreement, individually a "TA Investor" and collectively, the "TA Investors"),
each of the MacGregor Investors identified on the signature pages hereto and
Charles G. Shears, an individual residing in Harris County, Texas (together
with any Permitted Transferee (as hereinafter defined) or other assignee
thereof as contemplated by the terms of this Agreement, individually a
"MacGregor Investor" and collectively, the "MacGregor Investors"), each of the
Monarch Investors, identified on the signature pages hereto (together with any
Permitted Transferee (as hereinafter defined) or other assignee thereof as
contemplated by the terms of this Agreement, individually a "Monarch Investor"
and collectively, the "Monarch Investors") and each of the Hehli Investors
identified on the signature pages hereto and Yvonne Mayberry, an individual
residing in Buffalo County, Wisconsin (together with any Permitted Transferee
(as hereinafter defined) or other assignee thereof as contemplated by the terms
of this Agreement, individually a "Hehli Investor" and collectively, the "Hehli
Investors"). The TA Investors, the MacGregor Investors, the Monarch Investors
and the Hehli Investors are sometimes referred to herein collectively as the
"Investors" and individually an "Investor."
WHEREAS, each of the TA Investors, the MacGregor Investors and the
Monarch Investors made an investment in the Company in February 1996 and, along
with the Company, entered into that certain Stockholders' Agreement dated
February 5, 1996, as amended by that certain First Amendment to the
Stockholders' Agreement dated August 1, 1996 (the "Original Stockholders'
Agreement"); and
WHEREAS, concurrently herewith, the Hehli Investors are making an
investment in the Company; and
WHEREAS, the parties to the Original Stockholders' Agreement desire to
amend and restate such agreement to add the Hehli Investors as a party; and
WHEREAS, in consideration thereof, and for the purpose of setting
forth certain arrangements that will govern the parties' relationship as
investors in the Company, the Company is granting the Investors certain rights
and the Investors are entering into certain agreements and covenants as set
forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
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<PAGE> 5
ARTICLE I. DEFINITIONS
1.1 Construction of Terms. As used herein, the masculine, feminine
or neuter gender, and the singular or plural number, shall be deemed to be or
to include the other genders or number, as the case may be, whenever the
context so indicates or requires.
1.2 Defined Terms. The following capitalized terms, as used in
this Agreement, shall have the meanings set forth below.
An "Affiliate" of any Person means a Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by or
is under common control with the first mentioned Person. A Person shall be
deemed to control another Person if such first Person possesses directly or
indirectly the power to direct, or cause the direction of, the management and
policies of the second Person, whether through the ownership of voting
securities, by contract or otherwise. An "Affiliate" of any Person, where
applicable, shall also include any professional corporation that employs
dentists and which, directly or indirectly provides or makes available dental
services to such Person.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Common Stock, par value $.01 per share and
Class A Common Stock, par value $.01 per share, of the Company, as the context
requires, and any other common equity securities now or hereafter issued by the
Company (but not including the Preferred Stock), and any other shares of stock
issued or issuable with respect thereto (whether by way of a stock dividend or
stock split or in exchange for or upon conversion of such shares or otherwise
in connection with a combination of shares, recapitalization, merger,
consolidation or other corporate reorganization); provided, however, the term
"Common Stock" shall not include any invested shares of the Company's capital
stock that are subject to any restricted stock purchase or similar agreement.
"Company" means Monarch Dental Corporation, a Delaware corporation,
and its successors and assigns, whether by way of merger, consolidation or
otherwise.
"Convertible Participating Preferred Stock" means the Convertible
Participating Preferred Stock, par value $.01 per share, of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and the rules and regulations promulgated thereunder.
"Hehli Investors" has the meaning set forth in the first paragraph to
this Agreement.
- 2 -
<PAGE> 6
"Holder" has the meaning set forth in Section 4.1.
"Investors" has the meaning set forth in the first paragraph of this
Agreement.
"Investor Group" means each group of Investors consisting of (i) the
TA Investors, (ii) the MacGregor Investors, (iii) the Monarch Investors and
(iv) the Hehli Investors.
"Investor Group's Pro Rata Share" has the meaning set forth in Section
2.2(b).
"MacGregor Investors" has the meaning set forth in the first paragraph
to this Agreement.
"Monarch Investors" has the meaning set forth in the first paragraph
to this Agreement.
"Notice Period" has the meaning set forth in Section 2.2(b).
"Offer to Purchase" has the meaning set forth in Section 2.2.
"Offer to Sell" has the meaning set forth in Section 2.2(a).
"Offeror" has the meaning set forth in Section 2.2.
"Permitted Transfer" has the meaning set forth in Section 2.1(a).
"Permitted Transferee" has the meaning set forth in Section 2.1.
"Person" means an individual, a corporation, an association, a
partnership, a limited liability company, an estate, a trust, and any other
entity or organization, governmental or otherwise.
"Preferred Stock" means the Convertible Participating Preferred Stock
and the Redeemable Preferred Stock each issued or to be issued in accordance
with and subject to the terms of the Amended and Restated Certificate of
Incorporation of the Company substantially in the form attached hereto as
Schedule 1.2(a) (the "Charter"), together with any other shares issued or
issuable with respect thereto (whether by way of a stock dividend, stock split
or in exchange for or in replacement or upon conversion of such shares or
otherwise in connection with a combination of shares, recapitalization, merger,
consolidation or other corporate reorganization).
"Qualified Public Offering" means the first underwritten public
offering pursuant to an effective registration statement under the Securities
Act, covering the offer and sale of Common Stock to the public in which (i) the
proceeds received by the Company, net of underwriting discounts and
commissions, equal or exceed $20 million
- 3 -
<PAGE> 7
and the price per share implies a value for the Company of at least $50 million
and (ii) a portion of such proceeds is used to redeem all of the Redeemable
Preferred Stock then outstanding.
"Redeemable Preferred Stock" means the Redeemable Preferred Stock, par
value $.01 per share, of the Company.
"Registrable Securities" shall have the meaning set forth in Section
4.3.
"Right Holder" shall have the meaning set forth in Section 2.2(a).
"Securities Act" means the Securities Act of 1933, as amended from
time to time, and the rules and regulations promulgated thereunder.
"Selling Holder" has the meaning set forth in Section 4.5(a).
"TA Investors" has the meaning set forth in the first paragraph to
this Agreement.
"Transfer" has the meaning set forth in Section 2.1 (a). "Transferred"
means the accomplishment of a Transfer, and "Transferee" means the recipient of
a Transfer.
"Transferor" has the meaning set forth in Section 2.2.
ARTICLE II. TRANSFERS BY THE INVESTORS
The following provisions of this Article II shall terminate
immediately prior (and subject) to the closing of a Qualified Public Offering,
provided that the provisions of this Article II shall be inapplicable with
respect to sales by Investors in any transaction which qualifies as such.
2.1 General Restrictions on Transfer by Investors.
(a) Each Investor agrees that it will not directly or
indirectly offer, transfer, donate, sell, assign, pledge, hypothecate or
otherwise dispose of (any such action a "Transfer") all or any portion of the
shares of capital stock of the Company now owned or hereafter acquired by it,
except in connection with, and strictly in compliance with the conditions of,
any of the following (hereinafter "Permitted Transfers"):
(i) Transfers effected pursuant to Sections 2.2,
2.3 and 2.4 hereof, as applicable, and which do not violate Section
2.6 hereof, in each case made in accordance with the procedures set
forth therein;
(ii) with respect to any MacGregor Investor, a
Transfer to (A) any other MacGregor Investor listed on the signature
page hereof or to any
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spouse, child, child of spouse, parent, parent of spouse, grandchild,
grandchild of spouse, sibling, sibling of spouse, aunt or uncle or
aunt or uncle of spouse of any such MacGregor Investor, (B) any trust
for which any such MacGregor Investor and/or the spouse of such
MacGregor Investor is/are the settlor(s) for the sole benefit of any
such spouse, child, grandchild, parent, sibling, aunt or uncle
including by way of gift or the laws of descent and distribution or
(C) any limited partnership of which the sole general partner is the
transferor MacGregor Investor or an entity one hundred percent owned
and controlled by such transferor MacGregor Investor and any person
described in clause (A) and/or clause (B) of this clause (ii), and the
limited partners are persons described in clause (A) and/or clause (B)
of this clause (ii);
(iii) with respect to any Monarch Investor, a
Transfer to (A) any other Monarch Investor listed on the signature
page hereof or to any spouse, child, child of spouse, parent, parent
of spouse, grandchild, grandchild of spouse, sibling, sibling of
spouse, aunt or uncle or aunt or uncle of spouse of any such Monarch
Investor, (B) any trust for which any such Monarch Investor and/or the
spouse of such Monarch Investor is/are the settlor(s) for the sole
benefit of any such spouse, child, grandchild, parent, sibling, aunt
or uncle including by way of gift or the laws of descent and
distribution, (C) any limited partnership of which the sole general
partner is the transferor Monarch Investor or an entity one hundred
percent owned and controlled by such transferor Monarch Investor and
any person described in clause (A) and/or clause (B) of this clause
(iii), and the limited partners are persons described in clause (A)
and/or clause (B) of this clause (iii), or (D) Martin Lipke or Carol
Clarke;
(iv) with respect to any TA Investor, a Transfer
to any other TA Investor listed on the signature page hereof, to any
other investment fund or other entity for which TA Associates, Inc.
and/or one or more partners thereof, directly or indirectly through
one or more intermediaries, serves as general partner or manager or in
a like capacity (a "TA Fund") or to any partner of a TA Fund; and
(v) with respect to any Hehli Investor, a
Transfer to (A) any other Hehli Investor listed on the signature page
hereof or to any spouse, child, child of spouse, parent, parent of
spouse, grandchild, grandchild of spouse, sibling, sibling of spouse,
aunt or uncle or aunt or uncle of spouse of any such Hehli Investor,
(B) any trust for which any such Hehli Investor and/or the spouse of
such Hehli Investor is/are the settlor(s) for the sole benefit of any
such spouse, child, grandchild, parent, sibling, aunt or uncle
including by way of gift or the laws of descent and distribution, (C)
any limited partnership of which the sole general partner is the
transferor Hehli Investor or an entity one hundred percent owned and
controlled by such transferor Hehli Investor and any person described
in clause (A) and/or clause (B) of this clause (v), and the limited
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partners are persons described in clause (A) and/or clause (B) of this
clause (v), or (D) Yvonne M. Mayberry.
Any permitted Transferee of a MacGregor Investor, a Monarch Investor,
a TA Investor or a Hehli Investor pursuant to the preceding clause (ii), (iii),
(iv) or (v) shall be referred to herein as a "Permitted Transferee" of such
Investor. In the case of any Permitted Transfer, the provisions of Sections
2.2, 2.3, 2.4 and 2.6 shall not apply, provided that the transferee shall have
entered into an enforceable written agreement substantially in the form
attached hereto as Exhibit A providing that all shares so Transferred shall
continue to be subject to all provisions of this Agreement as if such shares
were still held by the transferring Investor, and in connection therewith such
Permitted Transferee shall be deemed a TA Investor, a MacGregor Investor, a
Monarch Investor, a Hehli Investor, as applicable, for purposes of this
Agreement. In addition to compliance with the foregoing conditions, in
connection with any otherwise Permitted Transfer of shares of capital stock
that are restricted shares and are subject to any stock restriction agreement,
any transferee of any such shares shall agree in writing to be bound by the
terms of any such stock restriction or similar agreement, including, without
limitation, any repurchase or similar right contained therein. Anything to the
contrary in this Agreement notwithstanding, transferees permitted by clauses
(ii), (iii), (iv) and (v) of this Section 2.1 (a) shall take any shares so
Transferred subject to all rights and obligations under this Agreement as if
such shares were still held by the relevant Investor whether or not they so
agree with such transferring Investor. If any Transfer is made or attempted
contrary to the provisions of this Agreement, such purported Transfer shall be
void ab initio and the Company and the other Investors shall have, in addition
to any other legal or equitable remedies which they may have, the right to
enforce the provisions of this Agreement by actions for specific performance as
contemplated by Section 6.8; and the Company shall have the right to refuse to
recognize any purported transferee in such a Transfer as one of its
stockholders for any purpose.
2.2 Right of Last Refusal. If at any time on or after the Date
hereof any Investor receives a bona fide offer to purchase any or all of the
shares of any class of capital stock of the Company held by it (the "Offer to
Purchase") from an unaffiliated third party (the "Offeror") which such Investor
wishes to accept (whether initiated by such Investor or the third party), such
Investor may transfer such shares only pursuant to and in accordance with the
following provisions of this Section 2.2 (any Investor receiving an Offer to
Purchase being referred to in this Section 2.2 as the "Transferor"):
(a) The Transferor shall cause the Offer to Purchase to
be reduced to writing and shall notify each of the other Investors, other than
those Investors that are members of the Investor Group in which the Transferor
is a member (or deemed to be a member as provided in this Agreement) (the party
or parties receiving such notice being referred to as the "Right Holders") in
writing of its desire to accept the Offer to Purchase and otherwise comply with
the applicable provisions of this Article II. The
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Transferor's notice shall constitute an irrevocable offer to sell (the "Offer
to Sell") such shares to the Right Holders on the basis described below at a
purchase price equal to the price contained in, and on the same terms and
conditions of, the Offer to Purchase. The notice shall be accompanied by a true
copy of the Offer to Purchase (which shall identify the Offeror and all
relevant information in connection therewith).
(b) At any time within 45 days after the date of the
giving of notice pursuant to Section 2.2(a) (the "Notice Period"), the Right
Holders may, subject to the terms hereof, choose to accept the Offer to Sell
with respect to all or a portion of the shares covered thereby by giving
written notice to the Transferor as follows: all Right Holders that are members
of an Investor Group, if applicable, shall, collectively, indicate the maximum
number of shares that members of such Investor Group wish to purchase including
such number of shares that such Investor Group would purchase if the Right
Holders of any other Investor Group do not in the aggregate elect to purchase
such Investor Group's Pro Rata Share (as defined below). If the members of each
Investor Group which are Right Holders choose to accept such Offer to Sell in
amounts greater than each such Investor Group's Pro Rata Share, the number of
shares for which the Offer to Sell may be accepted by the members of each such
Investor Group shall equal each such Investor Group's Pro Rata Share. If the
members of each Investor Group which are Right Holders choose to accept such
Offer to Sell in amounts equal to each such Investor Group's Pro Rata Share,
the number of shares for which the Offer to Sell may be accepted by the members
of each such Investor Group shall equal each such Investor Group's Pro Rata
Share. If the members of each Investor Group which are Right Holders choose to
accept such Offer to Sell in amounts less than each such Investor Group's Pro
Rata Share, the number of shares for which the Offer to Sell may be accepted by
the members of each such Investor Group shall equal the amounts so accepted by
the members of each such Investor Group. If the members of one or more Investor
Groups which are Right Holders choose to accept such Offer to Sell in amounts
greater than its or their Pro Rata Share and the members of one or more
Investor Groups choose to accept such Offer to Sell in amounts less than its
Pro Rata Share, the members of the Investor Group(s) choosing to so accept in
excess of its (their) Pro Rata Share may accept those shares not accepted by
the other Investor Group(s), with allocation within each such accepting
Investor Group based upon the relative holdings of each such accepting Investor
Group. An "Investor Group's Pro Rata Share" shall equal the number of shares of
Common Stock (including shares of Common Stock issuable upon conversion of
Preferred Stock) then held by the Right Holders that are members of such
Investor Group, divided by the total number of shares of Common Stock
(including shares of Common Stock issuable upon conversion of Preferred Stock)
then held by the members of all Investor Groups which are Right Holders.
Notwithstanding anything contained herein to the contrary, unless otherwise
agreed to by all of the members of an Investor Group, each member of an
Investor Group shall be entitled to its proportionate share of such Investor
Group's Pro Rata Share, based upon the number of shares of Common Stock
(including shares of Common Stock issuable upon conversion of Preferred Stock)
then held by each such member relative to the number of shares of such Common
Stock (including shares of
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Common Stock issuable upon conversion of Preferred Stock) then held by all such
members, and members of an Investor Group shall have the first right to elect
to purchase shares allocable to such Investor Group in connection with any
offer to sell in lieu of any member of any other Investor Group.
(c) If shares covered by any Offer are purchased pursuant
to Section 2.2(b), such purchase shall be (i) at the same price and on the same
terms and conditions as the Offer to Purchase if the Offer to Purchase is for
cash and/or notes or (ii) if the Offer to Purchase includes any consideration
other than cash and notes, then at the equivalent all cash price for such other
consideration determined reasonably and in good faith. The closing of the
purchase of the shares subject to an Offer to Sell pursuant to this Section 2.2
shall take place within 15 days after the expiration of the Notice Period, or
upon satisfaction of any governmental approval requirements, if later, by
delivery by the respective Right Holders of the purchase price for the shares
being purchased as provided above to the Transferor against delivery of the
certificates representing the shares so purchased, appropriately endorsed for
transfer by such Transferor.
2.3 Right of Co-sale. In the event a Transferor proposes to sell
any shares that following the delivery of an Offer to Sell were not purchased
pursuant to Section 2.2, such Transferor may transfer such shares subject
thereto only following compliance with this Section 2.3 and Section 2.4 below.
In such event, promptly following the last day of the Notice Period, the
Transferor shall give a notice of the proposed sale to the Investors (other
than those Investors that are members (or deemed to be members as provided in
this Agreement) of the Investor Group in which the Transferor is a member),
once again enclosing a copy of the Offer to Purchase, if applicable, which
shall identify the Offeror and the number of shares proposed to be sold (the
"Co-Sale Notice"). Each of the Investors (other than those Investors, if
applicable, that are members of the Investor Group in which the Transferor is a
member) thereupon shall have the right, exercisable upon written notice to such
Transferor within 20 days after delivery to it of the Co-Sale Notice (the "Co-
Sale Notice Period"), which notice shall indicate the maximum number of shares
such Investor wishes to sell including the number of shares it would sell if
one or more other Investors do not elect to participate, to participate in the
sale on the terms and conditions stated in the Offer to Purchase and in the
Co-Sale Notice, except that (i) any Investor who holds Preferred Stock shall be
permitted to sell to the relevant purchaser shares of Common Stock acquired
upon conversion thereof or, at its election, an option to acquire such Common
Stock when it receives the same upon such conversion at the election of such
Investor or as otherwise provided in the Charter with the same effect as if
Common Stock were being conveyed, and (ii) in the event the Transferor proposes
to sell shares of Convertible Participating Preferred Stock those Investors
electing to participate in the sale by selling Common Stock shall only be
entitled to receive an amount per share of Common Stock equal to the difference
of (A) the amount per share the Transferor will receive per share of
Convertible Participating Preferred Stock and (B) $2.0834. Each of the
Investors entitled to receive the Co-Sale Notice shall have the
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right to sell all or any portion of its shares on the terms and conditions in
the Co-Sale Notice (subject to the foregoing), with the maximum number of
shares to be sold by each such Investor equal to the product obtained by
multiplying the number of shares proposed to be sold by the Transferor as
described in the Co-Sale Notice by a fraction, the numerator of which is the
number of shares of Common Stock (including shares of Common Stock issuable
upon conversion of Preferred Stock) owned by such Investor on the date of the
Co-Sale Notice and the denominator of which is the sum of the number of shares
of Common Stock (including shares of Common Stock issuable upon conversion of
Preferred Stock) owned by all of the Investors (including all permitted
assignees of the Investors), as of the date of the Co-Sale Notice. To the
extent one or more Investors who receive a Co-Sale Notice elect not to sell the
full amount of shares which they are entitled to sell pursuant to this Section
2.3, the other participating Investors' rights to sell shares under this
Section 2.3 shall be increased by including additional shares up to the amounts
indicated in their notice of election to participate, with participation to be
determined in the event of oversubscription proportionately based on the
relative holdings of Common Stock (including shares of Common Stock issuable
upon conversion of Preferred Stock) of the Investors who elect to participate;
provided, however, that participating Investors within any Investor Group shall
have the first right to include shares in place of non-participating Investors
within such Investor Group. Within 20 days after the expiration of the Co-Sale
Notice Period, the Transferor shall notify each participating Investor of the
number of shares held by such Investor that will be included in the sale and
the date on which the sale will be consummated, which shall be no later than
the later of (i) 30 days after the expiration of the Co-Sale Notice Period and
(ii) the satisfaction of all governmental approval requirements, if any. Each
of the Investors may effect its participation in any Offer to Purchase
hereunder by delivery to the Offeror, or to the Transferor for transfer to the
Offeror, of one or more instruments, certificates and/or option agreements,
properly endorsed for transfer, representing the shares it elects to sell
therein. At the time of consummation of the Offer to Purchase, the Offeror
shall remit directly to each participating Investor that portion of the sale
proceeds to which each such Investor is entitled by reason of its participation
therein. All costs and expenses in connection with any sales pursuant to this
Section 2.3 (including the cost of complying with this Article II) shall be
paid for by the sellers of shares on a pro rata basis (based on participation
rather than holdings) or otherwise as they may have agreed; provided, however,
that all costs and expenses in connection with any sale pursuant to this
Section 2.3 that relate specifically or incrementally to participation therein
by a certain seller (including the fees and expenses of counsel to such seller)
shall be paid for by such seller. No shares may be purchased by the Offeror
from an Investor unless the Offeror simultaneously purchases from the Investors
all of the shares that they have elected to sell pursuant to this Section 2.3.
Notwithstanding anything contained in this Agreement to the contrary, the
provisions of this Section 2.3 shall not apply and shall be inapplicable to any
sales of Redeemable Preferred Stock.
2.4 Sales by Investors. Any shares covered by an Offer to Purchase
received by Investor which are not acquired pursuant to Section 2.2 that such
Investor desires
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to sell following compliance with Sections 2.2 and 2.3 may be sold to the
Offeror only during the 90-day period after the expiration of the Co-Sale
Notice Period and only on terms no more favorable to the selling Investor than
those contained in the Offer to Purchase. Promptly after such sale, such
Investor shall notify the other Investors of the consummation thereof and shall
furnish such Investors evidence of the completion and time of completion of
such sale and of the terms thereof. Such Offeror shall take the shares so
Transferred subject to the restrictions of this Article II and with the
benefits contemplated by Sections 2.7, 3.2, 4.8 and 5.5 to the extent
applicable, and thereupon shall be deemed a member of the same Investor Group
as the relevant Transferor and thereby a MacGregor Investor, a Monarch
Investor, a TA Investor or a Hehli Investor hereunder except as the parties
hereto may otherwise agree in connection with any proposed transfer. If, at the
end of such 90-day period, the Investor has not completed the sale of such
shares as aforesaid, all the restrictions on Transfer contained in this Article
II shall again be in effect with respect to such shares.
2.5 Contemporaneous Transfers. If two or more Investors propose
concurrent transfers which are subject to this Article II, then the relevant
provisions of Sections 2.2 and 2.3 shall apply separately to each such proposed
transfer.
2.6 Sales to Competitors. Notwithstanding any other provision of
this Article II, each Investor hereby agrees not to directly or indirectly
transfer any securities of the Company or options in respect of any thereof to
any person or company whose activities or services are competitive with
activities or services of the Company as of the date of the proposed transfer.
The Company may impose stop transfer instructions with its transfer agent in
order to enforce the foregoing covenant.
2.7 Assignment. Each Investor shall have the right to assign its
rights under this Article II in connection with any transaction or series of
related transactions involving the transfer to a transferee or two or more
transferees that are Affiliates of each other of at least 50,000 shares of
capital stock of the Company (subject to adjustments for stock splits, stock
dividends, reclassifications, reorganizations and the like and aggregating all
contemporaneous transfers by two or more Investors), or to any TA Fund, and
upon any such transfer, any such transferee or TA Fund thereupon shall be
deemed an "Investor" and a member of the same Investor Group as the relevant
Transferor in connection with its ownership of the shares Transferred for
purposes of this Article II.
ARTICLE III. RIGHTS TO PURCHASE
Notwithstanding anything herein to the contrary, the following
provisions of this Article III shall terminate immediately prior (and subject)
to the closing of a Qualified Public Offering, provided that the provisions of
this Article III shall be inapplicable with respect to any proposed issuance in
a transaction which qualifies as such.
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3.1 Right to Participate in Certain Sales of Additional
Securities. The Company agrees that it will not sell or issue any shares of
capital stock of the Company, or other securities convertible into or
exchangeable for capital stock of the Company, or options, warrants or rights
carrying any rights to purchase capital stock of the Company unless the Company
first submits a written offer to the Investors identifying the terms of the
proposed sale (including price, number or aggregate principal amount of
securities and all other material terms), and offers to each Investor the
opportunity to purchase up to its Pro Rata Share (as hereinafter defined) of
the securities (subject to increase for over-allotment if some Investors do not
fully exercise their rights as provided below) on terms and conditions,
including price, not less favorable to the Investors than those on which the
Company proposes to sell such securities to a third party or parties. Each
Investor's "Pro Rata Share" of such securities shall be based on the ratio
which the shares of Common Stock (including shares issuable upon conversion of
Preferred Stock) owned by it bears to all the issued and outstanding shares of
Common Stock (including shares issuable upon conversion of Preferred Stock)
calculated in each case on a fully-diluted basis giving effect to the
conversion of convertible securities and assuming the exercise of all
outstanding vested options, in each case as of the date of such written offer.
The Company's offer to the Investors shall remain open and irrevocable for a
period of 30 days, and Investors shall elect to purchase by giving written
notice thereof to the Company within such thirty-day period including therein
the maximum number of shares or other securities such Investor would purchase
if other Investors do not elect to purchase, with the rights of electing
Investors to purchase such additional shares to be based upon the relative
holdings of Common Stock (including shares issuable upon conversion of
Preferred Stock) of the electing Investors in the case of over-subscription,
provided that in the event any Investor within an Investor Group does not elect
to purchase its Pro Rata Share, the other members of such Investor Group may
elect to purchase such non-electing Investor's Pro Rata Share or portion
thereof not so elected based on the relevant holdings of the participating
Investors within such Investor Group before any such shares are allocated to
participating Investors within any other Investor Group. Any securities so
offered which are not purchased pursuant to such offer may be sold by the
Company but only on the terms and conditions set forth in the initial offer to
the Investors, at any time within 120 days following the termination of the
above-referenced 30-day period but may not be sold to any other person or on
terms and conditions, including price, that are more favorable to the purchaser
than those set forth in such offer or after such 120-day period without renewed
compliance with this Section 3.1.
Notwithstanding the foregoing, the right to purchase granted under
this Article III shall be inapplicable with respect to any issuance or proposed
issuance by the Company of (i) warrants or options, or stock issued on the
exercise thereof in connection with any financing transaction, (ii) securities
issued in connection with the acquisition of another corporation by the Company
or any Affiliate of the Company, whether by merger, purchase of stock, purchase
of all or substantially all of the assets of such corporation, or otherwise,
(iii) Common Stock issued, or options or rights to
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purchase Common Stock granted, to employees, consultants, officers, directors,
advisors or independent contractors of the Company or of any Affiliate of the
Company, (iv) securities issued as a result of any stock split, stock dividend,
reclassification or reorganization of the Company's stock or (v) Common Stock
or Redeemable Preferred Stock issued upon conversion of Convertible
Participating Preferred Stock in accordance with the terms of the Company's
Amended and Restated Certificate of Incorporation.
3.2 Assignment of Rights. Each Investor may assign its rights
under this Article III in connection with any transaction or series of related
transactions involving the transfer to a transferee or two or more transferees
that are Affiliates of each other of at least 50,000 shares of capital stock of
the Company (subject to adjustments for stock splits, stock dividends,
reclassifications, reorganizations and the like and aggregating all
contemporaneous transfers by Investors), or to any TA Fund, and upon any such
transfer any such transferee or TA Fund shall be deemed an "Investor" and a
member of the same Investor Group as the relevant Transferor in connection with
its ownership of the shares Transferred for purposes of Sections 3.1 and 3.2
with the rights set forth in such Sections.
ARTICLE IV. REGISTRATION RIGHTS
4.1 Optional Registrations. If at any time or times after the date
hereof, the Company shall seek to register any shares of its capital stock or
securities convertible into capital stock under the Securities Act (whether in
connection with a public offering of securities by the Company (a "primary
offering"), a public offering of securities by shareholders of the Company (a
"secondary offering"), or both), the Company will promptly give written notice
thereof to each Investor (the "Holders," subject to Section 4.8) holding
Registrable Securities as hereinafter defined in Section 4.4 below. If within
30 days after their receipt of such notice one or more Holders request the
inclusion of some or all of the Registrable Securities owned by them in such
registration, the Company will, subject to the limitations and conditions
contained herein, use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which such Holders may request in
a writing delivered to the Company within 30 days after their receipt of the
notice given by the Company. In the case of the registration of shares of
capital stock by the Company in connection with any underwritten public
offering, if the underwriter(s) determines in its sole discretion that
marketing factors require a limitation on the number of Registrable Securities
to be offered, the Company shall not be required to register Registrable
Securities in excess of the amount, if any, of shares of the capital stock
which the principal underwriter of such underwritten offering shall reasonably
and in good faith agree to include in such offering in excess of any amount to
be registered for the Company. If any limitation of the number of shares of
Registrable Securities to be registered by the Holders is required pursuant to
this Section 4.1, the number of shares that may be included in the registration
on behalf of the Holders shall be allocated among the
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<PAGE> 16
Holders or the holders of any other registration rights in proportion, as
nearly as practicable, to their respective holdings of Registrable Securities;
provided, however, that participating Holders within any Investor Group shall
have the first right to include shares in place of non-participating Investors
within such Investor Group before shares are allocated to participating
Investors within any other Investor Group. In connection with any underwritten
public offering, the Registrable Securities of Holders included in any such
offering as provided in this Section 4.1 must be sold to the underwriter on the
same terms and conditions as those securities being sold by the Company. The
provisions of this Section will not apply to a registration effected solely to
implement (i) an employee benefit plan, or (ii) a transaction to which Rule 145
or any other similar rule of the Securities and Exchange Commission (the "SEC"
or the "Commission") under the Securities Act is applicable. Notwithstanding
anything herein to the contrary, (i) no Holder shall be entitled to register
and sell any securities of the Company pursuant to this Section 4.1 prior to a
Qualified Public Offering and (ii) the Company may in its sole discretion prior
to its effectiveness withdraw any registration statement under this Section
4.1.
4.2 Demand Registrations.
(a) TA Investor Demand Registrations. If on any two (2)
occasions after the earlier of (a) 120 days after the initial public offering
of capital stock of the Company and (b) the second anniversary of the date
hereof, one or more TA Investors holding Registrable Securities shall notify
the Company in writing that they intend to offer or cause to be offered for
public sale all or any portion of their Registrable Securities, the Company
will notify all of the Holders who would be entitled to notice of a proposed
registration under Section 4.1 above and any other holder of piggyback
registration rights of its receipt of such notification from the requesting
Holders. Subject to Section 4.1, upon the written request of any such Holder or
other holder of the Company's securities delivered to the Company within 20
days after receipt from the Company of such notification, the Company will
either (i) elect to make a primary offering, in which case the rights of such
Holders shall be as set forth in Section 4.1 above (in which case the
registration shall not count as one of the permitted demand registrations
hereunder), or (ii) use its best efforts to cause such of the Registrable
Securities as may be requested by any Holders and any other holders of
piggyback registration rights to be registered under the Securities Act in
accordance with the terms of this Section 4.2.
(b) Form S-3. If on any occasion (subject to the further
provisions of this Section 4.2(b)) after the Company becomes eligible to use
Form S-3 under the Securities Act or a comparable successor form, Holders of
Registrable Securities who are TA Investors, MacGregor Investors, Monarch
Investors or Hehli Investors, as applicable, shall notify the Company that they
intend to offer or cause to be offered for public sale all or any portion of
their Registrable Securities in a transaction anticipated to result in
aggregate offering proceeds to such requesting Holder or Holders, net of
underwriting discounts and commissions, of at least $500,000 (or at least 80%
of the
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requesting Holder or Holders' Registrable Securities, if less), the Company
will notify all of the Holders who would be entitled to notice of a proposed
registration under Section 4.1 above and any other holder of "piggyback"
registration rights of its receipt of such notification from the requesting
Holders. Upon the written request of any such Holder or other holder of the
Company's securities delivered to the Company within 20 days after receipt from
the Company of such notification, the Company will use its best efforts to
cause such of the Registrable Securities as may be requested by any Holders and
any other holders of piggyback registration rights to be registered under the
Securities Act in accordance with the terms of this Section 4.2. The Company
shall not be obligated to effect more than one registration statement on Form
S-3 per any twelve-month period at the initial request of Holders who are
members of the same Investor Group.
(c) Certain Limitations. The Company may postpone the
filing of any registration statement required hereunder for a reasonable period
of time, not to exceed 90 days during any twelve-month period, if the Company
has been advised by legal counsel that such filing would require a special
audit or the disclosure of a material impending transaction or other matter and
the Company's Board of Directors determines reasonably and in good faith that
such disclosure would have a material adverse effect on the Company. The
Company shall not be required to cause a registration statement requested
pursuant to this Section 4.2 to become effective prior to 180 days following
the effective date of the registration statement in connection with the
Company's initial public offering, or more than 120 days following the
effective date of any other registration statement on Form S-1, S-2 or S-B
which is initiated by the Company; provided, however, that the Company shall
use its best efforts to achieve such effectiveness promptly thereafter.
4.3 Registrable Securities. For the purposes of this Article IV,
the term "Registrable Securities" shall mean any shares of Common Stock held by
a Holder or subject to acquisition by a Holder upon conversion of Convertible
Participating Preferred Stock, as applicable, including any shares issued by
way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization;
provided, however, that if an Investor owns Convertible Participating Preferred
Stock or Common Stock, the Investor may exercise its registration rights
hereunder by converting the shares to be sold publicly into Common Stock as of
the closing of the relevant offering and shall not be required (except as
provided in the Company's Amended and Restated Certificate of Incorporation) to
cause such Convertible Participating Preferred Stock to be converted to Common
Stock until and unless such closing occurs, it being understood that such
conversion shall be wholly contingent upon the closing of the relevant offering
and, in the case of a mandatory redemption of Redeemable Preferred Stock as
provided in the Company's Amended and Restated Certificate of Incorporation,
the qualification of the relevant offering as a "Qualified Public Offering" as
defined in such Amended and Restated Certificate of Incorporation; and
provided, further, that any Common Stock that (a) is sold in a registered sale
pursuant to an effective registration statement
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<PAGE> 18
under the Securities Act or pursuant to Rule 144 thereunder, or (b) may be sold
without restriction as to volume or otherwise pursuant to Rule 144 under the
Securities Act (as confirmed by an unqualified opinion of counsel to the
Company), shall not be deemed Registrable Securities.
4.4 Further Obligations of the Company. Whenever the Company is
required hereunder to register any Registrable Securities, it agrees that it
shall also do the following:
(a) Pay all expenses of such registrations and offerings
(exclusive of underwriting discounts and commissions) and the reasonable fees
and expenses of not more than one independent counsel for the Holders
satisfactory to the Holders requesting the relevant registration or a majority
in interest (based on shares proposed to be sold) of the Holders in the case of
a Company-initiated registration;
(b) Use its best efforts (with due regard to management
of the ongoing business of the Company and the allocation of managerial
resources) diligently to prepare and file with the SEC a registration statement
and such amendments and supplements to said registration statement and the
prospectus used in connection therewith as may be necessary to keep said
registration statement effective for at least 90 days (or 30 days in the case
of Form S-3) and to comply with the provisions of the Securities Act with
respect to the sale of securities covered by said registration statement for
such period or any shorter period necessary to complete the proposed public
offering;
(c) Furnish to each selling Holder such copies of each
preliminary and final prospectus and such other documents as such Holder may
reasonably request to facilitate the public offering of its Registrable
Securities;
(d) Enter into any reasonable underwriting agreement
required by the proposed underwriter for the selling Holders, if any, (which
underwriter shall be selected by the Holders initiating the registration in the
case of a Holder-initiated demand and reasonably acceptable to the Company) in
such form and containing such terms as are customary; provided, however, that
if the underwriter requires that representations or warranties be made and that
indemnification be provided in respect of the Company's business, operations,
financial information and the like and the disclosures relating thereto in the
prospectus, the Company shall make all such representations and warranties and
provide all such indemnities.
(e) Use its best efforts (with due regard to management
of the ongoing business of the Company and the allocation of managerial
resources) to register or qualify the securities covered by said registration
statement under the securities or "blue sky" laws of such jurisdictions as any
selling Holder (or in the case of an underwritten offering, the underwriter)
may reasonably request, provided that the Company shall not be required to
register or qualify the securities in any jurisdictions
- 15 -
<PAGE> 19
which require it to (i) execute a general consent to service of process in
effecting such registration or qualification or (ii) qualify to do business as
a foreign corporation where doing so would subject it to taxation in such
jurisdiction unless the Company is already subject to service or taxation in
such jurisdiction;
(f) Immediately notify each selling Holder, at any time
when a prospectus relating to his Registrable Securities is required to be
delivered under the Securities Act, of the happening of any event as a result
of which such prospectus contains an untrue statement of a material fact or
omits any material fact necessary to make the statements therein not
misleading, and, at the request of any such selling Holder, prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading;
(g) Cause all such Registrable Securities to be listed on
each securities exchange or quotation system on which similar securities issued
by the Company are then listed or quoted;
(h) Otherwise use its best efforts to comply with the
securities laws of the United States and other applicable jurisdictions and all
applicable rules and regulations of the SEC and comparable governmental
agencies in other applicable jurisdictions and make generally available to its
holders, in each case as soon as practicable, but not later than 45 days after
the close of the period covered thereby, an earnings statement of the Company
which will satisfy the provisions of Section 11(a) of the Securities Act;
(i) Use its best efforts to obtain and furnish to each
selling Holder, immediately prior to the effectiveness of the registration
statement (and, in the case of an underwritten offering, at the time of
delivery of any Registrable Securities sold pursuant thereto), a cold comfort
letter from the Company's independent public accountants in customary form and
covering such matters of the type customarily covered by cold comfort letters
as the holders of a majority of the Registrable Securities being sold may
reasonably request; and
(j) Otherwise cooperate with the underwriter or
underwriters, the Commission and other regulatory agencies and take all actions
and execute and deliver or cause to be executed and delivered all documents
necessary to effect the registration of any Registrable Securities under this
Article IV.
4.5 Indemnification; Contribution.
(a) Incident to any registration statement referred to in
this Article IV, the Company will indemnify and hold harmless each underwriter,
each Holder who offers or sells any such Registrable Securities in connection
with such registration
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<PAGE> 20
statement (including its partners, (partners of partners and stockholders of
any such partners), and directors, officers, employees and agents of any of
them (a "Selling Holder"), and each person who controls any of them within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
(a "Controlling Person"), from and against any and all losses, claims, damages,
expenses and liabilities, joint or several (including any investigation, legal
and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, as the
same are incurred), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based on (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement
(including any related preliminary or definitive prospectus, or any amendment
or supplement to such registration statement or prospectus), (ii) any omission
or alleged omission to state in such document a material fact required to be
stated in it or necessary to make the statements in it not misleading, or (iii)
any violation by the Company of the Securities Act, any state securities or
"blue sky" laws or any rule or regulation thereunder in connection with such
registration; provided, however, that the Company will not be liable to the
extent that such loss, claim, damage, expense or liability arises from and is
based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information furnished in
writing to the Company by such underwriter, Selling Holder or Controlling
Person expressly for use in such registration statement. With respect to such
untrue statement or omission or alleged untrue statement or omission in the
information furnished in writing to the Company by such Selling Holder
expressly for use in such registration statement, such Selling Holder will
indemnify and hold harmless each other underwriter, the Company (including its
directors, officers, employees, shareholders and agents), each other Holder
(including its partners (including partners of partners and stockholders of
such partners) and directors, officers, employees and agents of any of them,
and each person who controls any of them within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages, expenses and liabilities, joint or several, to
which they, or any of them, may become subject under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise to the same extent provided in the immediately preceding
sentence. However, the liability of a Selling Holder for indemnification under
this Section 4.5(a) shall not exceed the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against equal
to the proportion of the total securities sold under such registration
statement which is being sold by such Selling Holder or (ii) the proceeds
received by such Selling Holder from its sale of Registrable Securities under
such registration statement.
(b) If the indemnification provided for in Section 4.5(a)
above for any reason is held by a court of competent jurisdiction to be
unavailable to an indemnified party in respect of any losses, claims, damages,
expenses or liabilities referred to therein, then each indemnifying party under
this Section 4.5, in lieu of indemnifying
- 17 -
<PAGE> 21
such indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
expenses or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the other Selling Holders and the
underwriters from the offering of the Registrable Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, the
other Selling Holders and the underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company, the Selling Holders and the
underwriters shall be deemed to be in the same respective proportions that the
net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Holders and the underwriting discount and fees received
by the underwriters, in each case as set forth in the table on the cover page
of the applicable prospectus, bear to the aggregate public offering price of
the Registrable Securities. The relative fault of the Company, the Selling
Holders and the underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Holders or the underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Holders, and the underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 4.5(b)
were determined by pro rata or per capita allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in the immediately preceding paragraph. However, a Selling Holder shall not
be required to contribute any amount under this Section 4.5(b) in excess of the
lesser of (i) that proportion of the total of such losses, claims, damages or
liabilities indemnified against equal to the proportion of the total
Registrable Securities sold under such registration statement which are being
sold by such Selling Holder or (ii) the proceeds received by such Selling
Holder from its sale of Registrable Securities under such registration
statement. No person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation.
(c) The amount paid by an indemnifying party or payable
to an indemnified party as a result of the losses, claims, damages and
liabilities referred to in this Section 4.5 shall be deemed to include, subject
to the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim, payable as the same are incurred. The
indemnification and contribution provided for in this Section 4.5 will remain
in full force and effect regardless of any investigation made by or on
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<PAGE> 22
behalf of the indemnified parties or any officer, director, employee, agent or
controlling person of the indemnified parties.
4.6 Rule 144 Requirements. In the event that the Company becomes
subject to Section 13 or Section 15(d) of the Exchange Act, the Company shall
use its best efforts to take all action as may be required as a condition to
the availability of Rule 144 under the Securities Act (or any successor or
similar exemptive rules hereafter in effect). The Company shall furnish to any
Holder, within 15 days of a written request, a written statement executed by
the Company as to the steps it has taken to comply with the current public
information requirement of Rule 144 or such successor rules.
4.7 Stand-Off. Each Holder agrees, if requested by the Company and
an underwriter of Registrable Securities of the Company, not to sell or
otherwise transfer or dispose of any securities of the Company (including,
without limitation pursuant to Rule 144 under the Securities Act (or any
successor or similar exemptive rules hereafter in effect)) held by it following
the effective date of any registration statement of the Company on Form S-1,
Form S-2 or Form S-B filed under the Securities Act as the Company or such
underwriter shall specify reasonably and in good faith, not to exceed 180 days
in the case of the Company's initial public offering or 90 days in the case of
any other offering on Form S-1, S-2 or S-B.
4.8 Transfer of Registration Rights. The registration rights and
related obligations under this Article IV of the Holders with respect to their
Registrable Securities may be assigned in connection with any transaction or
series of related transactions involving the transfer to a transferee or one or
more transferees that are Affiliates of each other, other than pursuant to an
effective registration statement under the Securities Act or pursuant to Rule
144 thereunder, of at least 1,000 shares of capital stock of the Company
(subject to adjustments for stock splits, stock dividends, reclassifications,
reorganizations and the like and aggregating all contemporaneous transfers by
Holders), or (in the case of the Investors) to any TA Fund, and upon any such
transfer such transferee or TA Fund shall be deemed to be included within the
definition of a "Holder" and a member of the same Investor Group as the
relevant Transferor for purposes of this Article IV with the rights set forth
herein. The relevant Holder as the case may be, shall notify the Company at the
time of such transfer.
ARTICLE V. ELECTION OF DIRECTORS; FINANCIAL INFORMATION
5.1 Board Composition. Each Investor agrees to vote all its shares
of the Company's capital stock having voting power (and any other shares over
which it exercises voting control) in connection with the election of Directors
and to take such other actions as are necessary so as to fix the number of
members of the Board of Directors of the Company at five or six, as indicated
below, and to elect and thereafter continue in (and not remove from (except as
provided in Section 5.2)) office as Directors of the Company:
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<PAGE> 23
(1) one (1) individual nominated by the Monarch Investors
who shall initially be Dr. Warren F. Melamed;
(2) one (1) individual nominated by the MacGregor
Investors who shall initially be Dr. Charles G. Shears;
(3) one (1) individual nominated by the TA Investors who
shall initially be Roger B. Kafker; provided, however, that the TA
Investors may at any time upon notice to the other Investors designate
a second nominee and promptly upon such notice the other parties
hereto will take such action as is necessary, including the voting of
their shares, to expand the Board of Directors of the Company to six
members and to cause the additional nominee of the TA Investors to be
nominated and elected as a director of the Company as a second nominee
of the TA Investors; and
(4) two (2) individuals (the "Outside Directors") who are
not employed by the Company or any subsidiary or Affiliate of the Company or
any of the Investors or affiliated with or related to any Investor or any of
their Affiliates and who are designated with the joint approval of two thirds
in interest (based on aggregate holdings of the Company's outstanding voting
power of all Investor Groups) of the TA Investors, the MacGregor Investors, the
Monarch Investors and the Hehli Investors; provided, however, that an Outside
Director shall be removed or not renominated for election as a Director of the
Company if two-thirds in interest (based on aggregate holdings of the Company's
outstanding voting power of all Investor Groups) of the TA Investors, the
MacGregor Investors, the Monarch Investors and the Hehli Investors so request,
whereupon an approved successor in the manner provided above shall be
appointed. If an Outside Director fails to be renominated as provided herein, a
replacement Outside Director shall be nominated for election in accordance with
the provisions of this Article V.
5.2 Removal. Each Investor agrees to vote all of its shares of the
Company's capital stock having voting power (and any other shares over which
she or it exercises voting control) for the removal of any Director upon the
request of the Investor Group designating such Director and for the election to
the Board of Directors of a substitute designated by such party in accordance
with the provisions of Section 5.1 hereof.
5.3 Vacancies. Each Investor agrees to vote all shares of the
Company's capital stock having voting power (and any other shares over which
she or it exercises voting control) in such manner as shall be necessary or
appropriate to ensure that any vacancy on the Board of Directors of the Company
(occurring for any reason) shall be filled only in accordance with the
provisions of this Article V.
5.4 Increase in Size of Board. Any increase in the size of the
Board of Directors to a number greater than six (6) shall require an amendment
to this Agreement.
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<PAGE> 24
5.5 Assignment. Each Investor agrees, as a condition to any
transfer of its shares, to cause the transferee to agree to the provisions of
this Article V, whereupon such transferee shall be subject to the provisions
hereof as an Investor and a member of the same Investor Group as the relevant
Transferor in connection with its ownership of the shares Transferred for
purposes of this Article V.
5.6 Financial Statements and Budgetary Information; Inspection.
The Company will deliver to the Investors internally prepared unaudited monthly
and quarterly consolidated and consolidating financial statements and audited
annual consolidated and consolidating financial statements, as well as annual
budgetary information. The monthly and quarterly consolidated and consolidating
financial information will be provided to the Investors within 35 days after
the end of each month and quarter. The annual budgetary information will be
presented at a Board of Directors' meeting at least one month prior to each
fiscal year-end of the Company. An annual audit by a so-called "Big Six"
accounting firm selected by the Board of Directors will be provided within 90
days after each fiscal year-end of the Company.
The Company will, upon reasonable prior notice to the Company, permit
authorized representatives of the Investors to visit and inspect any of the
properties of the Company and its subsidiaries, including its books of account
(and to make copies thereof and take extracts therefrom), and to discuss its
affairs, finances and accounts with its officers, administrative employees and
independent accountants, all at such reasonable times and as often as may be
reasonably requested.
5.7 Term. This Article V shall remain in effect until the closing
of a Qualified Public Offering or, if sooner, February 5, 2006.
ARTICLE VI. GENERAL
6.1 Amendment and Waiver. Any party may waive any provision hereof
intended for its benefit in writing. No failure or delay on the part of any
party hereto in exercising any right, power or remedy hereunder shall operate
as a waiver thereof. The remedies provided for herein are cumulative and are
not exclusive of any remedies that may be available to any party hereto at law
or in equity or otherwise. This Agreement may be amended with the prior written
consent of two-thirds in interest (based on aggregate holdings of the Company's
outstanding voting power of all Investor Groups) of the TA Investors, the
Monarch Investors, the MacGregor Investors and the Hehli Investors; provided,
however, any amendment that affects an Investor materially, adversely and in a
manner different than other members of the Investor Group of which such
Investor is a member, shall require such Investor's consent. Any actions
required to be taken, or consents required to be given, by any Investor Group
separately shall require the approval of a two-thirds in interest (based on
relative holdings of the Company's outstanding voting power) of the members of
such Investor
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<PAGE> 25
Group. Any amendment or waiver effected in accordance with this Section 6.1
shall be binding upon each party to this Agreement and each assignee of such a
party.
6.2 Assignability of Rights. All covenants and agreements made
herein shall bind the successors and assigns of the parties hereto, and such
covenants and agreements and the rights and obligations of the parties herein
shall be assignable as provided in Sections 2.7, 3.2, 4.8 and 5.5, whether so
expressed or not, and, except as otherwise provided in this Agreement, all such
covenants and agreements shall inure to the benefit of the Investors'
successors and assigns and to transferees of the Securities, whether so
expressed or not, subject to the provisions of Sections 2.7, 3.2, 4.8 and 5.5.
6.3 Legend on Securities. The Company and the Investors
acknowledge and agree that the following legend shall be typed on each
certificate evidencing any of the securities issued hereunder held at any time
by an Investor:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE
SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF AN
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF AUGUST 29, 1996,
INCLUDING THEREIN CERTAIN RESTRICTIONS ON TRANSFER, AND VOTING AGREEMENTS. A
COMPLETE AND CORRECT COPY OF THIS AGREEMENT IS AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
6.4 Governing Law. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of Delaware,
without giving effect to conflict of laws principles thereof.
6.5 Section Headings and Gender. The descriptive headings in this
Agreement have been inserted for convenience only and shall not be deemed to
limit or otherwise affect the construction of any provision thereof or hereof.
The use in this Agreement of the masculine pronoun in reference to a party
hereto shall be deemed to include the feminine or neuter, and vice versa, as
the context may require.
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<PAGE> 26
6.6 Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which when so executed and delivered shall
be taken to be an original; but such counterparts shall together constitute but
one and the same document.
6.7 Notices and Demands. Any notice or demand which is required or
provided to be given under this Agreement shall be deemed to have been
sufficiently given and received for all purposes when delivered by hand,
telecopy, telex or other method of facsimile, or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, or two days after being sent by overnight delivery providing receipt
of delivery, to the following addresses: if to the Company at 4201 Spring
Valley, Suite 320, Dallas, Texas 75244, or at any other address designated by
the Company to the Investors in writing; if to an Investor, at its mailing
address as shown on the signature pages hereto, or to any other address
designated by such Investor to the Company, and the other Investors in writing.
6.8 Remedies; Severability. It is specifically understood and
agreed that any breach of the provisions of this Agreement by any person
subject hereto will result in irreparable injury to the other parties hereto,
that the remedy at law alone will be an inadequate remedy for such breach, and
that, in addition to any other legal or equitable remedies which they may have,
such other parties may enforce their respective rights by actions for specific
performance (to the extent permitted by law) and the Company may refuse to
recognize any unauthorized transferee as one of its shareholders for any
purpose, including, without limitation, for purposes of dividend and voting
rights, until the relevant party or parties have complied with all applicable
provisions of this Agreement. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions of this Agreement.
6.9 Integration. This Agreement, including the exhibits, documents
and instruments referred to herein or therein, constitutes the entire
agreement, and supersedes all other prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
*****
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<PAGE> 27
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered in one or more counterparts as of the day and year first
above written.
COMPANY:
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
--------------------------------
Warren F. Melamed, D.D.S., CEO
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<PAGE> 28
TA INVESTORS:
ADVENT VII L.P.
By: TA Associates VI L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: *
------------------------------------
ADVENT ATLANTIC AND PACIFIC II L.P.
By: TA Associates AAP II Partners,
its General Partner
By: *
------------------------------------
ADVENT NEW YORK L.P.
By: TA Associates VI L.P.,
its General Partner
By: *
------------------------------------
TA VENTURE INVESTORS L.P.
By: *
------------------------------------
Address for Each of the above TA Investors is as follows:
c/o TA Associates, Inc.
125 High Street, Suite 2500
Boston, MA 02110
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<PAGE> 29
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
Mrs. Wellington Robert H. Wellington, III
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
Mrs. Shumake Steven W. Shumake
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
Mrs. Broun Robert C. Broun
Address for each of the three immediately
preceding TA Investors is as follows:
c/o Wellington Associates, Inc.
1700 Pacific Avenue, Suite 2720
Dallas, TX 75201
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<PAGE> 30
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
Ruth A. Hodges John R. LeClaire
*
-----------------------------------
H. David Henken
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
Ivy B. Cubell Howard A. Cubell
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
- ------------------------ Maura L. Connolly
Address for each of the four immediately
preceding TA Investors is as follows:
c/o Goodwin, Procter & Hoar
53 State Street, Exchange Place
Boston, MA 02109
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<PAGE> 31
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
* *
- ------------------------------ -----------------------------------
Marla B. Kaufman Kenneth K. Bezozo
4819 Sandestin Drive
Dallas, Texas 75287
* /s/ ROGER B. KAFKER
- ------------------------------
*By Roger B. Kafker
I, Roger B. Kafker, represent and warrant to the parties to this
Agreement that I am duly authorized to execute this Agreement on behalf of all
of the TA Investors and their spouses as set forth above.
/s/ ROGER B. KAFKER
- ------------------------------
Roger B. Kafker
- 28 -
<PAGE> 32
MacGREGOR INVESTORS:
SHEARS VANGUARD, LTD.
ATTEST By: SHEARS VANGUARD
GENERAL, INC.,
its general partner
/s/ CHARLES G. SHEARS By: /s/ CHARLES G. SHEARS
- ---------------------------- ---------------------------------
Secretary Title: President
[Corporate Seal] ------------------------------
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
/s/ BARBARA W. SHEARS By: /s/ CHARLES G. SHEARS
- ------------------------------ -----------------------------------
Mrs. Shears Charles G. Shears
Address for each of the MacGregor
Investors is as follows:
1325 La Concha
------------------------
Houston, TX 77054
------------------------
- 29 -
<PAGE> 33
SPOUSE'S CONSENT MONARCH INVESTORS:
I acknowledge that I have read
the foregoing Agreement and that I
understand the contents thereof.
/s/ JANET L. MELAMED /s/ WARREN F. MELAMED, D.D.S.
- ------------------------------ -----------------------------------
Janet L. Melamed Warren F. Melamed, D.D.S.
SPOUSE'S CONSENT
I acknowledge that I have read
the foregoing Agreement and that I
understand the contents thereof.
/s/ JOANIE M. SMITH /s/ ROY D. SMITH, III D.D.S.
- ------------------------------ -----------------------------------
Joanie M. Smith Roy D. Smith, III D.D.S.
SPOUSE'S CONSENT HEHLI INVESTORS:
I acknowledge that I have read
the foregoing Agreement and that I
understand the contents thereof.
/s/ DAVID L. HEHLI, D.D.S.
- ------------------------------ -----------------------------------
Mary K. Hehli David L. Hehli, D.D.S.
Address for each of the Hehli Investors
is as follows:
------------------------
------------------------
- 30 -
<PAGE> 34
Schedule 1.2(a)
Amended and
Restated Certificate
of Incorporation
- 31 -
<PAGE> 35
EXHIBIT A
ADDENDUM AGREEMENT
Addendum Agreement made this _____ day of __________, _____, by and
between ____________________ (the "New Stockholder") and MONARCH DENTAL
CORPORATION, a Delaware corporation (the "Company"), who is a party to that
certain Amended and Restated Stockholders' Agreement dated August 29, 1996 (the
"Agreement"), among the Company and the stockholders of the Company.
W I T N E S S E T H:
WHEREAS, the Company and stockholders of the Company entered into the
Agreement to impose certain restrictions and obligations upon the stockholders
and the shares of common stock, par value $.01 per share (the "Common Stock"),
and other equity securities of the Company owned by such stockholders;
WHEREAS, the New Stockholder is desirous of becoming a stockholder of
the Company as a Permitted Transferee (as defined in the Agreement) of a
__________ Investor (as defined in the Agreement); and
WHEREAS, the Company and the stockholders of the Company have provided
in the Agreement that all Permitted Transferees shall be made a party to the
Agreement, binding the New Stockholder to the Agreement to the same extent as
if it were an original party thereto, so as to promote the mutual interests of
the Company, the stockholders of the Company and the New Stockholder by
imposing the same restrictions and obligations on the New Stockholder and the
shares of Common Stock to be acquired by the New Stockholder as were imposed
upon the stockholders of the Company under the Agreement.
NOW, THEREFORE, in consideration of the mutual promises of the
parties, and as a condition of the transfer of the shares of Common Stock, the
New Stockholder acknowledges that the New Stockholder has read the Agreement.
The New Stockholder agrees for the benefit of the Company and each of the other
parties to the Agreement that such New Stockholder shall be bound by, and shall
have the benefit of, all the terms and conditions set out in the Agreement as a
"__________ Investor" as defined in the Agreement. This Addendum Agreement
shall be attached to and become a part of the Agreement.
* * * * *
- 32 -
<PAGE> 36
NEW STOCKHOLDER:
-----------------------------------------
-------------------
Address for notices under Section 6.7
of the Agreement:
-----------------------------------------
-----------------------------------------
Consented and agreed to by the Company pursuant to Section 2.1 of the
Agreement.
COMPANY:
MONARCH DENTAL CORPORATION
a Delaware corporation
By:
-------------------------------------
---------------------------
- 33 -
<PAGE> 1
EXHIBIT 10.7
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between MODERN DENTAL PROFESSIONALS, P.C., a professional corporation organized
and existing under the laws of the State of Texas ("P.C."), and MONARCH DENTAL
ASSOCIATES, L.P. a limited partnership organized and existing under the laws of
the State of Texas (the "Service Company").
RECITALS
A. P.C. is engaged in the practice of dentistry through dentists licensed
by the Texas Dental Board and who are employed by P.C. or who have entered into
independent contractor agreements with P.C. to provide services to patients of
P.C. and conducts such practice at dental centers located in the State of Texas
(the "Dental Centers").
B. Service Company has been organized for the purpose of providing
comprehensive management and related administrative services to dental
practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.C.
C. P.C., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Texas Dental Practice Act and the Regulations of the
Dental Board adopted pursuant thereto.
(b) "Cost of Dental Services" means: the aggregate compensation of
dentists who are employed by or who are independent contractors with P.C. at
the Dental Centers and other personnel who must be employed by the P.C. under
applicable law including dental hygienists ("Support Personnel") together with
the cost of expenses, taxes and benefits of such dentists and Support Personnel
including, but not limited to, vacation pay, sick pay, health care expenses,
professional dues, expense reimbursement, discretionary bonuses or incentive
payments, if any, based on profitability or productivity and other expenses and
payments required to be made to or for the benefit of the dentists or the
Support Personnel pursuant to their employment agreements or independent
contractor agreements or otherwise plus P.C.'s portion of all employment and
payroll taxes; other expenses incurred by
<PAGE> 2
P.C. in carrying out its obligations under this Agreement; and the costs of
malpractice insurance, in each case on an accrual basis.
(c) "Dental Board" means the Texas State Board of Dental Examiners
established under the Act.
(d) "Dental Center" means the facility or facilities operated by P.C.
and at which Dental Services are, or in the future may be, rendered by P.C.
identified on Exhibit A hereto, as amended, supplemented or modified from time
to time.
(e) "Dental Services" means all services rendered by P.C. which
constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the total of Service
Company Costs and the Cost of Dental Services, but without regard for the
provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or billing
adjustments.
(h) "Non-Dental Personnel" means all personnel including, but not
limited to, accountants, bookkeepers and receptionists who perform services
which do not constitute the practice of dentistry or who are not required by
applicable law to be employees of P.C.
(i) "Revenues" means all amounts on an accrual basis which P.C. receives
or becomes entitled to receive for any services or sales of products or
otherwise, including, without limitation, for the performance of Dental
Services for its patients by dentists or Support Personnel who are employees or
independent contractors of P.C. or for the sale of products including
pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by Service Company,
including indirect overhead and other expenses attributable to the carrying out
of its obligations under this Agreement, in each case on an accrual basis.
(k) "Support Personnel" shall have the meaning specified in the
definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this Agreement and
all renewals and extensions thereof, P.C. engages Service Company to provide
sole and exclusive development, management and administrative services with
respect to all non-dental functions relating to the operation of the Dental
Centers, and Service Company agrees to furnish to P.C. all of the non-dental
development, management and administrative services needed by P.C. in
connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder,
<PAGE> 3
Service Company shall control all aspects of P.C.'s business other than those
aspects which relate to the provision of dental services, as contemplated by
Section 4
3. Services. The non-dental development, management and administrative
services to be provided by Service Company shall include the following:
(a) Bookkeeping and Accounts. Service Company shall provide all
bookkeeping and accounting services necessary or appropriate to the functioning
of the Dental Centers including, but not limited to, maintenance, custody and
supervision of all business records, ledgers, journals and reports, and the
preparation, distribution and recordation of all bills and statements for
professional services rendered by P.C. including the billing and completion of
reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be responsible, for and
on behalf of P.C., as its agent, for billing and collecting the charges made
with respect to all Dental Services provided by P.C. at the Dental Centers. The
extent to which Service Company attempts to collect such charges, the methods
of collection and the amount of settlements with respect to disputed charges,
and the determination of which charges are not collectible, shall be within the
sole discretion of the Service Company; provided that Service Company will
comply with all applicable law, including without limitation, the Federal Fair
Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its sole discretion
but following consultation with P.C., select for employment and terminate the
employment of all Non-Dental Personnel as Service Company shall deem necessary
or advisable, and shall be responsible for the supervision, direction, training
and assigning of duties of all Non-Dental Personnel, with the exception of
activities carried on by Non-Dental Personnel which must be under the direction
or supervision of licensed dentists in accordance with applicable law and
regulations. Unless otherwise specifically agreed in writing, all Non-Dental
Personnel shall be employees or independent contractors employed or engaged by
Service Company, and the selection and terms of employment or engagement,
including the rates of compensation, supervision, direction, training and
assignment of duties of all Non-Dental Personnel shall be determined and
controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall, in consultation with P.C.,
establish guidelines for the selection, hiring and firing of dentists and
Support Personnel by P.C. and shall recruit and evaluate prospective dentists
and Support Personnel as employees or independent contractors of P.C., provided
that all dentists and Support Personnel shall be employees of or independent
contractors to P.C.
<PAGE> 4
(e) Marketing and Advertising Programs. Service Company shall: develop
marketing and advertising programs for P.C.; provide advice and assistance to
P.C. on overall marketing programs, and determine and analyze the effect of
such programs; plan, create, write and prepare advertising materials; negotiate
contracts with advertising media for space and time; and obtain services
necessary in connection with the production and presentation of advertisements.
(f) Insurance. Service Company shall, in its sole discretion but
following consultation with P.C., make reasonable efforts to obtain and
maintain in full force and effect during the term of this Agreement, and all
extensions and renewals thereof, public liability and property insurance which
Service Company deems appropriate to protect against loss, claims, and other
risks, or which is necessary to comply with the terms of lease agreements for
the Dental Centers, and Service Company shall assist P.C. and the dentists in
obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply to P.C. all
dental and non-Dental supplies which may be reasonably required in connection
with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on and be
responsible for all negotiations, in consultation with P.C., with managed care
plans, preferred provider plans, insurers and other third party payors relating
to the provision of services by P.C. Service Company shall develop, negotiate,
market and administer prepaid managed and other health plans for the providing
of dental care and shall obtain licensure as a third party administrator, and
any other appropriate licenses, registrations or certificates, if and to the
extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is authorized to
establish and maintain for and on behalf of P.C. bank accounts for the
collection and disbursement of P.C.'s funds. Service Company is authorized to
disburse funds from such accounts for the payment of costs incurred by or on
behalf of P.C. in accordance with this Agreement, for Service Company's
compensation, and for all other costs, expenses, and disbursements which are
incurred in connection with this Agreement. Service Company shall manage all
cash and cash equivalents of P.C.
(j) Tax Returns, Reports. Service Company shall be responsible for
preparing and filing all tax returns and reports required or necessary in
connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide P.C. with overall
supervision and management, including maintenance and repair, of the Dental
Centers and all furniture, fixtures, furnishings, equipment, and leasehold
improvements located in or used at the Dental Centers.
<PAGE> 5
(l) Equipment and Furnishings. Service Company shall provide and
maintain, either directly or through appropriate lease agreements, all
necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide planning and
studies to determine the location of new Dental Centers (including acquired
Dental Centers), provide designs for such new Dental Centers, obtain leases for
the space for Dental Centers, and do all things necessary in connection with
equipping of such new Dental Centers for operation, and shall make such space
available to P.C. Service Company shall amend, modify or supplement Exhibit A
to this Agreement in connection with the establishment of new Dental Centers,
as appropriate.
(n) Financial Statements and Budgets. Service Company shall prepare
monthly and annual financial statements containing a balance sheet and
statement of income for P.C. Annual financial statements shall be delivered to
P.C. within 90 days after the end of each fiscal year and monthly financial
statements shall be delivered to P.C. within 30 days after the end of each
calendar month. Service Company shall prepare, in reasonable detail, an annual
operating and capital budgets for P.C. which shall be delivered to P.C. within
30 days after the end of each fiscal year, with Service Company retaining final
authority with respect to budgeting including without limitation as to
compensation and payments to employees and independent contractors.
(o) Litigation Management. Service Company will (i) manage and direct
the defense of all claims, actions, proceedings, or investigations against P.C.
or any of its officers, directors or employees in their capacity as such, and
(ii) manage and direct the initiation and prosecution of all claims, actions,
proceedings or investigations brought by P.C. against any person other than the
Service Company.
(p) Access. Service Company shall grant access to its facilities to all
employees and independent contractors of P.C. for the purpose of performing
Dental Services in connection with the business of the Dental Centers.
(q) Business Operations. Service Company shall generally control and
manage all aspects of business of the Dental Centers other than those aspects
relating to the provision of Dental Services which under applicable law are
required to be subject to the control of P.C., as contemplated by Section 4.
<PAGE> 6
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.C. shall be solely and exclusively in
control of all clinical aspects of the practice of dentistry and the delivery
of Dental Services at the Dental Centers, including the exercise of independent
professional judgment regarding the diagnosis or treatment of any dental
disease, disorder or physical condition (which Service Company shall not
control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.C. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.C. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.C. of their professional
judgment. P.C. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.C. hold all necessary
licenses from the State of Texas and that such licenses are current and in good
standing, and that such professional services are performed in accordance with
the applicable ethical standards, laws and regulations relating to professional
practice in the State of Texas. P.C. shall take all actions necessary to
maintain its status as a professional corporation including provision for
succession so that the outstanding shares of P.C. are owned at all times by a
person licensed to practice dentistry in the State of Texas.
(b) Patient Referrals. It is not a purpose of this Agreement to induce
or encourage the referral of patients. The parties agree that the benefits to
P.C. and Service Company do not require, are not payment or inducement for, and
are not in any way contingent upon the admission, referral or any other
arrangement for the provisions of any item or service offered by Service
Company to any of P.C.'s patients or for the referral of any patient.
(c) Noncompetition. P.C. hereby irrevocably appoints Service Company as
its agent and attorney in fact during the term of this Agreement with full
power and authority to enforce the terms of any employment or independent
contractor agreements to which it is a party and any noncompetition,
confidentiality and similar covenants or restrictions (collectively,
"Non-competition Agreements") of which it is the beneficiary. During the term
of this Agreement, P.C. shall not establish, operate or provide dental services
at any dental office, clinic or other health care facility providing services
substantially similar to those provided by P.C. pursuant to this Agreement
anywhere within 100 miles of any facility operated by Service Company. The
provisions of this Section 4(c) shall not in any way limit or otherwise affect
the terms and provisions of the Non-Competition Agreement dated as of February
6, 1996 by and among Monarch Dental Corporation, Dr. Warren F. Melamed, D.D.S.
and the other parties identified on the signature pages thereto (the "Melamed
Non-Competition Agreement"). To the extent of any conflict between the
provisions of this Section 4(c) and the provisions of the Melamed
Non-Competition Agreement, the provisions of the Melamed Non-Competition
Agreement shall control.
<PAGE> 7
(d) Attorney-in-Fact. P.C. hereby appoints Service Company for the term
of this Agreement to be its true and lawful attorney-in-fact for all purposes
relating to or arising in connection with the provisions by Service Company of
the comprehensive management and related administrative services as provided in
this Agreement, including without limitation the provisions of Section 3(b) and
Section 3(i). This power of attorney and the power of attorney granted under
Section 4(c) are coupled with an interest and shall be irrevocable and remain
in effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.C. assigns to Service Company all
of P.C.'s right and interests in all Revenues such that all Revenues shall be
paid to and collected by Service Company and all Revenues of P.C. (and all
accounts receivable relating thereto) shall be reported on the income statement
and balance sheet of Service Company during the term of this Agreement;
provided, however, that no assignment shall be made of any such rights or
interests, the assignment of which is prohibited by law (for example, amounts
receivable from Medicare or Medicaid accounts). P.C. hereby issues a standing
instruction, which it shall confirm upon request from time to time, that all
payments due to P.C. shall be remitted directly to Service Company as its agent
and attorney-in-fact hereunder. To the extent that the foregoing assignment of
Revenues shall be ineffective for any reason, P.C. hereby grants a security
interest in all accounts receivable, contract rights, Revenues and general
intangibles of P.C. to Service Company to secure all indebtedness and
obligations of P.C. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.C. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration for the services
provided by Service Company under this Agreement, Service Company shall receive
a service fee (the "Service Fee") in an amount equal to: (i) Service Company
Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax Income or 30% of
Net Revenues.
(c) Application of Net Revenues. Service Company shall apply Net
Revenues as follows:
(i) First, Service Company shall remit to P.C., or cause to
be paid on behalf of P.C., from Net Revenues an amount
equal to the Costs of Dental Services and such other
payments or disbursements as P.C. shall direct Service
Company to make in accordance with this Agreement;
(ii) Second, Service Company shall retain out of Net Revenues
an amount equal to the Service Fee; and
<PAGE> 8
(iii) Third, Service Company shall remit all remaining Net
Revenues to P.C.
(d) Adjustment. The Service Fee shall be payable monthly in arrears
based upon Service Company Costs and P.C.'s Net Revenues in the prior month.
Adjustments to the estimated payments shall be made to reconcile actual amounts
due under Section 5(b) by the end of the following month. The Service Fee shall
be reviewed annually and at such other times as may be deemed appropriate and
adjusted in such manner as the parties may agree; in the absence of such
agreement, the Service Fee then in effect shall continue in effect.
6. General Obligations of P.C. and Service Company. P.C. and Service
Company each agrees to cooperate fully with the other in connection with the
carrying out of their respective obligations under this Agreement and to employ
their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
7. Term. The term of this Agreement shall be for a period of 40 years
from February 6, 1996 and, unless either party shall give notice to the
contrary at least 180 days prior to the thirty-first anniversary of this
Agreement or any anniversary thereafter, the term shall be extended for an
additional year on the thirty-first anniversary and on each anniversary
thereafter so that at each anniversary of this Agreement the remaining term
shall always be, unless such notice is given, ten (10) years.
8. [Omitted].
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its obligations under this
Agreement and, after written notice from the other party demanding that such
failure be cured, the party on whom such notice is served shall fail to cure
such breach within 30 days after such notice or, if such breach will reasonably
require more than 30 days to cure, such party is not diligently pursuing
efforts to cure such breach; provided, however, that if the party on whom such
demand is made elects to submit such dispute to arbitration, no action to
terminate this Agreement can be taken until such arbitration has been finally
adjudicated and then only if the party guilty of such failure shall fail to
comply with the arbitration award within 60 days after its issuance.
(c) If any bankruptcy, insolvency or receivership proceedings are
instituted by or against the P.C. and not dismissed within sixty (60) days
after the commencement of such proceedings or if the P.C. party shall
voluntarily dissolve.
<PAGE> 9
(d) As of any anniversary date of this Agreement, by Service Company
delivering written notice to P.C. of such termination of at least 90 days prior
to such anniversary date.
If this Agreement is terminated for any reason, P.C. shall have the right,
exercisable within sixty days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and shall
not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.C.
Since the dentists who perform services for the P.C. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.C.
11. Confidential Information. Each of P.C. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by the Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.C. acknowledges that the Service Company has a proprietary
interest in such information, that such information constitutes trade secrets
and that P.C. does not, by reason of this Agreement, acquire any continuing
right or interest in such proprietary information or trade secrets. P.C. will
hold such proprietary information and trade secrets in confidence and will not
disclose them, either during the term of this Agreement or thereafter, to any
person or entity other than employees or independent contractors of P.C. or
Service Company without the prior written consent of Service Company or as may
be required by law. Service Company will preserve the confidentiality of all
files and records of P.C. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of the P.C.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.C.
Each of P.C. and Service Company acknowledges that it does not have an
adequate remedy at law for a breach of this Section 11, will suffer irreparable
harm in the event of such breach and that, therefore, the other party shall be
entitled to injunctive and other equitable relief for the enforcement of this
Section 11. The provisions of this Section 11 shall survive termination of
this Agreement.
<PAGE> 10
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by either party
hereto without the express prior written consent of the other; provided,
however, that this Agreement shall be assignable by Service Company to any of
its affiliates or successors without the consent of P.C.
(b) Waiver. Waiver of any agreement or obligation set forth in this
Agreement by either party shall not prevent that party from later insisting
upon full performance of such agreement or obligation and no course of dealing,
partial exercise or any delay or failure on the part of any party hereto in
exercising any right, power, privilege, or remedy under this Agreement or any
related agreement or instrument shall impair or restrict any such right, power,
privilege or remedy or be construed as a waiver therefor. No waiver shall be
valid against any party unless made in writing and signed by the party against
whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions of this
Agreement shall be effective unless made in writing and signed by and on behalf
of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties in connection with the subject matter of this Agreement and
supersedes all prior agreements entered into before the effective date of this
Agreement, amending and restating in its entirety the Management Services
Agreements dated as of February 6, 1996.
(e) Notices. The mailing addresses of Service Company and P.C. for the
purposes of any notices to be given under this Agreement are as follows:
If to Service Company: Monarch Dental Associates, L.P.
4201 Spring Valley Road
Suite 320
Dallas, TX 75244
Attn: General Partner/President
If to P.C.: Modern Dental Professionals, P.C.
4201 Spring Valley Road
Suite 320
Dallas, Texas 75244
Attn: President
(f) Binding Effect. Subject to the provisions set forth in this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and upon their respective successors and assigns.
<PAGE> 11
(g) Arbitration. Any disputes arising under this Agreement shall be
resolved by arbitration; provided, however, that arbitration shall not apply to
the enforcement of the Service Company's rights under Section 11. Any party
electing to submit an action to arbitration shall give written notice to the
other party of such election. The dispute shall be submitted to arbitration in
accordance with the Rules of the American Arbitration Association. Such
arbitration shall be conducted, unless otherwise agreed by the parties, by a
single arbitrator in Dallas, Texas. The award of the arbitrator can be
confirmed or enforced in any court of competent jurisdiction. The prevailing
party in any arbitration shall be entitled to recover all costs incurred by
such party in connection with such proceedings, including reasonable attorney
fees.
(h) Severability. If any one or more of the provisions of this Agreement
is adjudged to any extent invalid, unenforceable, or contrary to law by a court
of competent jurisdiction, each and all of the remaining provisions of this
Agreement will not be affected thereby and shall be valid and forcible to the
fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by and enforced in
accordance with the laws of the State of Texas.
(j) Change in Law. If after the effective date of this Agreement, any
new law, rule or regulation becomes effective which renders illegal the
structure of the relationship between P.C. and the Service Company set forth in
this Agreement, or otherwise substantially impairs the economics of the parties
hereunder, this Agreement shall not terminate, but the parties hereto agree to
exclusively negotiate with each other in good faith for a period of six months
following such change of law or circumstance with respect to the subject matter
hereof. To the maximum extent possible, any amendment hereto shall preserve the
underlying economic and financial arrangements between P.C. and the Service
Company.
IN WITNESS WHEREOF, the parties have signed this Agreement and agreed that
it shall be deemed effective as of February 6, 1996.
SERVICE COMPANY: P.C.:
MONARCH DENTAL ASSOCIATES, L.P. MODERN DENTAL PROFESSIONALS,
P.C.
By: Monarch Dental Management, Inc.,
general partner
By:/s/ GARY W. CAGE By: /s/ WARREN F. MELAMED
------------------------------- -------------------------------
Name: Gary W. Cage Name: Warren F. Melamed, D.D.S.
Title: Chief Executive Officer Title: President
<PAGE> 12
EXHIBIT A
Locations of Dental Centers
1717 Airport Freeway
Bedford, TX 76021 (Bedford)
2540 Old Denton Road, Suite 188
Carrollton, TX 75006 (Carrollton)
Golden Triangle Mall
2201 I-35 East, Room #N-7
Denton, TX 76205 (Denton)
723 North Olive Street
Dallas, TX 75201 (Downtown)
3325 Beltline Road
Garland, TX 75044 (Garland)
6261 Granbury Road
Fort Worth, TX 76133 (Hulen)
3401 West Airport Freeway
Suite 206
Irving, TX 75062 (Irving)
10505 Church Road
Dallas, TX 75238 (Lake Highlands)
1288 W. Main
Suite 123
Lewisville, TX 75067 (Lewisville)
3501 Towne Crossing Blvd.
Suite 180
Mesquite, TX 75150 (Mesquite)
6757 Arapaho Road, #777, 779
Dallas, TX 75248 (North Dallas)
<PAGE> 13
6455 Hilltop Drive
Suite 114
North Richland Hills, TX 76180 (North Richland Hills)
Ruisseau Village Shopping Center
3303 N. Central Expressway
Suite 250
Plano, TX 75028 (Plano)
3235 West Camp Wisdom Road
Dallas, TX (Redbird)
6909 Green Oaks Road
Fort Worth, TX 76116 (Ridgmar)
5068 W. Plano Parkway
Suite 122
Plano, TX 75093 (West Plano)
<PAGE> 1
EXHIBIT 10.8
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between MODERN DENTAL PROFESSIONALS, P.C., a professional corporation organized
and existing under the laws of the State of Texas ("P.C."), and MacGREGOR
DENTAL ASSOCIATES, L.P., a limited partnership organized and existing under the
laws of the State of Texas (the "Service Company").
RECITALS
A. P.C. is engaged in the practice of dentistry through dentists
licensed by the Texas Dental Board and who are employed by P.C. or who have
entered into independent contractor agreements with P.C. to provide services to
patients of P.C. and conducts such practice at dental centers located in the
State of Texas (the "Dental Centers").
B. Service Company has been organized for the purpose of
providing comprehensive management and related administrative services to
dental practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.C.
C. P.C., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Texas Dental Practice Act and the
Regulations of the Dental Board adopted pursuant thereto.
(b) "Cost of Dental Services" means: the aggregate
compensation of dentists who are employed by or who are independent contractors
with P.C. at the Dental Centers and other personnel who must be employed by the
P.C. under applicable law including dental hygienists ("Support Personnel")
together with the cost of expenses, taxes and benefits of such dentists and
Support Personnel including, but not limited to, vacation pay, sick pay, health
care expenses, professional dues, expense reimbursement, discretionary bonuses
or incentive payments, if any, based on profitability or productivity and other
expenses and payments required to be made to or for the benefit of the dentists
or the Support Personnel pursuant to their employment agreements or independent
contractor agreements or otherwise plus P.C.'s portion of all employment and
payroll taxes; other expenses incurred by
<PAGE> 2
P.C. in carrying out its obligations under this Agreement; and the costs of
malpractice insurance, in each case on an accrual basis.
(c) "Dental Board" means the Texas State Board of Dental
Examiners established under the Act.
(d) "Dental Center" means the facility or facilities
operated by P.C. and at which Dental Services are, or in the future may be,
rendered by P.C. identified on Exhibit A hereto, as amended, supplemented or
modified from time to time.
(e) "Dental Services" means all services rendered by P.C.
which constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the
total of Service Company Costs and the Cost of Dental Services, but without
regard for the provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or
billing adjustments.
(h) "Non-Dental Personnel" means all personnel including,
but not limited to, accountants, bookkeepers and receptionists who perform
services which do not constitute the practice of dentistry or who are not
required by applicable law to be employees of P.C.
(i) "Revenues" means all amounts on an accrual basis
which P.C. receives or becomes entitled to receive for any services or sales of
products or otherwise, including, without limitation, for the performance of
Dental Services for its patients by dentists or Support Personnel who are
employees or independent contractors of P.C. or for the sale of products
including pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by
Service Company, including indirect overhead and other expenses attributable to
the carrying out of its obligations under this Agreement, in each case on an
accrual basis.
(k) "Support Personnel" shall have the meaning specified
in the definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this
Agreement and all renewals and extensions thereof, P.C. engages Service Company
to provide sole and exclusive development, management and administrative
services with respect to all non-dental functions relating to the operation of
the Dental Centers, and Service Company agrees to furnish to P.C. all of the
non-dental development, management and administrative services needed by P.C.
in connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder,
<PAGE> 3
Service Company shall control all aspects of P.C.'s business other than those
aspects which relate to the provision of dental services, as contemplated by
Section 4.
3. Services. The non-dental development, management and
administrative services to be provided by Service Company shall include the
following:
(a) Bookkeeping and Accounts. Service Company shall
provide all bookkeeping and accounting services necessary or appropriate to the
functioning of the Dental Centers including, but not limited to, maintenance,
custody and supervision of all business records, ledgers, journals and reports,
and the preparation, distribution and recordation of all bills and statements
for professional services rendered by P.C. including the billing and completion
of reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be
responsible, for and on behalf of P.C., as its agent, for billing and
collecting the charges made with respect to all Dental Services provided by
P.C. at the Dental Centers. The extent to which Service Company attempts to
collect such charges, the methods of collection and the amount of settlements
with respect to disputed charges, and the determination of which charges are
not collectible, shall be within the sole discretion of the Service Company;
provided that Service Company will comply with all applicable law, including
without limitation, the Federal Fair Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its
sole discretion but following consultation with P.C., select for employment and
terminate the employment of all Non-Dental Personnel as Service Company shall
deem necessary or advisable, and shall be responsible for the supervision,
direction, training and assigning of duties of all Non-Dental Personnel, with
the exception of activities carried on by Non-Dental Personnel which must be
under the direction or supervision of licensed dentists in accordance with
applicable law and regulations. Unless otherwise specifically agreed in
writing, all Non-Dental Personnel shall be employees or independent contractors
employed or engaged by Service Company, and the selection and terms of
employment or engagement, including the rates of compensation, supervision,
direction, training and assignment of duties of all Non-Dental Personnel shall
be determined and controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall, in
consultation with P.C., establish guidelines for the selection, hiring and
firing of dentists and Support Personnel by P.C. and shall recruit and evaluate
prospective dentists and Support Personnel as employees or independent
contractors of P.C., provided that all dentists and Support Personnel shall be
employees of or independent contractors to P.C.
<PAGE> 4
(e) Marketing and Advertising Programs. Service Company
shall: develop marketing and advertising programs for P.C.; provide advice and
assistance to P.C. on overall marketing programs, and determine and analyze the
effect of such programs; plan, create, write and prepare advertising materials;
negotiate contracts with advertising media for space and time; and obtain
services necessary in connection with the production and presentation of
advertisements.
(f) Insurance. Service Company shall, in its sole
discretion but following consultation with P.C., make reasonable efforts to
obtain and maintain in full force and effect during the term of this Agreement,
and all extensions and renewals thereof, public liability and property
insurance which Service Company deems appropriate to protect against loss,
claims, and other risks, or which is necessary to comply with the terms of
lease agreements for the Dental Centers, and Service Company shall assist P.C.
and the dentists in obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply to
P.C. all dental and non-Dental supplies which may be reasonably required in
connection with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on
and be responsible for all negotiations, in consultation with P.C., with
managed care plans, preferred provider plans, insurers and other third party
payors relating to the provision of services by P.C. Service Company shall
develop, negotiate, market and administer prepaid managed and other health
plans for the providing of dental care and shall obtain licensure as a third
party administrator, and any other appropriate licenses, registrations or
certificates, if and to the extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is
authorized to establish and maintain for and on behalf of P.C. bank accounts
for the collection and disbursement of P.C.'s funds. Service Company is
authorized to disburse funds from such accounts for the payment of costs
incurred by or on behalf of P.C. in accordance with this Agreement, for Service
Company's compensation, and for all other costs, expenses, and disbursements
which are incurred in connection with this Agreement. Service Company shall
manage all cash and cash equivalents of P.C.
(j) Tax Returns, Reports. Service Company shall be
responsible for preparing and filing all tax returns and reports required or
necessary in connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide
P.C. with overall supervision and management, including maintenance and repair,
of the Dental Centers and all furniture, fixtures, furnishings, equipment, and
leasehold improvements located in or used at the Dental Centers.
<PAGE> 5
(l) Equipment and Furnishings. Service Company shall
provide and maintain, either directly or through appropriate lease agreements,
all necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide
planning and studies to determine the location of new Dental Centers (including
acquired Dental Centers), provide designs for such new Dental Centers, obtain
leases for the space for Dental Centers, and do all things necessary in
connection with equipping of such new Dental Centers for operation, and shall
make such space available to P.C. Service Company shall amend, modify or
supplement Exhibit A to this Agreement in connection with the establishment of
new Dental Centers, as appropriate.
(n) Financial Statements and Budgets. Service Company
shall prepare monthly and annual financial statements containing a balance
sheet and statement of income for P.C. Annual financial statements shall be
delivered to P.C. within 90 days after the end of each fiscal year and monthly
financial statements shall be delivered to P.C. within 30 days after the end of
each calendar month. Service Company shall prepare, in reasonable detail, an
annual operating and capital budgets for P.C. which shall be delivered to P.C.
within 30 days after the end of each fiscal year, with Service Company
retaining final authority with respect to budgeting including without
limitation as to compensation and payments to employees and independent
contractors.
(o) Litigation Management. Service Company will (i)
manage and direct the defense of all claims, actions, proceedings, or
investigations against P.C. or any of its officers, directors or employees in
their capacity as such, and (ii) manage and direct the initiation and
prosecution of all claims, actions, proceedings or investigations brought by
P.C. against any person other than the Service Company.
(p) Access. Service Company shall grant access to its
facilities to all employees and independent contractors of P.C. for the purpose
of performing Dental Services in connection with the business of the Dental
Centers.
(q) Business Operations. Service Company shall generally
control and manage all aspects of business of the Dental Centers other than
those aspects relating to the provision of Dental Services which under
applicable law are required to be subject to the control of P.C., as
contemplated by Section 4.
<PAGE> 6
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.C. shall be solely and
exclusively in control of all clinical aspects of the practice of dentistry and
the delivery of Dental Services at the Dental Centers, including the exercise
of independent professional judgment regarding the diagnosis or treatment of
any dental disease, disorder or physical condition (which Service Company shall
not control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.C. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.C. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.C. of their professional
judgment. P.C. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.C. hold all necessary
licenses from the State of Texas and that such licenses are current and in good
standing, and that such professional services are performed in accordance with
the applicable ethical standards, laws and regulations relating to professional
practice in the State of Texas. P.C. shall take all actions necessary to
maintain its status as a professional corporation including provision for
succession so that the outstanding shares of P.C. are owned at all times by a
person licensed to practice dentistry in the State of Texas.
(b) Patient Referrals. It is not a purpose of this
Agreement to induce or encourage the referral of patients. The parties agree
that the benefits to P.C. and Service Company do not require, are not payment
or inducement for, and are not in any way contingent upon the admission,
referral or any other arrangement for the provisions of any item or service
offered by Service Company to any of P.C.'s patients or for the referral of any
patient.
(c) Noncompetition. P.C. hereby irrevocably appoints
Service Company as its agent and attorney in fact during the term of this
Agreement with full power and authority to enforce the terms of any employment
or independent contractor agreements to which it is a party and any
noncompetition, confidentiality and similar covenants or restrictions
(collectively, "Non-competition Agreements") of which it is the beneficiary.
During the term of this Agreement, P.C. shall not establish, operate or provide
dental services at any dental office, clinic or other health care facility
providing services substantially similar to those provided by P.C. pursuant to
this Agreement anywhere within 100 miles of any facility operated by Service
Company. The provisions of this Section 4(c) shall not in any way limit or
otherwise affect the terms and provisions of the Non-Competition Agreement
dated as of February 6, 1996 by and among Monarch Dental Corporation, Dr.
Warren F. Melamed, D.D.S. and the other parties identified on the signature
pages thereto (the "Melamed Non-Competition Agreement"). To the extent of any
conflict between the provisions of this Section 4(c) and the provisions of the
Melamed Non-Competition Agreement, the provisions of the Melamed
Non-Competition Agreement shall control.
<PAGE> 7
(d) Attorney-in-Fact. P.C. hereby appoints Service
Company for the term of this Agreement to be its true and lawful
attorney-in-fact for all purposes relating to or arising in connection with the
provisions by Service Company of the comprehensive management and related
administrative services as provided in this Agreement, including without
limitation the provisions of Section 3(b) and Section 3(i). This power of
attorney and the power of attorney granted under Section 4(c) are coupled with
an interest and shall be irrevocable and remain in effect for the term of this
Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.C. assigns to
Service Company all of P.C.'s right and interests in all Revenues such that all
Revenues shall be paid to and collected by Service Company and all Revenues of
P.C. (and all accounts receivable relating thereto) shall be reported on the
income statement and balance sheet of Service Company during the term of this
Agreement; provided, however, that no assignment shall be made of any such
rights or interests, the assignment of which is prohibited by law (for example,
amounts receivable from Medicare or Medicaid accounts). P.C. hereby issues a
standing instruction, which it shall confirm upon request from time to time,
that all payments due to P.C. shall be remitted directly to Service Company as
its agent and attorney-in-fact hereunder. To the extent that the foregoing
assignment of Revenues shall be ineffective for any reason, P.C. hereby grants
a security interest in all accounts receivable, contract rights, Revenues and
general intangibles of P.C. to Service Company to secure all indebtedness and
obligations of P.C. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.C. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration for
the services provided by Service Company under this Agreement, Service Company
shall receive a service fee (the "Service Fee") in an amount equal to: (i)
Service Company Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax
Income or 30% of Net Revenues.
(c) Application of Net Revenues. Service Company shall
apply Net Revenues as follows:
(i) First, Service Company shall remit to P.C.,
or cause to be paid on behalf of P.C., from
Net Revenues an amount equal to the Costs of
Dental Services and such other payments or
disbursements as P.C. shall direct Service
Company to make in accordance with this
Agreement;
(ii) Second, Service Company shall retain out of
Net Revenues an amount equal to the Service
Fee; and
<PAGE> 8
(iii) Third, Service Company shall remit all
remaining Net Revenues to P.C.
(d) Adjustment. The Service Fee shall be payable monthly
in arrears based upon Service Company Costs and P.C.'s Net Revenues in the
prior month. Adjustments to the estimated payments shall be made to reconcile
actual amounts due under Section 5(b) by the end of the following month. The
Service Fee shall be reviewed annually and at such other times as may be deemed
appropriate and adjusted in such manner as the parties may agree; in the
absence of such agreement, the Service Fee then in effect shall continue in
effect.
6. General Obligations of P.C. and Service Company. P.C. and
Service Company each agrees to cooperate fully with the other in connection
with the carrying out of their respective obligations under this Agreement and
to employ their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
7. Term. The term of this Agreement shall be for a period of 40
years from February 6, 1996 and, unless either party shall give notice to the
contrary at least 180 days prior to the thirty-first anniversary of this
Agreement or any anniversary thereafter, the term shall be extended for an
additional year on the thirty-first anniversary and on each anniversary
thereafter so that at each anniversary of this Agreement the remaining term
shall always be, unless such notice is given, ten (10) years.
8. [Omitted].
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its
obligations under this Agreement and, after written notice from the other party
demanding that such failure be cured, the party on whom such notice is served
shall fail to cure such breach within 30 days after such notice or, if such
breach will reasonably require more than 30 days to cure, such party is not
diligently pursuing efforts to cure such breach; provided, however, that if the
party on whom such demand is made elects to submit such dispute to arbitration,
no action to terminate this Agreement can be taken until such arbitration has
been finally adjudicated and then only if the party guilty of such failure
shall fail to comply with the arbitration award within 60 days after its
issuance.
(c) If any bankruptcy, insolvency or receivership
proceedings are instituted by or against the P.C. and not dismissed within
sixty (60) days after the commencement of such proceedings or if the P.C. party
shall voluntarily dissolve.
<PAGE> 9
(d) As of any anniversary date of this Agreement, by
Service Company delivering written notice to P.C. of such termination of at
least 90 days prior to such anniversary date.
If this Agreement is terminated for any reason, P.C. shall have the
right, exercisable within sixty days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and
shall not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.C.
Since the dentists who perform services for the P.C. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.C.
11. Confidential Information. Each of P.C. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by the Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.C. acknowledges that the Service Company has a proprietary
interest in such information, that such information constitutes trade secrets
and that P.C. does not, by reason of this Agreement, acquire any continuing
right or interest in such proprietary information or trade secrets. P.C. will
hold such proprietary information and trade secrets in confidence and will not
disclose them, either during the term of this Agreement or thereafter, to any
person or entity other than employees or independent contractors of P.C. or
Service Company without the prior written consent of Service Company or as may
be required by law. Service Company will preserve the confidentiality of all
files and records of P.C. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of the P.C.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.C.
Each of P.C. and Service Company acknowledges that it does not have an adequate
remedy at law for a breach of this Section 11, will suffer irreparable harm in
the event of such breach and that, therefore, the other party shall be entitled
to injunctive and other equitable relief for the enforcement of this Section
11. The provisions of this Section 11 shall survive termination of this
Agreement.
<PAGE> 10
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by
either party hereto without the express prior written consent of the other;
provided, however, that this Agreement shall be assignable by Service Company
to any of its affiliates or successors without the consent of P.C.
(b) Waiver. Waiver of any agreement or obligation set
forth in this Agreement by either party shall not prevent that party from later
insisting upon full performance of such agreement or obligation and no course
of dealing, partial exercise or any delay or failure on the part of any party
hereto in exercising any right, power, privilege, or remedy under this
Agreement or any related agreement or instrument shall impair or restrict any
such right, power, privilege or remedy or be construed as a waiver therefor. No
waiver shall be valid against any party unless made in writing and signed by
the party against whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions
of this Agreement shall be effective unless made in writing and signed by and
on behalf of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the
entire agreement between the parties in connection with the subject matter of
this Agreement and supersedes all prior agreements entered into before the
effective date of this Agreement, amending and restating in its entirety the
Management Services Agreements dated as of February 6, 1996.
(e) Notices. The mailing addresses of Service Company and
P.C. for the purposes of any notices to be given under this Agreement are as
follows:
If to Service Company: MacGregor Dental Associates, L.P..
4201 Spring Valley Road
Suite 320
Dallas, TX 75244
Attn: General Partner/President
If to P.C.: Modern Dental Professionals, P.C.
4201 Spring Valley Road
Suite 320
Dallas, Texas 75244
Attn: President
(f) Binding Effect. Subject to the provisions set forth
in this Agreement, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and upon their respective successors and assigns.
<PAGE> 11
(g) Arbitration. Any disputes arising under this
Agreement shall be resolved by arbitration; provided, however, that arbitration
shall not apply to the enforcement of the Service Company's rights under
Section 11. Any party electing to submit an action to arbitration shall give
written notice to the other party of such election. The dispute shall be
submitted to arbitration in accordance with the Rules of the American
Arbitration Association. Such arbitration shall be conducted, unless otherwise
agreed by the parties, by a single arbitrator in Dallas, Texas. The award of
the arbitrator can be confirmed or enforced in any court of competent
jurisdiction. The prevailing party in any arbitration shall be entitled to
recover all costs incurred by such party in connection with such proceedings,
including reasonable attorney fees.
(h) Severability. If any one or more of the provisions of
this Agreement is adjudged to any extent invalid, unenforceable, or contrary to
law by a court of competent jurisdiction, each and all of the remaining
provisions of this Agreement will not be affected thereby and shall be valid
and forcible to the fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by
and enforced in accordance with the laws of the State of Texas.
(j) Change in Law. If after the effective date of this
Agreement, any new law, rule or regulation becomes effective which renders
illegal the structure of the relationship between P.C. and the Service Company
set forth in this Agreement, or otherwise substantially impairs the economics
of the parties hereunder, this Agreement shall not terminate, but the parties
hereto agree to exclusively negotiate with each other in good faith for a
period of six months following such change of law or circumstance with respect
to the subject matter hereof. To the maximum extent possible, any amendment
hereto shall preserve the underlying economic and financial arrangements
between P.C. and the Service Company.
IN WITNESS WHEREOF, the parties have signed this Agreement and agreed
that it shall be deemed effective as of February 6, 1996.
SERVICE COMPANY: P.C.:
MacGREGOR DENTAL ASSOCIATES, L.P. MODERN DENTAL PROFESSIONALS, P.C.
By: Monarch Dental Management, Inc.,
general partner
By: /s/ GARY W. CAGE By: /s/ WARREN F. MELAMED
------------------------------ ---------------------------------
Name: Gary W. Cage Name: Warren F. Melamed, D.D.S.
Title: Chief Executive Officer Title: President
<PAGE> 12
EXHIBIT A
Locations of Dental Centers
6366 Martin Luther King
Houston, TX 77021 (MLK)
12341 South Main
Houston, TX 77035 (South Main)
4411 Louetta
Spring, TX 77488 (Louetta)
8455 Fannin
Houston, TX 77054 (Fannin)
11300 Harwin
Houston, TX 77072 (Harwin)
1049 Blalock
Houston, TX 77055 (Blalock)
8470 Gulf Freeway
Houston, TX 77017 (Gulf Freeway)
15700 Vickery
Houston, TX 77032 (North Belt / Vickery)
12322 East Freeway
Houston, TX 77015 (I10 East)
5215 West 34th
Houston, TX 77092 (290 / West 34th)
4002 Burke Rd.
Pasadena, TX 77504 (Pasadena / Burke Rd.)
4701 Airline
Houston, TX 77022 (I45 / Airline)
<PAGE> 13
2321 Bay Area Blvd.
Houston, TX 77058 (Clear Lake)
7303 Bellaire
Houston, TX 77036 (Bellaire)
462 Mason Road
Suite 100
Katy, TX 77450 (Mason)
<PAGE> 1
EXHIBIT 10.9
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between MODERN DENTAL PROFESSIONALS--GIRLINGHOUSE, P.A., a professional
corporation organized and existing under the laws of the State of Arkansas
("P.A."), and CONVENIENT DENTAL CARE, INC., a corporation organized and
existing under the laws of the State of Arkansas ("Service Company").
RECITALS
A. P.A. is engaged in the practice of dentistry through dentists licensed
by the Arkansas State Board of Dental Examiners and who are employed by P.A. or
who have entered into independent contractor agreements with P.A. to provide
services to patients of P.A. and conducts such practice at dental centers
located in the State of Arkansas (the "Dental Centers").
B. Service Company has been organized for the purpose of providing
comprehensive management and related administrative services to dental
practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.A.
C. P.A., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Arkansas Dental Practice Act and the Regulations of
the Arkansas State Board of Dental Examiners adopted pursuant thereto.
(b) "Cost of Dental Services" means: the aggregate compensation of
dentists who are employed by or who are independent contractors with P.A. at
the Dental Centers and other personnel who must be employed by the P.A. under
applicable law including dental hygienists ("Support Personnel") together with
the cost of expenses, taxes and benefits of such dentists and Support Personnel
including, but not limited to, vacation pay, sick pay, health care expenses,
professional dues, expense reimbursement, discretionary bonuses or incentive
payments, if any, based on profitability or productivity and other expenses and
payments required to be made to or for the benefit of the dentists or the
Support Personnel pursuant to their employment agreements or independent
contractor agreements or
<PAGE> 2
otherwise plus P.A.'s portion of all employment and payroll taxes; other
expenses incurred by P.A. in carrying out its obligations under this Agreement;
and the costs of malpractice insurance, in each case on an accrual basis.
(c) "Dental Board" means the Arkansas State Board of Dental Examiners
established under the Act.
(d) "Dental Center" means the facility or facilities operated by P.A.
and at which Dental Services are, or in the future may be, rendered by P.A.
identified on Exhibit A hereto, as amended, supplemented or modified from time
to time.
(e) "Dental Services" means all services rendered by P.A. which
constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the total of Service
Company Costs and the Cost of Dental Services, but without regard for the
provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or billing
adjustments.
(h) "Non-Dental Personnel" means all personnel including, but not
limited to, accountants, bookkeepers and receptionists who perform services
which do not constitute the practice of dentistry or who are not required by
applicable law to be employees of P.A.
(i) "Revenues" means all amounts on an accrual basis which P.A. receives
or becomes entitled to receive for any services or sales of products or
otherwise, including, without limitation, for the performance of Dental
Services for its patients by dentists or Support Personnel who are employees or
independent contractors of P.A. or for the sale of products including
pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by Service Company,
including indirect overhead and other expenses attributable to the carrying out
of its obligations under this Agreement, in each case on an accrual basis.
(k) "Support Personnel" shall have the meaning specified in the
definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this Agreement and
all renewals and extensions thereof, P.A. engages Service Company to provide
sole and exclusive development, management and administrative services with
respect to all non-dental functions relating to the operation of the Dental
Centers, and Service Company agrees to furnish to P.A. all of the non-dental
development, management and administrative services needed by P.A. in
connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder,
<PAGE> 3
Service Company shall control all aspects of P.A.'s business other than those
aspects which relate to the provision of dental services, as contemplated by
Section 4.
3. Services. The non-dental development, management and administrative
services to be provided by Service Company shall include the following:
(a) Bookkeeping and Accounts. Service Company shall provide all
bookkeeping and accounting services necessary or appropriate to the functioning
of the Dental Centers including, but not limited to, maintenance, custody and
supervision of all business records, ledgers, journals and reports, and the
preparation, distribution and recordation of all bills and statements for
professional services rendered by P.A. including the billing and completion of
reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be responsible, for and
on behalf of P.A., as its agent, for billing and collecting the charges made
with respect to all Dental Services provided by P.A. at the Dental Centers.
The extent to which Service Company attempts to collect such charges, the
methods of collection and the amount of settlements with respect to disputed
charges, and the determination of which charges are not collectible, shall be
within the sole discretion of the Service Company; provided that Service
Company will comply with all applicable law, including without limitation, the
Federal Fair Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its sole discretion
but following consultation with P.A., select for employment and terminate the
employment of all Non-Dental Personnel as Service Company shall deem necessary
or advisable, and shall be responsible for the supervision, direction, training
and assigning of duties of all Non-Dental Personnel, with the exception of
activities carried on by Non-Dental Personnel which must be under the direction
or supervision of licensed dentists in accordance with applicable law and
regulations. Unless otherwise specifically agreed in writing, all Non-Dental
Personnel shall be employees or independent contractors employed or engaged by
Service Company, and the selection and terms of employment or engagement,
including the rates of compensation, supervision, direction, training and
assignment of duties of all Non-Dental Personnel shall be determined and
controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall, in consultation with P.A.,
establish guidelines for the selection, hiring and firing of dentists and
Support Personnel by P.A. and shall recruit and evaluate prospective dentists
and Support Personnel as employees or independent contractors of P.A., provided
that all dentists and Support Personnel shall be employees of or independent
contractors to P.A.
<PAGE> 4
(e) Marketing and Advertising Programs. Service Company shall: develop
marketing and advertising programs for P.A.; provide advice and assistance to
P.A. on overall marketing programs, and determine and analyze the effect of
such programs; plan, create, write and prepare advertising materials; negotiate
contracts with advertising media for space and time; and obtain services
necessary in connection with the production and presentation of advertisements.
(f) Insurance. Service Company shall, in its sole discretion but
following consultation with P.A., make reasonable efforts to obtain and
maintain in full force and effect during the term of this Agreement, and all
extensions and renewals thereof, public liability and property insurance which
Service Company deems appropriate to protect against loss, claims, and other
risks, or which is necessary to comply with the terms of lease agreements for
the Dental Centers, and Service Company shall assist P.A. and the dentists in
obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply to P.A. all
dental and non-Dental supplies which may be reasonably required in connection
with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on and be
responsible for all negotiations, in consultation with P.A., with managed care
plans, preferred provider plans, insurers and other third party payors relating
to the provision of services by P.A. Service Company shall develop, negotiate,
market and administer prepaid managed and other health plans for the providing
of dental care and shall obtain licensure as a third party administrator, and
any other appropriate licenses, registrations or certificates, if and to the
extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is authorized to
establish and maintain for and on behalf of P.A. bank accounts for the
collection and disbursement of P.A.'s funds. Service Company is authorized to
disburse funds from such accounts for the payment of costs incurred by or on
behalf of P.A. in accordance with this Agreement, for Service Company's
compensation, and for all other costs, expenses, and disbursements which are
incurred in connection with this Agreement. Service Company shall manage all
cash and cash equivalents of P.A.
(j) Tax Returns, Reports. Service Company shall be responsible for
preparing and filing all tax returns and reports required or necessary in
connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide P.A. with
overall supervision and management, including maintenance and repair, of the
Dental Centers and all furniture, fixtures, furnishings, equipment, and
leasehold improvements located in or used at the Dental Centers.
<PAGE> 5
(l) Equipment and Furnishings. Service Company shall provide and
maintain, either directly or through appropriate lease agreements, all
necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide planning and
studies to determine the location of new Dental Centers (including acquired
Dental Centers), provide designs for such new Dental Centers, obtain leases for
the space for Dental Centers, and do all things necessary in connection with
equipping of such new Dental Centers for operation, and shall make such space
available to P.A. Service Company shall amend, modify or supplement Exhibit A
to this Agreement in connection with the establishment of new Dental Centers,
as appropriate.
(n) Financial Statements and Budgets. Service Company shall prepare
monthly and annual financial statements containing a balance sheet and
statement of income for P.A. Annual financial statements shall be delivered to
P.A. within 90 days after the end of each fiscal year and monthly financial
statements shall be delivered to P.A. within 30 days after the end of each
calendar month. Service Company shall prepare, in reasonable detail, an annual
operating and capital budgets for P.A. which shall be delivered to P.A. within
30 days after the end of each fiscal year, with Service Company retaining final
authority with respect to budgeting including without limitation as to
compensation and payments to employees and independent contractors.
(o) Litigation Management. Service Company will (i) manage and direct
the defense of all claims, actions, proceedings, or investigations against P.A.
or any of its officers, directors or employees in their capacity as such, and
(ii) manage and direct the initiation and prosecution of all claims, actions,
proceedings or investigations brought by P.A. against any person other than the
Service Company.
(p) Access. Service Company shall grant access to its facilities to all
employees and independent contractors of P.A. for the purpose of performing
Dental Services in connection with the business of the Dental Centers.
(q) Business Operations. Service Company shall generally control and
manage all aspects of business of the Dental Centers other than those aspects
relating to the provision of Dental Services which under applicable law are
required to be subject to the control of P.A., as contemplated by Section 4.
<PAGE> 6
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.A. shall be solely and exclusively in
control of all clinical aspects of the practice of dentistry and the delivery
of Dental Services at the Dental Centers, including the exercise of independent
professional judgment regarding the diagnosis or treatment of any dental
disease, disorder or physical condition (which Service Company shall not
control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.A. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.A. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.A. of their professional
judgment. P.A. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.A. hold all necessary
licenses from the State of Arkansas and that such licenses are current and in
good standing, and that such professional services are performed in accordance
with the applicable ethical standards, laws and regulations relating to
professional practice in the State of Arkansas. P.A. shall take all actions
necessary to maintain its status as a professional corporation including
provision for succession so that the outstanding shares of P.A. are owned at
all times by a person licensed to practice dentistry in the State of Arkansas.
(b) Patient Referrals. It is not a purpose of this Agreement to
induce or encourage the referral of patients. The parties agree that the
benefits to P.A. and Service Company do not require, are not payment or
inducement for, and are not in any way contingent upon the admission, referral
or any other arrangement for the provisions of any item or service offered by
Service Company to any of P.A.'s patients or for the referral of any patient.
(c) Noncompetition. P.A. hereby irrevocably appoints Service Company as
its agent and attorney in fact during the term of this Agreement with full
power and authority to enforce the terms of any employment or independent
contractor agreements to which it is a party and any noncompetition,
confidentiality and similar covenants or restrictions (collectively,
"Non-competition Agreements") of which it is the beneficiary. During the term
of this Agreement, P.A. shall not establish, operate or provide dental services
at any dental office, clinic or other health care facility providing services
substantially similar to those provided by P.A. pursuant to this Agreement
anywhere within 100 miles of any facility operated by Service Company. The
provisions of this Section 4(c) shall not in any way limit or otherwise affect
the terms and provisions of the Non-Competition Agreement dated as of November
7, 1996 by and among Monarch Dental Corporation, Ronald K. Girlinghouse, D.D.S.
and the other parties identified on the signature pages thereto (the
"Girlinghouse Non-Competition Agreement"). To the extent of any conflict
between the provisions of this Section 4(c) and the provisions of the
Girlinghouse Non-Competition Agreement, the provisions of the Girlinghouse
Non-Competition Agreement shall control.
<PAGE> 7
(d) Attorney-in-Fact. P.A. hereby appoints Service Company for the term
of this Agreement to be its true and lawful attorney-in-fact for all purposes
relating to or arising in connection with the provisions by Service Company of
the comprehensive management and related administrative services as provided in
this Agreement, including without limitation the provisions of Section 3(b) and
Section 3(i). This power of attorney and the power of attorney granted under
Section 4(c) are coupled with an interest and shall be irrevocable and remain
in effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.A. assigns to Service Company all
of P.A.'s right and interests in all Revenues such that all Revenues shall be
paid to and collected by Service Company and all Revenues of P.A. (and all
accounts receivable relating thereto) shall be reported on the income statement
and balance sheet of Service Company during the term of this Agreement;
provided, however, that no assignment shall be made of any such rights or
interests, the assignment of which is prohibited by law (for example, amounts
receivable from Medicare or Medicaid accounts). P.A. hereby issues a standing
instruction, which it shall confirm upon request from time to time, that all
payments due to P.A. shall be remitted directly to Service Company as its agent
and attorney-in-fact hereunder. To the extent that the foregoing assignment of
Revenues shall be ineffective for any reason, P.A. hereby grants a security
interest in all accounts receivable, contract rights, Revenues and general
intangibles of P.A. to Service Company to secure all indebtedness and
obligations of P.A. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.A. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration for the services
provided by Service Company under this Agreement, Service Company shall receive
a service fee (the "Service Fee") in an amount equal to: (i) Service Company
Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax Income or 30% of
Net Revenues.
(c) Application of Net Revenues. Service Company shall apply Net
Revenues as follows:
(i) First, Service Company shall remit to P.A., or cause to
be paid on behalf of P.A., from Net Revenues an amount
equal to the Costs of Dental Services and such other
payments or disbursements as P.A. shall direct Service
Company to make in accordance with this Agreement;
(ii) Second, Service Company shall retain out of Net Revenues
an amount equal to the Service Fee; and
<PAGE> 8
(iii) Third, Service Company shall remit all remaining Net
Revenues to P.A.
(d) Adjustment. The Service Fee shall be payable monthly in arrears
based upon Service Company Costs and P.A.'s Net Revenues in the prior month.
Adjustments to the estimated payments shall be made to reconcile actual amounts
due under Section 5(b) by the end of the following month. The Service Fee
shall be reviewed annually and at such other times as may be deemed appropriate
and adjusted in such manner as the parties may agree; in the absence of such
agreement, the Service Fee then in effect shall continue in effect.
6. General Obligations of P.A. and Service Company. P.A. and Service
Company each agrees to cooperate fully with the other in connection with the
carrying out of their respective obligations under this Agreement and to employ
their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
7. Term. The term of this Agreement shall be for a period of 40 years
from November 1, 1996 and, unless either party shall give notice to the
contrary at least 180 days prior to the thirty-first anniversary of this
Agreement or any anniversary thereafter, the term shall be extended for an
additional year on the thirty-first anniversary and on each anniversary
thereafter so that at each anniversary of this Agreement the remaining term
shall be, unless such notice is given, ten (10) years.
8. [Omitted].
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its obligations under this
Agreement and, after written notice from the other party demanding that such
failure be cured, the party on whom such notice is served shall fail to cure
such breach within 30 days after such notice or, if such breach will reasonably
require more than 30 days to cure, such party is not diligently pursuing
efforts to cure such breach; provided, however, that if the party on whom such
demand is made elects to submit such dispute to arbitration, no action to
terminate this Agreement can be taken until such arbitration has been finally
adjudicated and then only if the party guilty of such failure shall fail to
comply with the arbitration award within 60 days after its issuance.
(c) If any bankruptcy, insolvency or receivership proceedings are
instituted by or against the P.A. and not dismissed within sixty (60) days
after the commencement of such proceedings or if the P.A. party shall
voluntarily dissolve.
<PAGE> 9
(d) As of any anniversary date of this Agreement, by Service Company
delivering written notice to P.A. of such termination of at least 90 days prior
to such anniversary date.
If this Agreement is terminated for any reason, P.A. shall have the right,
exercisable within sixty days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and shall
not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.A.
Since the dentists who perform services for the P.A. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.A.
11. Confidential Information. Each of P.A. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by the Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.A. acknowledges that the Service Company has a proprietary
interest in such information, that such information constitutes trade secrets
and that P.A. does not, by reason of this Agreement, acquire any continuing
right or interest in such proprietary information or trade secrets. P.A. will
hold such proprietary information and trade secrets in confidence and will not
disclose them, either during the term of this Agreement or thereafter, to any
person or entity other than employees or independent contractors of P.A. or
Service Company without the prior written consent of Service Company or as may
be required by law. Service Company will preserve the confidentiality of all
files and records of P.A. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of the P.A.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.A.
Each of P.A. and Service Company acknowledges that it does not have an
adequate remedy at law for a breach of this Section 11, will suffer irreparable
harm in the event of such breach and that, therefore, the other party shall be
entitled to injunctive and other equitable relief for the enforcement of this
Section 11. The provisions of this Section 11 shall survive termination of
this Agreement.
<PAGE> 10
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by either party
hereto without the express prior written consent of the other; provided,
however, that this Agreement shall be assignable by Service Company to any of
its affiliates or successors without the consent of P.A.
(b) Waiver. Waiver of any agreement or obligation set forth in this
Agreement by either party shall not prevent that party from later insisting
upon full performance of such agreement or obligation and no course of dealing,
partial exercise or any delay or failure on the part of any party hereto in
exercising any right, power, privilege, or remedy under this Agreement or any
related agreement or instrument shall impair or restrict any such right, power,
privilege or remedy or be construed as a waiver therefor. No waiver shall be
valid against any party unless made in writing and signed by the party against
whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions of this
Agreement shall be effective unless made in writing and signed by and on behalf
of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties in connection with the subject matter of this Agreement and
supersedes all prior agreements entered into before the effective date of this
Agreement, amending and restating in its entirety the Management Services
Agreement dated as of November 7, 1996.
(e) Notices. The mailing addresses of Service Company and P.A. for the
purposes of any notices to be given under this Agreement are as follows:
If to Service Company: Convenient Dental Care, Inc.
5704 South 14th Street
Fort Smith, Arkansas 72901
Attn: President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.A.: Modern Dental Professionals--Girlinghouse, P.A.
5704 South 14th Street
Fort Smith, Arkansas 72901
Attn: President
<PAGE> 11
(f) Binding Effect. Subject to the provisions set forth in this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this Agreement shall be
resolved by arbitration; provided, however, that arbitration shall not apply to
the enforcement of the Service Company's rights under Section 11. Any party
electing to submit an action to arbitration shall give written notice to the
other party of such election. The dispute shall be submitted to arbitration in
accordance with the Rules of the American Arbitration Association. Such
arbitration shall be conducted, unless otherwise agreed by the parties, by a
single arbitrator in Little Rock, Arkansas. The award of the arbitrator can be
confirmed or enforced in any court of competent jurisdiction. The prevailing
party in any arbitration shall be entitled to recover all costs incurred by
such party in connection with such proceedings, including reasonable attorney
fees.
(h) Severability. If any one or more of the provisions of this
Agreement is adjudged to any extent invalid, unenforceable, or contrary to law
by a court of competent jurisdiction, each and all of the remaining provisions
of this Agreement will not be affected thereby and shall be valid and forcible
to the fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by and enforced in
accordance with the laws of the State of Arkansas.
(j) Change in Law. If after the effective date of this Agreement, any
new law, rule or regulation becomes effective which renders illegal the
structure of the relationship between P.A. and the Service Company set forth in
this Agreement, or otherwise substantially impairs the economics of the parties
hereunder, this Agreement shall not terminate, but the parties hereto agree to
exclusively negotiate with each other in good faith for a period of six months
following such change of law or circumstance with respect to the subject matter
hereof. To the maximum extent possible, any amendment hereto shall preserve
the underlying economic and financial arrangements between P.A. and the Service
Company.
IN WITNESS WHEREOF, the parties have signed this Agreement and agreed that
it shall be deemed effective as of November 1, 1996.
SERVICE COMPANY: P.A.:
CONVENIENT DENTAL CARE, INC. MODERN DENTAL PROFESSIONALS--
GIRLINGHOUSE, P.A.
By: /s/ GARY W. CAGE By: /s/ RONALD K. GIRLINGHOUSE
--------------------------------- -------------------------------
Name: Gary W. Cage Name: Ronald K. Girlinghouse, D.D.S.
Title: Vice President Title: President
<PAGE> 12
EXHIBIT A
Locations of Dental Centers
4700 W. Markham
Little Rock, AR
4909 Warden Road
North Little Rock, AR
4700-A Commercial Drive
North Little Rock, AR
4700-B2 Commercial Drive
North Little Rock, AR
939 Locust
Conway, AR
#11 Chapel Village Shopping Center
Pine Bluff, AR
200 Shoppingway, Plaza Bld.
West Memphis, AR
3100 North College Ave.
Fayetteville, AR
1421 Central Ave.
Hot Springs, AR
1419 Central Ave.
Hot Springs, AR
<PAGE> 1
EXHIBIT 10.10
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between MODERN DENTAL PROFESSIONALS--BEAVERS, P.A., a professional corporation
organized and existing under the laws of the State of Arkansas ("P.A."), and
ARKANSAS DENTAL HEALTH ASSOCIATES, INC., a corporation organized and existing
under the laws of the State of Arkansas ("Service Company").
RECITALS
A. P.A. is engaged in the practice of dentistry through dentists licensed
by the Arkansas State Board of Dental Examiners and who are employed by P.A. or
who have entered into independent contractor agreements with P.A. to provide
services to patients of P.A. and conducts such practice at dental centers
located in the State of Arkansas (the "Dental Centers").
B. Service Company has been organized for the purpose of providing
comprehensive management and related administrative services to dental
practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.A.
C. P.A., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Arkansas Dental Practice Act and the Regulations of
the Arkansas State Board of Dental Examiners adopted pursuant thereto.
(b) "Cost of Dental Services" means: the aggregate compensation of
dentists who are employed by or who are independent contractors with P.A. at
the Dental Centers and other personnel who must be employed by the P.A. under
applicable law including dental hygienists ("Support Personnel") together with
the cost of expenses, taxes and benefits of such dentists and Support Personnel
including, but not limited to, vacation pay, sick pay, health care expenses,
professional dues, expense reimbursement, discretionary bonuses or incentive
payments, if any, based on profitability or productivity and other expenses and
payments required to be made to or for the benefit of the dentists or the
Support Personnel pursuant to their employment agreements or independent
contractor agreements or
<PAGE> 2
otherwise plus P.A.'s portion of all employment and payroll taxes; other
expenses incurred by P.A. in carrying out its obligations under this Agreement;
and the costs of malpractice insurance, in each case on an accrual basis.
(c) "Dental Board" means the Arkansas State Board of Dental Examiners
established under the Act.
(d) "Dental Center" means the facility or facilities operated by P.A.
and at which Dental Services are, or in the future may be, rendered by P.A.
identified on Exhibit A hereto, as amended, supplemented or modified from time
to time.
(e) "Dental Services" means all services rendered by P.A. which
constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the total of Service
Company Costs and the Cost of Dental Services, but without regard for the
provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or billing
adjustments.
(h) "Non-Dental Personnel" means all personnel including, but not
limited to, accountants, bookkeepers and receptionists who perform services
which do not constitute the practice of dentistry or who are not required by
applicable law to be employees of P.A.
(i) "Revenues" means all amounts on an accrual basis which P.A. receives
or becomes entitled to receive for any services or sales of products or
otherwise, including, without limitation, for the performance of Dental
Services for its patients by dentists or Support Personnel who are employees or
independent contractors of P.A. or for the sale of products including
pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by Service Company,
including indirect overhead and other expenses attributable to the carrying out
of its obligations under this Agreement, in each case on an accrual basis.
(k) "Support Personnel" shall have the meaning specified in the
definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this Agreement and
all renewals and extensions thereof, P.A. engages Service Company to provide
sole and exclusive development, management and administrative services with
respect to all non-dental functions relating to the operation of the Dental
Centers, and Service Company agrees to furnish to P.A. all of the non-dental
development, management and administrative services needed by P.A. in
connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder,
<PAGE> 3
Service Company shall control all aspects of P.A.'s business other than those
aspects which relate to the provision of dental services, as contemplated by
Section 4.
3. Services. The non-dental development, management and administrative
services to be provided by Service Company shall include the following:
(a) Bookkeeping and Accounts. Service Company shall provide all
bookkeeping and accounting services necessary or appropriate to the functioning
of the Dental Centers including, but not limited to, maintenance, custody and
supervision of all business records, ledgers, journals and reports, and the
preparation, distribution and recordation of all bills and statements for
professional services rendered by P.A. including the billing and completion of
reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be responsible, for and
on behalf of P.A., as its agent, for billing and collecting the charges made
with respect to all Dental Services provided by P.A. at the Dental Centers. The
extent to which Service Company attempts to collect such charges, the methods
of collection and the amount of settlements with respect to disputed charges,
and the determination of which charges are not collectible, shall be within the
sole discretion of the Service Company; provided that Service Company will
comply with all applicable law, including without limitation, the Federal Fair
Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its sole discretion
but following consultation with P.A., select for employment and terminate the
employment of all Non-Dental Personnel as Service Company shall deem necessary
or advisable, and shall be responsible for the supervision, direction, training
and assigning of duties of all Non-Dental Personnel, with the exception of
activities carried on by Non-Dental Personnel which must be under the direction
or supervision of licensed dentists in accordance with applicable law and
regulations. Unless otherwise specifically agreed in writing, all Non-Dental
Personnel shall be employees or independent contractors employed or engaged by
Service Company, and the selection and terms of employment or engagement,
including the rates of compensation, supervision, direction, training and
assignment of duties of all Non-Dental Personnel shall be determined and
controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall, in consultation with P.A.,
establish guidelines for the selection, hiring and firing of dentists and
Support Personnel by P.A. and shall recruit and evaluate prospective dentists
and Support Personnel as employees or independent contractors of P.A., provided
that all dentists and Support Personnel shall be employees of or independent
contractors to P.A.
<PAGE> 4
(e) Marketing and Advertising Programs. Service Company shall: develop
marketing and advertising programs for P.A.; provide advice and assistance to
P.A. on overall marketing programs, and determine and analyze the effect of
such programs; plan, create, write and prepare advertising materials; negotiate
contracts with advertising media for space and time; and obtain services
necessary in connection with the production and presentation of advertisements.
(f) Insurance. Service Company shall, in its sole discretion but
following consultation with P.A., make reasonable efforts to obtain and
maintain in full force and effect during the term of this Agreement, and all
extensions and renewals thereof, public liability and property insurance which
Service Company deems appropriate to protect against loss, claims, and other
risks, or which is necessary to comply with the terms of lease agreements for
the Dental Centers, and Service Company shall assist P.A. and the dentists in
obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply to P.A. all
dental and non-Dental supplies which may be reasonably required in connection
with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on and be
responsible for all negotiations, in consultation with P.A., with managed care
plans, preferred provider plans, insurers and other third party payors relating
to the provision of services by P.A. Service Company shall develop, negotiate,
market and administer prepaid managed and other health plans for the providing
of dental care and shall obtain licensure as a third party administrator, and
any other appropriate licenses, registrations or certificates, if and to the
extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is authorized to
establish and maintain for and on behalf of P.A. bank accounts for the
collection and disbursement of P.A.'s funds. Service Company is authorized to
disburse funds from such accounts for the payment of costs incurred by or on
behalf of P.A. in accordance with this Agreement, for Service Company's
compensation, and for all other costs, expenses, and disbursements which are
incurred in connection with this Agreement. Service Company shall manage all
cash and cash equivalents of P.A.
(j) Tax Returns, Reports. Service Company shall be responsible for
preparing and filing all tax returns and reports required or necessary in
connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide P.A. with overall
supervision and management, including maintenance and repair, of the Dental
Centers and all furniture, fixtures, furnishings, equipment, and leasehold
improvements located in or used at the Dental Centers.
<PAGE> 5
(l) Equipment and Furnishings. Service Company shall provide and
maintain, either directly or through appropriate lease agreements, all
necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide planning and
studies to determine the location of new Dental Centers (including acquired
Dental Centers), provide designs for such new Dental Centers, obtain leases for
the space for Dental Centers, and do all things necessary in connection with
equipping of such new Dental Centers for operation, and shall make such space
available to P.A. Service Company shall amend, modify or supplement Exhibit A
to this Agreement in connection with the establishment of new Dental Centers,
as appropriate.
(n) Financial Statements and Budgets. Service Company shall prepare
monthly and annual financial statements containing a balance sheet and
statement of income for P.A. Annual financial statements shall be delivered to
P.A. within 90 days after the end of each fiscal year and monthly financial
statements shall be delivered to P.A. within 30 days after the end of each
calendar month. Service Company shall prepare, in reasonable detail, an annual
operating and capital budgets for P.A. which shall be delivered to P.A. within
30 days after the end of each fiscal year, with Service Company retaining final
authority with respect to budgeting including without limitation as to
compensation and payments to employees and independent contractors.
(o) Litigation Management. Service Company will (i) manage and direct
the defense of all claims, actions, proceedings, or investigations against P.A.
or any of its officers, directors or employees in their capacity as such, and
(ii) manage and direct the initiation and prosecution of all claims, actions,
proceedings or investigations brought by P.A. against any person other than the
Service Company.
(p) Access. Service Company shall grant access to its facilities to all
employees and independent contractors of P.A. for the purpose of performing
Dental Services in connection with the business of the Dental Centers.
(q) Business Operations. Service Company shall generally control and
manage all aspects of business of the Dental Centers other than those aspects
relating to the provision of Dental Services which under applicable law are
required to be subject to the control of P.A., as contemplated by Section 4.
<PAGE> 6
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.A. shall be solely and exclusively in
control of all clinical aspects of the practice of dentistry and the delivery
of Dental Services at the Dental Centers, including the exercise of independent
professional judgment regarding the diagnosis or treatment of any dental
disease, disorder or physical condition (which Service Company shall not
control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.A. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.A. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.A. of their professional
judgment. P.A. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.A. hold all necessary
licenses from the State of Arkansas and that such licenses are current and in
good standing, and that such professional services are performed in accordance
with the applicable ethical standards, laws and regulations relating to
professional practice in the State of Arkansas. P.A. shall take all actions
necessary to maintain its status as a professional corporation including
provision for succession so that the outstanding shares of P.A. are owned at
all times by a person licensed to practice dentistry in the State of Arkansas.
(b) Patient Referrals. It is not a purpose of this Agreement to induce
or encourage the referral of patients. The parties agree that the benefits to
P.A. and Service Company do not require, are not payment or inducement for, and
are not in any way contingent upon the admission, referral or any other
arrangement for the provisions of any item or service offered by Service
Company to any of P.A.'s patients or for the referral of any patient.
(c) Noncompetition. P.A. hereby irrevocably appoints Service Company as
its agent and attorney in fact during the term of this Agreement with full
power and authority to enforce the terms of any employment or independent
contractor agreements to which it is a party and any noncompetition,
confidentiality and similar covenants or restrictions (collectively,
"Non-competition Agreements") of which it is the beneficiary. During the term
of this Agreement, P.A. shall not establish, operate or provide dental services
at any dental office, clinic or other health care facility providing services
substantially similar to those provided by P.A. pursuant to this Agreement
anywhere within 100 miles of any facility operated by Service Company. The
provisions of this Section 4(c) shall not in any way limit or otherwise affect
the terms and provisions of the Non-Competition Agreement dated as of January
3, 1997 by and among Monarch Dental Corporation on the one hand, and Sam L.
Beavers, D.D.S., William M. Lee, D.D.S., W. Gene Howard, D.D.S. and Jeffrey M.
Moore, D.D.S., respectively, on the other hand (the "Beavers Non-Competition
Agreements"). To the extent of any conflict between the provisions of this
Section 4(c) and the provisions of the Beavers Non-Competition Agreements, the
provisions of the Beavers Non-Competition Agreements shall control.
<PAGE> 7
(d) Attorney-in-Fact. P.A. hereby appoints Service Company for the term
of this Agreement to be its true and lawful attorney-in-fact for all purposes
relating to or arising in connection with the provisions by Service Company of
the comprehensive management and related administrative services as provided in
this Agreement, including without limitation the provisions of Section 3(b) and
Section 3(i). This power of attorney and the power of attorney granted under
Section 4(c) are coupled with an interest and shall be irrevocable and remain
in effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.A. assigns to Service Company all
of P.A.'s right and interests in all Revenues such that all Revenues shall be
paid to and collected by Service Company and all Revenues of P.A. (and all
accounts receivable relating thereto) shall be reported on the income statement
and balance sheet of Service Company during the term of this Agreement;
provided, however, that no assignment shall be made of any such rights or
interests, the assignment of which is prohibited by law (for example, amounts
receivable from Medicare or Medicaid accounts). P.A. hereby issues a standing
instruction, which it shall confirm upon request from time to time, that all
payments due to P.A. shall be remitted directly to Service Company as its agent
and attorney-in-fact hereunder. To the extent that the foregoing assignment of
Revenues shall be ineffective for any reason, P.A. hereby grants a security
interest in all accounts receivable, contract rights, Revenues and general
intangibles of P.A. to Service Company to secure all indebtedness and
obligations of P.A. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.A. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration for the services
provided by Service Company under this Agreement, Service Company shall receive
a service fee (the "Service Fee") in an amount equal to: (i) Service Company
Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax Income or 30% of
Net Revenues.
(c) Application of Net Revenues. Service Company shall apply Net
Revenues as follows:
(i) First, Service Company shall remit to P.A., or cause to
be paid on behalf of P.A., from Net Revenues an amount
equal to the Costs of Dental Services and such other
payments or disbursements as P.A. shall direct Service
Company to make in accordance with this Agreement;
(ii) Second, Service Company shall retain out of Net Revenues
an amount equal to the Service Fee; and
<PAGE> 8
(iii) Third, Service Company shall remit all remaining Net
Revenues to P.A.
(d) Adjustment. The Service Fee shall be payable monthly in arrears
based upon Service Company Costs and P.A.'s Net Revenues in the prior month.
Adjustments to the estimated payments shall be made to reconcile actual amounts
due under Section 5(b) by the end of the following month. The Service Fee shall
be reviewed annually and at such other times as may be deemed appropriate and
adjusted in such manner as the parties may agree; in the absence of such
agreement, the Service Fee then in effect shall continue in effect.
6. General Obligations of P.A. and Service Company. P.A. and Service
Company each agrees to cooperate fully with the other in connection with the
carrying out of their respective obligations under this Agreement and to employ
their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
7. Term. The term of this Agreement shall be for a period of 40 years
from January 1, 1997 and, unless either party shall give notice to the contrary
at least 180 days prior to the thirty-first anniversary of this Agreement or
any anniversary thereafter, the term shall be extended for an additional year
on the thirty-first anniversary and on each anniversary thereafter so that on
each anniversary of this Agreement the remaining term shall always be, unless
such notice is given, ten (10) years.
8. [Omitted].
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its obligations under this
Agreement and, after written notice from the other party demanding that such
failure be cured, the party on whom such notice is served shall fail to cure
such breach within 30 days after such notice or, if such breach will reasonably
require more than 30 days to cure, such party is not diligently pursuing
efforts to cure such breach; provided, however, that if the party on whom such
demand is made elects to submit such dispute to arbitration, no action to
terminate this Agreement can be taken until such arbitration has been finally
adjudicated and then only if the party guilty of such failure shall fail to
comply with the arbitration award within 60 days after its issuance.
(c) If any bankruptcy, insolvency or receivership proceedings are
instituted by or against the P.A. and not dismissed within sixty (60) days
after the commencement of such proceedings or if the P.A. party shall
voluntarily dissolve.
<PAGE> 9
(d) As of any anniversary date of this Agreement, by Service Company
delivering written notice to P.A. of such termination of at least 90 days prior
to such anniversary date.
If this Agreement is terminated for any reason, P.A. shall have the right,
exercisable within sixty days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and shall
not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.A.
Since the dentists who perform services for the P.A. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.A.
11. Confidential Information. Each of P.A. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by the Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.A. acknowledges that the Service Company has a proprietary
interest in such information, that such information constitutes trade secrets
and that P.A. does not, by reason of this Agreement, acquire any continuing
right or interest in such proprietary information or trade secrets. P.A. will
hold such proprietary information and trade secrets in confidence and will not
disclose them, either during the term of this Agreement or thereafter, to any
person or entity other than employees or independent contractors of P.A. or
Service Company without the prior written consent of Service Company or as may
be required by law. Service Company will preserve the confidentiality of all
files and records of P.A. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of the P.A.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.A.
Each of P.A. and Service Company acknowledges that it does not have an
adequate remedy at law for a breach of this Section 11, will suffer irreparable
harm in the event of such breach and that, therefore, the other party shall be
entitled to injunctive and other equitable relief for the enforcement of this
Section 11. The provisions of this Section 11 shall survive termination of
this Agreement.
<PAGE> 10
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by either party
hereto without the express prior written consent of the other; provided,
however, that this Agreement shall be assignable by Service Company to any of
its affiliates or successors without the consent of P.A.
(b) Waiver. Waiver of any agreement or obligation set forth in this
Agreement by either party shall not prevent that party from later insisting
upon full performance of such agreement or obligation and no course of dealing,
partial exercise or any delay or failure on the part of any party hereto in
exercising any right, power, privilege, or remedy under this Agreement or any
related agreement or instrument shall impair or restrict any such right, power,
privilege or remedy or be construed as a waiver therefor. No waiver shall be
valid against any party unless made in writing and signed by the party against
whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions of this
Agreement shall be effective unless made in writing and signed by and on behalf
of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties in connection with the subject matter of this Agreement and
supersedes all prior agreements entered into before the effective date of this
Agreement, amending and restating in its entirety the Management Services
Agreement dated as of January 3, 1997.
(e) Notices. The mailing addresses of Service Company and P.A. for the
purposes of any notices to be given under this Agreement are as follows:
If to Service Company: Arkansas Dental Health Associates, Inc.
301 North Shackleford Road
Little Rock, Arkansas 72211
Attn: President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.A.: Modern Dental Professionals--Beavers, P.A.
301 North Shackleford Road
Little Rock, Arkansas 72211
Attn: President
<PAGE> 11
(f) Binding Effect. Subject to the provisions set forth in this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this Agreement shall be
resolved by arbitration; provided, however, that arbitration shall not apply to
the enforcement of the Service Company's rights under Section 11. Any party
electing to submit an action to arbitration shall give written notice to the
other party of such election. The dispute shall be submitted to arbitration in
accordance with the Rules of the American Arbitration Association. Such
arbitration shall be conducted, unless otherwise agreed by the parties, by a
single arbitrator in Little Rock, Arkansas. The award of the arbitrator can be
confirmed or enforced in any court of competent jurisdiction. The prevailing
party in any arbitration shall be entitled to recover all costs incurred by
such party in connection with such proceedings, including reasonable attorney
fees.
(h) Severability. If any one or more of the provisions of this Agreement
is adjudged to any extent invalid, unenforceable, or contrary to law by a court
of competent jurisdiction, each and all of the remaining provisions of this
Agreement will not be affected thereby and shall be valid and forcible to the
fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by and enforced in
accordance with the laws of the State of Arkansas.
(j) Change in Law. If after the effective date of this Agreement, any
new law, rule or regulation becomes effective which renders illegal the
structure of the relationship between P.A. and the Service Company set forth in
this Agreement, or otherwise substantially impairs the economics of the parties
hereunder, this Agreement shall not terminate, but the parties hereto agree to
exclusively negotiate with each other in good faith for a period of six months
following such change of law or circumstance with respect to the subject matter
hereof. To the maximum extent possible, any amendment hereto shall preserve the
underlying economic and financial arrangements between P.A. and the Service
Company.
IN WITNESS WHEREOF, the parties have signed this Agreement and agreed that
it shall be deemed effective as of January 1, 1997.
SERVICE COMPANY: P.A.:
ARKANSAS DENTAL HEALTH MODERN DENTAL PROFESSIONALS--
ASSOCIATES, INC. BEAVERS, P.A.
By: /s/ GARY W. CAGE By: /s/ SAM L. BEAVERS
------------------------------ ----------------------------
Name: Gary W. Cage Name: Sam L. Beavers, D.D.S.
Title: Vice President Title: President
<PAGE> 12
EXHIBIT A
Locations of Dental Centers
301 North Shackleford Road
Little Rock, AR 72211
8505 Geyer Springs Road
Little Rock, AR
4724 Camp Robinson Road
North Little Rock, AR
<PAGE> 1
EXHIBIT 10.11
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made by and
between MODERN DENTAL PROFESSIONALS/UDC-- GIRLINGHOUSE, P.A., a professional
corporation organized and existing under the laws of the State of Arkansas
("P.A."), and UNITED DENTAL CARE, INC., a corporation organized and existing
under the laws of the State of Arkansas ("Service Company").
RECITALS
A. P.A. is engaged in the practice of dentistry through dentists
licensed by the Arkansas State Board of Dental Examiners and who are employed
by P.A. or who have entered into independent contractor agreements with P.A. to
provide services to patients of P.A. and conducts such practice at dental
centers located in the State of Arkansas (the "Dental Centers").
B. Service Company has been organized for the purpose of
providing comprehensive management and related administrative services to
dental practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.A.
C. P.A., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Arkansas Dental Practice Act and the
Regulations of the Arkansas State Board of Dental Examiners adopted pursuant
thereto.
(b) "Cost of Dental Services" means: the aggregate
compensation of dentists who are employed by or who are independent contractors
with P.A. at the Dental Centers and other personnel who must be employed by the
P.A. under applicable law including dental hygienists ("Support Personnel")
together with the cost of expenses, taxes and benefits of such dentists and
Support Personnel including, but not limited to, vacation pay, sick pay, health
care expenses, professional dues, expense reimbursement, discretionary bonuses
or incentive payments, if any, based on profitability or productivity and other
expenses and payments required to be made to or for the benefit of the dentists
or the Support Personnel pursuant to their employment agreements or independent
contractor agreements or
<PAGE> 2
otherwise plus P.A.'s portion of all employment and payroll taxes; other
expenses incurred by P.A. in carrying out its obligations under this Agreement;
and the costs of malpractice insurance, in each case on an accrual basis.
(c) "Dental Board" means the Arkansas State Board of
Dental Examiners established under the Act.
(d) "Dental Center" means the facility or facilities
operated by P.A. and at which Dental Services are, or in the future may be,
rendered by P.A. identified on Exhibit A hereto, as amended, supplemented or
modified from time to time.
(e) "Dental Services" means all services rendered by P.A.
which constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the
total of Service Company Costs and the Cost of Dental Services, but without
regard for the provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or
billing adjustments.
(h) "Non-Dental Personnel" means all personnel including,
but not limited to, accountants, bookkeepers and receptionists who perform
services which do not constitute the practice of dentistry or who are not
required by applicable law to be employees of P.A.
(i) "Revenues" means all amounts on an accrual basis
which P.A. receives or becomes entitled to receive for any services or sales of
products or otherwise, including, without limitation, for the performance of
Dental Services for its patients by dentists or Support Personnel who are
employees or independent contractors of P.A. or for the sale of products
including pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by
Service Company, including indirect overhead and other expenses attributable to
the carrying out of its obligations under this Agreement, in each case on an
accrual basis.
(k) "Support Personnel" shall have the meaning specified
in the definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this
Agreement and all renewals and extensions thereof, P.A. engages Service Company
to provide sole and exclusive development, management and administrative
services with respect to all non-dental functions relating to the operation of
the Dental Centers, and Service Company agrees to furnish to P.A. all of the
non-dental development, management and administrative services needed by P.A.
in connection with the operation of the Dental Centers. Pursuant to its
engagement hereunder,
<PAGE> 3
Service Company shall control all aspects of P.A.'s business other than those
aspects which relate to the provision of dental services, as contemplated by
Section 4.
3. Services. The non-dental development, management and
administrative services to be provided by Service Company shall include the
following:
(a) Bookkeeping and Accounts. Service Company shall
provide all bookkeeping and accounting services necessary or appropriate to the
functioning of the Dental Centers including, but not limited to, maintenance,
custody and supervision of all business records, ledgers, journals and reports,
and the preparation, distribution and recordation of all bills and statements
for professional services rendered by P.A. including the billing and completion
of reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists.
(b) Billing; Collections. Service Company shall be
responsible, for and on behalf of P.A., as its agent, for billing and
collecting the charges made with respect to all Dental Services provided by
P.A. at the Dental Centers. The extent to which Service Company attempts to
collect such charges, the methods of collection and the amount of settlements
with respect to disputed charges, and the determination of which charges are
not collectible, shall be within the sole discretion of the Service Company;
provided that Service Company will comply with all applicable law, including
without limitation, the Federal Fair Debt Collection Practice Act.
(c) Non-Dental Personnel. Service Company shall, in its
sole discretion but following consultation with P.A., select for employment and
terminate the employment of all Non-Dental Personnel as Service Company shall
deem necessary or advisable, and shall be responsible for the supervision,
direction, training and assigning of duties of all Non-Dental Personnel, with
the exception of activities carried on by Non-Dental Personnel which must be
under the direction or supervision of licensed dentists in accordance with
applicable law and regulations. Unless otherwise specifically agreed in
writing, all Non-Dental Personnel shall be employees or independent contractors
employed or engaged by Service Company, and the selection and terms of
employment or engagement, including the rates of compensation, supervision,
direction, training and assignment of duties of all Non-Dental Personnel shall
be determined and controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall, in
consultation with P.A., establish guidelines for the selection, hiring and
firing of dentists and Support Personnel by P.A. and shall recruit and evaluate
prospective dentists and Support Personnel as employees or independent
contractors of P.A., provided that all dentists and Support Personnel shall be
employees of or independent contractors to P.A.
<PAGE> 4
(e) Marketing and Advertising Programs. Service Company
shall: develop marketing and advertising programs for P.A.; provide advice and
assistance to P.A. on overall marketing programs, and determine and analyze the
effect of such programs; plan, create, write and prepare advertising materials;
negotiate contracts with advertising media for space and time; and obtain
services necessary in connection with the production and presentation of
advertisements.
(f) Insurance. Service Company shall, in its sole
discretion but following consultation with P.A., make reasonable efforts to
obtain and maintain in full force and effect during the term of this Agreement,
and all extensions and renewals thereof, public liability and property
insurance which Service Company deems appropriate to protect against loss,
claims, and other risks, or which is necessary to comply with the terms of
lease agreements for the Dental Centers, and Service Company shall assist P.A.
and the dentists in obtaining professional liability insurance.
(g) Supplies. Service Company shall acquire and supply to
P.A. all dental and non-Dental supplies which may be reasonably required in
connection with the operation of the Dental Centers.
(h) Negotiation; Plans. Service Company shall carry on
and be responsible for all negotiations, in consultation with P.A., with
managed care plans, preferred provider plans, insurers and other third party
payors relating to the provision of services by P.A. Service Company shall
develop, negotiate, market and administer prepaid managed and other health
plans for the providing of dental care and shall obtain licensure as a third
party administrator, and any other appropriate licenses, registrations or
certificates, if and to the extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is
authorized to establish and maintain for and on behalf of P.A. bank accounts
for the collection and disbursement of P.A.'s funds. Service Company is
authorized to disburse funds from such accounts for the payment of costs
incurred by or on behalf of P.A. in accordance with this Agreement, for Service
Company's compensation, and for all other costs, expenses, and disbursements
which are incurred in connection with this Agreement. Service Company shall
manage all cash and cash equivalents of P.A.
(j) Tax Returns, Reports. Service Company shall be
responsible for preparing and filing all tax returns and reports required or
necessary in connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide
P.A. with overall supervision and management, including maintenance and repair,
of the Dental Centers and all furniture, fixtures, furnishings, equipment, and
leasehold improvements located in or used at the Dental Centers.
<PAGE> 5
(l) Equipment and Furnishings. Service Company shall
provide and maintain, either directly or through appropriate lease agreements,
all necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide
planning and studies to determine the location of new Dental Centers (including
acquired Dental Centers), provide designs for such new Dental Centers, obtain
leases for the space for Dental Centers, and do all things necessary in
connection with equipping of such new Dental Centers for operation, and shall
make such space available to P.A. Service Company shall amend, modify or
supplement Exhibit A to this Agreement in connection with the establishment of
new Dental Centers, as appropriate.
(n) Financial Statements and Budgets. Service Company
shall prepare monthly and annual financial statements containing a balance
sheet and statement of income for P.A. Annual financial statements shall be
delivered to P.A. within 90 days after the end of each fiscal year and monthly
financial statements shall be delivered to P.A. within 30 days after the end of
each calendar month. Service Company shall prepare, in reasonable detail, an
annual operating and capital budgets for P.A. which shall be delivered to P.A.
within 30 days after the end of each fiscal year, with Service Company
retaining final authority with respect to budgeting including without
limitation as to compensation and payments to employees and independent
contractors.
(o) Litigation Management. Service Company will (i)
manage and direct the defense of all claims, actions, proceedings, or
investigations against P.A. or any of its officers, directors or employees in
their capacity as such, and (ii) manage and direct the initiation and
prosecution of all claims, actions, proceedings or investigations brought by
P.A. against any person other than the Service Company.
(p) Access. Service Company shall grant access to its
facilities to all employees and independent contractors of P.A. for the purpose
of performing Dental Services in connection with the business of the Dental
Centers.
(q) Business Operations. Service Company shall generally
control and manage all aspects of business of the Dental Centers other than
those aspects relating to the provision of Dental Services which under
applicable law are required to be subject to the control of P.A., as
contemplated by Section 4.
<PAGE> 6
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.A. shall be solely and
exclusively in control of all clinical aspects of the practice of dentistry and
the delivery of Dental Services at the Dental Centers, including the exercise
of independent professional judgment regarding the diagnosis or treatment of
any dental disease, disorder or physical condition (which Service Company shall
not control, attempt to control, influence, attempt to influence or otherwise
interfere with), and P.A. shall be responsible for providing all Dental
Services and for the payment of all Costs of Dental Services. All persons to
whom such Dental Services are provided shall be patients of P.A. and not of
Service Company, and Service Company shall not have or exercise any control or
direction over the manner or methods with which Dental Services and related
duties are performed or interfere in any way with the exercise by the dentists
who are employees or independent contractors of P.A. of their professional
judgment. P.A. shall be solely responsible for assuring that all dentists who
are employed or who are independent contractors of P.A. hold all necessary
licenses from the State of Arkansas and that such licenses are current and in
good standing, and that such professional services are performed in accordance
with the applicable ethical standards, laws and regulations relating to
professional practice in the State of Arkansas. P.A. shall take all actions
necessary to maintain its status as a professional corporation including
provision for succession so that the outstanding shares of P.A. are owned at
all times by a person licensed to practice dentistry in the State of Arkansas.
(b) Patient Referrals. It is not a purpose of this
Agreement to induce or encourage the referral of patients. The parties agree
that the benefits to P.A. and Service Company do not require, are not payment
or inducement for, and are not in any way contingent upon the admission,
referral or any other arrangement for the provisions of any item or service
offered by Service Company to any of P.A.'s patients or for the referral of any
patient.
(c) Noncompetition. P.A. hereby irrevocably appoints
Service Company as its agent and attorney in fact during the term of this
Agreement with full power and authority to enforce the terms of any employment
or independent contractor agreements to which it is a party and any
noncompetition, confidentiality and similar covenants or restrictions
(collectively, "Non-competition Agreements") of which it is the beneficiary.
During the term of this Agreement, P.A. shall not establish, operate or provide
dental services at any dental office, clinic or other health care facility
providing services substantially similar to those provided by P.A. pursuant to
this Agreement anywhere within 100 miles of any facility operated by Service
Company. The provisions of this Section 4(c) shall not in any way limit or
otherwise affect the terms and provisions of the Non-Competition Agreement
dated as of November 7, 1996 by and among Monarch Dental Corporation, Ronald K.
Girlinghouse, D.D.S. and the other parties identified on the signature pages
thereto (the "Girlinghouse Non-Competition Agreement"). To the extent of any
conflict between the provisions of this Section 4(c) and the provisions of the
Girlinghouse Non-Competition Agreement, the provisions of the Girlinghouse Non-
Competition Agreement shall control.
<PAGE> 7
(d) Attorney-in-Fact. P.A. hereby appoints Service
Company for the term of this Agreement to be its true and lawful
attorney-in-fact for all purposes relating to or arising in connection with the
provisions by Service Company of the comprehensive management and related
administrative services as provided in this Agreement, including without
limitation the provisions of Section 3(b) and Section 3(i). This power of
attorney and the power of attorney granted under Section 4(c) are coupled with
an interest and shall be irrevocable and remain in effect for the term of this
Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.A. assigns to
Service Company all of P.A.'s right and interests in all Revenues such that all
Revenues shall be paid to and collected by Service Company and all Revenues of
P.A. (and all accounts receivable relating thereto) shall be reported on the
income statement and balance sheet of Service Company during the term of this
Agreement; provided, however, that no assignment shall be made of any such
rights or interests, the assignment of which is prohibited by law (for example,
amounts receivable from Medicare or Medicaid accounts). P.A. hereby issues a
standing instruction, which it shall confirm upon request from time to time,
that all payments due to P.A. shall be remitted directly to Service Company as
its agent and attorney-in-fact hereunder. To the extent that the foregoing
assignment of Revenues shall be ineffective for any reason, P.A. hereby grants
a security interest in all accounts receivable, contract rights, Revenues and
general intangibles of P.A. to Service Company to secure all indebtedness and
obligations of P.A. to Service Company arising under or in connection with this
Agreement. At the request of Service Company, P.A. shall execute all documents
and instruments necessary to evidence and perfect the foregoing security
interest.
(b) Compensation of Service Company. As consideration for
the services provided by Service Company under this Agreement, Service Company
shall receive a service fee (the "Service Fee") in an amount equal to: (i)
Service Company Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax
Income or 30% of Net Revenues.
(c) Application of Net Revenues. Service Company shall
apply Net Revenues as follows:
(i) First, Service Company shall remit to P.A.,
or cause to be paid on behalf of P.A., from
Net Revenues an amount equal to the Costs of
Dental Services and such other payments or
disbursements as P.A. shall direct Service
Company to make in accordance with this
Agreement;
(ii) Second, Service Company shall retain out of
Net Revenues an amount equal to the Service
Fee; and
<PAGE> 8
(iii) Third, Service Company shall remit all
remaining Net Revenues to P.A.
(d) Adjustment. The Service Fee shall be payable monthly
in arrears based upon Service Company Costs and P.A.'s Net Revenues in the
prior month. Adjustments to the estimated payments shall be made to reconcile
actual amounts due under Section 5(b) by the end of the following month. The
Service Fee shall be reviewed annually and at such other times as may be deemed
appropriate and adjusted in such manner as the parties may agree; in the
absence of such agreement, the Service Fee then in effect shall continue in
effect.
6. General Obligations of P.A. and Service Company. P.A. and
Service Company each agrees to cooperate fully with the other in connection
with the carrying out of their respective obligations under this Agreement and
to employ their best efforts to resolve any dispute which may arise under or in
connection with the carrying out of this Agreement.
7. Term. The term of this Agreement shall be for a period of 40
years from March 31, 1997 and, unless either party shall give notice to the
contrary at least 180 days prior to the thirty-first anniversary of this
Agreement or any anniversary thereafter, the term shall be extended for an
additional year on the thirty-first anniversary and on each anniversary
thereafter so that at each anniversary of this Agreement the remaining term
shall always be, unless notice is given, ten (10) years.
8. [Omitted].
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its
obligations under this Agreement and, after written notice from the other party
demanding that such failure be cured, the party on whom such notice is served
shall fail to cure such breach within 30 days after such notice or, if such
breach will reasonably require more than 30 days to cure, such party is not
diligently pursuing efforts to cure such breach; provided, however, that if the
party on whom such demand is made elects to submit such dispute to arbitration,
no action to terminate this Agreement can be taken until such arbitration has
been finally adjudicated and then only if the party guilty of such failure
shall fail to comply with the arbitration award within 60 days after its
issuance.
(c) If any bankruptcy, insolvency or receivership
proceedings are instituted by or against the P.A. and not dismissed within
sixty (60) days after the commencement of such proceedings or if the P.A. party
shall voluntarily dissolve.
<PAGE> 9
(d) As of any anniversary date of this Agreement, by
Service Company delivering written notice to P.A. of such termination of at
least 90 days prior to such anniversary date.
If this Agreement is terminated for any reason, P.A. shall have the
right, exercisable within sixty days after the date of termination, to purchase
equipment and furnishings provided by Service Company at the Dental Centers for
a purchase price equal to the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and
shall not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.A.
Since the dentists who perform services for the P.A. are not employees or
independent contractors of Service Company, Service Company shall not withhold
on their behalf any amounts for income tax, social security, unemployment
compensation, workers compensation or other similar withholding provisions and
all such withholding shall be the obligation of P.A.
11. Confidential Information. Each of P.A. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by the Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.A. acknowledges that the Service Company has a proprietary
interest in such information, that such information constitutes trade secrets
and that P.A. does not, by reason of this Agreement, acquire any continuing
right or interest in such proprietary information or trade secrets. P.A. will
hold such proprietary information and trade secrets in confidence and will not
disclose them, either during the term of this Agreement or thereafter, to any
person or entity other than employees or independent contractors of P.A. or
Service Company without the prior written consent of Service Company or as may
be required by law. Service Company will preserve the confidentiality of all
files and records of P.A. including patient records and comply with all
federal, state and local laws, rules and regulations relating to the
confidentiality of the P.A.'s files and records (including patient records).
Service Company will use the information in such records only for the limited
purposes necessary to perform the services of Service Company set forth herein
(including billing and collections) and shall not use patient names, addresses
or any other patient information for marketing or any other purpose except as
expressly permitted by this Agreement without the prior written consent of P.A.
Each of P.A. and Service Company acknowledges that it does not have an adequate
remedy at law for a breach of this Section 11, will suffer irreparable harm in
the event of such breach and that, therefore, the other party shall be entitled
to injunctive and other equitable relief for the enforcement of this Section
11. The provisions of this Section 11 shall survive termination of this
Agreement.
<PAGE> 10
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by
either party hereto without the express prior written consent of the other;
provided, however, that this Agreement shall be assignable by Service Company
to any of its affiliates or successors without the consent of P.A.
(b) Waiver. Waiver of any agreement or obligation set
forth in this Agreement by either party shall not prevent that party from later
insisting upon full performance of such agreement or obligation and no course
of dealing, partial exercise or any delay or failure on the part of any party
hereto in exercising any right, power, privilege, or remedy under this
Agreement or any related agreement or instrument shall impair or restrict any
such right, power, privilege or remedy or be construed as a waiver therefor. No
waiver shall be valid against any party unless made in writing and signed by
the party against whom enforcement of such waiver is sought.
(c) Amendment. No amendment or change in the provisions
of this Agreement shall be effective unless made in writing and signed by and
on behalf of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the
entire agreement between the parties in connection with the subject matter of
this Agreement and supersedes all prior agreements entered into before the
effective date of this Agreement, amending and restating in its entirety the
Management Services Agreement dated as of March 31, 1997.
(e) Notices. The mailing addresses of Service Company and
P.A. for the purposes of any notices to be given under this Agreement are as
follows:
If to Service Company: United Dental Care, Inc.
4700 West Commercial
North Little Rock, Arkansas 72216
Attn: President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.A.: Modern Dental Professionals/UDC--
Girlinghouse, P.A.
5704 South 14th Street
Fort Smith, Arkansas 72901
Attn: President
<PAGE> 11
] (f) Binding Effect. Subject to the provisions set forth
in this Agreement, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this
Agreement shall be resolved by arbitration; provided, however, that arbitration
shall not apply to the enforcement of the Service Company's rights under
Section 11. Any party electing to submit an action to arbitration shall give
written notice to the other party of such election. The dispute shall be
submitted to arbitration in accordance with the Rules of the American
Arbitration Association. Such arbitration shall be conducted, unless otherwise
agreed by the parties, by a single arbitrator in Little Rock, Arkansas. The
award of the arbitrator can be confirmed or enforced in any court of competent
jurisdiction. The prevailing party in any arbitration shall be entitled to
recover all costs incurred by such party in connection with such proceedings,
including reasonable attorney fees.
(h) Severability. If any one or more of the provisions of
this Agreement is adjudged to any extent invalid, unenforceable, or contrary to
law by a court of competent jurisdiction, each and all of the remaining
provisions of this Agreement will not be affected thereby and shall be valid
and forcible to the fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by
and enforced in accordance with the laws of the State of Arkansas.
(j) Change in Law. If after the effective date of this
Agreement, any new law, rule or regulation becomes effective which renders
illegal the structure of the relationship between P.A. and the Service Company
set forth in this Agreement, or otherwise substantially impairs the economics
of the parties hereunder, this Agreement shall not terminate, but the parties
hereto agree to exclusively negotiate with each other in good faith for a
period of six months following such change of law or circumstance with respect
to the subject matter hereof. To the maximum extent possible, any amendment
hereto shall preserve the underlying economic and financial arrangements
between P.A. and the Service Company.
IN WITNESS WHEREOF, the parties have signed this Agreement and agreed
that it shall be deemed effective as of March 31, 1997.
SERVICE COMPANY: P.A.:
UNITED DENTAL CARE, INC. MODERN DENTAL PROFESSIONALS/UDC--
GIRLINGHOUSE, P.A.
By: /s/ Gary W. Cage By: /s/ Ronald K. Girlinghouse
------------------------- ---------------------------------
Name: Gary W. Cage Name: Ronald K. Girlinghouse, D.D.S.
Title: Vice President Title: President
<PAGE> 12
EXHIBIT A
Locations of Dental Centers
5704 South 14th Street
Fort Smith, AR 72901
<PAGE> 1
EXHIBIT 10.12
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made as of
March 31, 1997 by and between William T. ("Tom") Harris and Associates a
Professional Dental Corporation, a professional dental corporation organized and
existing under the laws of the State of Louisiana ("P.A."), and United Dental
Care, Inc., a corporation organized and existing under the laws of the State of
Arkansas ("Service Company").
RECITALS
A. P.A. is engaged in the practice of dentistry through dentists licensed
by the Louisiana State Board of Dentistry and who are employed by P.A. or who
have entered into independent contractor agreements with P.A. to provide
services to patients of P.A. and conducts such practice at Dental Centers
located in the State of Louisiana.
B. Service Company is organized for the purpose of providing
comprehensive management and related administrative services to dental
practices and has developed extensive expertise and experience in the
operation, management and marketing of the non-dental aspects of dental centers
of the type operated by P.A.
C. P.A., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide, comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Louisiana Dental Practice Law and the Regulations of
the Louisiana State Board of Dentistry adopted pursuant thereto.
(b) "Cost of Dental Services" means: the aggregate compensation of
dentists who are employed by or who are independent contractors with P.A. at
the Dental Centers and other licensed personnel who must be employed by the
P.A. under applicable law ("Support Personnel") together with the cost of
expenses, taxes and benefits of such dentists and Support Personnel including,
but not limited to, vacation pay, sick pay, health care expenses, professional
dues, expense reimbursement, discretionary bonuses or incentive payments, if
any, based on profitability or productivity and other expenses and payments
required to be made to or for the benefit of the dentists or the Support
Personnel pursuant to their
<PAGE> 2
employment agreements or independent contractor agreements or plus P.A.'s
portion of all employment and payroll taxes; other expenses incurred by P.A. in
carrying out its obligations under this Agreement; the costs of malpractice
insurance; and costs which are paid to Service Company under leases for
premises (including without limitation under Section 8 of this Agreement) or
personal property or under licenses.
(c) "Dental Board" means the Louisiana State Board of Dentistry
established under the Act.
(d) "Dental Center" means the facility or facilities operated by P.A.
and at which Dental Services are, or in the future may be, rendered by P.A.
identified on Exhibit A hereto, as amended, supplemented or modified from time
to time.
(e) "Dental Services" means all services rendered by P.A. which
constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the total of Service
Company Costs and the Cost of Dental Services, but without regard for the
provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or billing
adjustments.
(h) "Non-Dental Personnel" means all personnel including, but not
limited to, accountants, bookkeepers and receptionists who perform services
which do not constitute the practice of dentistry or who are not required by
applicable law to be employees of P.A.
(i) "Revenues" means all amounts which P.A. receives or becomes
entitled to receive for any services or sales of products or otherwise,
including, without limitation, for the performance of Dental Services for its
patients by dentists or Support Personnel who are employees or independent
contractors of P.A. or for the sale of products including pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by Service Company,
including indirect overhead and other expenses attributable to the carrying out
of its obligations under this Agreement, but excludes costs which are
reimbursed to Service Company under leases for premises or personal property or
licenses.
(k) "Support Personnel" shall have the meaning specified in the
definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this Agreement and
all renewals and extensions thereof, P.A. engages Service Company to provide
sole and exclusive development, management and administrative services with
respect to all non-dental functions relating to the operation of the Dental
Centers,
2
<PAGE> 3
and Service Company agrees to furnish to P.A. all of the non-dental
development, management and administrative services needed by P.A. in
connection with the operation of the Dental Centers.
3. Services. The non-dental development, management, and administrative
services to be provided by Service Company shall include the following:
(a) Bookkeeping and Accounts. Service Company shall provide all
bookkeeping and accounting services necessary or appropriate to the functioning
of the Dental Centers including, but not limited to, maintenance, custody, and
supervision of all business records, ledgers, journals and reports, and the
preparation, distribution, and recordation of all bills and statements for
professional services rendered by P.A. including the billing and completion of
reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies, or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists and, provided further, that all such
Business Records shall remain the property of P.A.
(b) Billing; Collections. Service Company shall be responsible, for and
on behalf of P.A., as its agent, for billing and collecting the charges made
with respect to all Dental Services provided by P.A. at the Dental Centers
unless otherwise agreed in writing. The extent to which Service Company
attempts to collect such charges, the methods of collection and the amount of
settlements with respect to disputed charges, and the determination of which
charges are not collectible, shall be within the sole discretion of the Service
Company; provided that (i) Service Company will comply with all applicable law,
including without limitation, the Federal Fair Debt Collection Practice Act,
and (ii) Service Company will not commence any legal action or settle or
compromise any legal action without P.A.'s approval, which shall not be
unreasonably withheld.
(c) Non-Dental Personnel. Service Company shall, following consultation
with P.A., select for employment and terminate the employment of all Non-Dental
Personnel as Service Company shall deem necessary or advisable, and shall be
responsible for the supervision, direction, training and assigning of duties of
all Non-Dental Personnel, with the exception of activities carried on by
Non-Dental Personnel which must be under the direction or supervision of
licensed dentists in accordance with applicable law and regulations. Unless
otherwise specifically agreed in writing, all Non-Dental Personnel shall be
employees or independent contractors employed or engaged by Service Company,
and the selection and terms of employment or engagement, including the rates of
compensation, supervision, direction, training and assignment of duties of all
Non-Dental Personnel shall be determined and controlled exclusively by Service
Company.
3
<PAGE> 4
(d) Dental Personnel. Service Company shall provide assistance to P.A.
in recruiting and evaluating prospective dentists and Support Personnel as
employees or independent contractors of P.A.
(e) Marketing and Advertising Programs. Service Company shall: develop
marketing and advertising programs for P.A.; provide advice and assistance to
P.A. on overall marketing programs, and determine and analyze the effect of
such programs; plan, create, write, and prepare advertising materials; negotiate
contracts with advertising media for space and time; and obtain services
necessary in connection with the production and presentation of advertisements.
(f) Insurance. Service Company shall, following consultation with P.A.,
make reasonable efforts to obtain and maintain in full force and effect during
the term of this Agreement, and all extensions and renewals thereof, public
liability and property insurance which Service Company deems appropriate to
protect against loss, claims, and other risks, or which is necessary to comply
with the terms of lease agreements for the Dental Centers, and Service Company
shall assist P.A. and the dentists in obtaining professional liability
insurance.
(g) Supplies. Service Company shall acquire and supply to P.A. all dental
and non-dental supplies which may be reasonably required in connection with the
operation of the Dental Centers.
(h) Health Plans. Service Company shall provide assistance to P.A.
in developing, negotiating, marketing, and administering prepaid managed and
other health plans for the providing of dental care and shall obtain licensure
as a third-party administrator, and any other appropriate licenses,
registrations or certificates, if and to the extent required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is authorized to
establish and maintain for and on behalf of P.A. bank accounts for the
collection and disbursement of P.A.'s funds. Service Company is authorized to
disburse funds from such accounts for the payment of costs incurred by or on
behalf of P.A. in accordance with this Agreement, for Service Company's
compensation, and for all other costs, expenses, and disbursements which are
incurred in connection with this Agreement. Service Company shall manage all
cash and cash equivalents of P.A.
(j) Tax Returns, Reports. Service Company shall be responsible for
preparing and filing all tax returns and reports required or necessary in
connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide P.A. with overall
supervision and management, including maintenance and repair, of the Dental
Centers and all furniture, fixtures, furnishings, equipment, and leasehold
improvements located in or used at the Dental Centers.
4
<PAGE> 5
(l) Equipment and Furnishings. Service Company shall provide and
maintain, either directly or through appropriate lease agreements, all
necessary equipment and furnishings for the Dental Centers.
(m) New Dental Centers. Service Company shall provide planning and
studies to determine the location of new Dental Centers, provide designs for
such new Dental Centers, obtain leases for the space for Dental Centers, and do
all things necessary in connection with equipping of such new Dental Centers for
operation, and shall make such space available to P.A. pursuant to appropriate
subleases, or other documents or agreements, all in such forms as may be
required by Service Company and/or its lessor. Service Company shall amend,
modify or supplement Exhibit A to this Agreement in connection with the
establishment of new Dental Centers, as appropriate.
(n) Financial Statements and Budgets. Service Company shall prepare
monthly and annual financial statements containing a balance sheet and
statement of income for P.A. Annual financial statements shall be delivered to
P.A. within 90 days after the end of each fiscal year and monthly financial
statements shall be delivered to P.A. within 30 days after the end of each
calendar month. Service Company shall prepare, in reasonable detail, an annual
budget for P.A. which shall be delivered to P.A. within 30 days after the end of
each fiscal year.
(o) Litigation Management. Subject to the provisions of Section 3(b)(ii),
Service Company will (i) manage and direct the defense of all claims, actions,
proceedings or investigations against P.A. or any of its officers, directors or
employees in their capacity as such, and (ii) manage and direct the initiation
and prosecution of all claims, actions, proceedings or investigations brought by
P.A. against any person other than the Service Company.
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.A. shall be solely and exclusively in
control of all clinical aspects of the practice of dentistry and the delivery
of Dental Services at the Dental Centers and P.A. shall be responsible for
providing all Dental Services and for the payment of all Costs of Dental
Services. P.A. shall be solely and exclusively in control of the operation of
the Dental Centers and any other office or place of business where dental
services are provided by P.A. All persons to whom such Dental Services are
provided shall be patients of P.A. and not of Service Company, and Service
Company shall not have or exercise any control or direction over the manner or
methods with which Dental Services and related duties are performed or
interfere in any way with the exercise by the dentists who are employees or
independent contractors of P.A. of their professional judgment. Nothing in this
Agreement shall be deemed to alter, change or abridge the relationship between
P.A. dentists and P.A. patients. P.A. shall be solely responsible for assuring
that all dentists who are employed or who are independent contractors of P.A.
hold all necessary licenses from the State of Louisiana and any other
jurisdictions in
5
<PAGE> 6
which the P.A. does business, that such licenses are current
and in good standing, and that such professional services are performed in
accordance with the applicable ethical standards, laws and regulations relating
to professional practice in the State of Louisiana. P.A. shall take all actions
necessary to maintain its status as a professional corporation including
provision for succession so that the outstanding shares of P.A. are owned at
all times by a person licensed to practice dentistry in the State of Louisiana.
(b) Patient Referrals. It is not a purpose of this Agreement to induce
or encourage the referral of patients. The parties agree that the benefits to
P.A. and Service Company do not require, are not payment or inducement for, and
are not in any way contingent upon the admission, referral or any other
arrangement for the provisions of any item or service offered by Service
Company to any of P.A.'s patients or for the referral of any patient.
(c) Noncompetition. P.A. shall enforce the terms of any employment or
independent contractor agreements to which it is a party and any
noncompetition, confidentiality and similar covenants or restrictions
("Non-competition Agreements") of which it is the beneficiary, except to the
extent that such Non-competition Agreements are unenforceable under applicable
law. During the term of this Agreement, P.A. shall not establish, operate or
provide dental services at any dental office, clinic or other health care
facility providing services substantially similar to those provided by P.A.
pursuant to this Agreement anywhere within 100 miles of any facility operated
by Service Company. The provisions of this Section 4(c) shall not in any way
limit or otherwise affect the terms and provisions of the Non-Competition
Agreement dated as of March 31, 1997 by and between Service Company and William
Thomas Harris, III, D.D.S. (the "Harris Non-Competition Agreement"). To the
extent of any conflict between the provisions of this Section 4(c) and the
provisions of the Harris Non-Competition Agreement, the provisions of the
Harris Non-Competition Agreement shall control.
(d) Attorney-in-Fact. P.A. hereby appoints Service Company for the term
of this Agreement to be its true and lawful attorney-in-fact for all purposes
relating to or arising in connection with the provisions by Service Company of
the comprehensive management and related administrative services as provided in
this Agreement, including without limitation the provisions of Section 3(b) and
Section 3(i). This power of attorney is coupled with an interest and shall be
irrevocable and remain in effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.A. assigns to Service Company all
of P.A.'s right and interests in all Revenues; provided, however, that no
assignment shall be made of any such rights or interests, the assignment of
which is prohibited by law (for example, amounts receivable from Medicare or
Medicaid accounts). To the extent that the foregoing assignment of Revenues
shall be
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ineffective for any reason, P.A. hereby grants a security interest in
all accounts receivable, contract rights, Revenues and general intangibles of
P.A. to Service Company to secure all indebtedness and obligations of P.A. to
Service Company arising under or in connection with this Agreement. At the
request of Service Company, P.A. shall execute all documents and instruments
necessary to evidence and perfect the foregoing security interest.
(b) Compensation of Service Company. As consideration for the services
provided by Service Company under this Agreement, Service Company shall receive
a service fee (the "Service Fee") in an amount equal to: (i) Service Company
Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax Income or 30% of
Net Revenues.
(c) Application of Net Revenues. Service Company shall apply Net
Revenues as follows:
(i) First, Service Company shall remit to P.A., or cause to be paid
on behalf of P.A., from Net Revenues an amount equal to the
Costs of Dental Services and such other payments or
disbursements as P.A. shall direct Service Company to make in
accordance with this Agreement;
(ii) Second, Service Company shall retain out of Net Revenues an
amount equal to the Service Fee; and
(iii) Third, Service Company shall remit all remaining Net Revenues
to P.A.
(d) Adjustment. The Service Fee shall be payable monthly in arrears based
upon Service Company Costs and P.A.'s Net Revenues in the prior month.
Adjustments to the estimated payments shall be made to reconcile actual amounts
due under Section 5(b) by the end of the following month. The Service Fee shall
be reviewed annually and at such other times as may be deemed appropriate and
adjusted in such manner as the parties may agree; in the absence of such
agreement, the Service Fee then in effect shall continue in effect.
6. Advisory Board and General Obligations of P.A. and Service Company.
(a) Advisory Board. P.A. and Service Company shall establish an
Advisory Board which shall provide advice to the Service Company concerning the
management and administrative policies for the overall operation of the Dental
Centers. The Advisory Board shall consist of four (4) members. The Service
Company shall designate, in its sole discretion, two (2) members of the
Advisory Board. P.A. shall designate, in its sole discretion, two (2) members
of the Advisory Board. Except as may otherwise be provided, the advice of a
majority of the members of the Advisory Board shall be the advice of the
Advisory Board.
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(b) General Obligations. P.A. and Service Company each agrees to
cooperate fully with the other in connection with the carrying out of their
respective obligations under this Agreement and to employ their best efforts to
resolve any dispute which may arise under or in connection with the carrying out
of this Agreement.
7. Term. The term of this Agreement shall be for a period of 9 months
from March 31, 1997 through December 31, 1997.
8. Subleases.
(a) Service Company hereby subleases (collectively, the "Subleases") to
P.A., for the purpose of conducting and operating a Dental Center, the "Demised
Premises," as described in each of the Leases listed on Exhibit B attached
hereto and incorporated herein by reference (collectively, the "Leases"). Each
such Sublease shall be subject to and upon the terms, provisions and conditions
of the Lease to which it applies. Service Company and P.A. hereby agree, from
time to time upon request of Service Company, to enter into separate
confirmatory Sublease Agreements confirming each of the Subleases.
(b) The initial term of such Subleases shall begin (unless otherwise
indicated) on the date hereof and continue until the earlier to occur of (a)
the expiration or earlier termination of the Lease to which it applies, or (b)
the expiration or earlier termination of this Agreement. If Service Company
extends the term of the Leases, P.A. shall, at the request of Service Company,
extend the Subleases for such additional period.
(c) P.A. shall pay to Service Company as rent an amount equal to the rent
being paid by Service Company to landlord under the Leases.
(d) P.A. covenants that it will be bound by and will perform and comply
with all the obligations of tenant under the Leases, all of which are
incorporated herein by reference, and agrees that whenever appropriate, the
term "tenant" shall be deemed to refer to P.A. to the same extent as if P.A.
were a party to the Leases; provided, however, that P.A. shall have no rights
against landlord under the Leases and shall have only such rights against
Service Company as are set forth in this Agreement.
(e) Without limiting the foregoing provisions, P.A. shall not have any
right or obligation to enter into agreements directly with landlord; shall not
have any right to extend, without the consent of Service Company, the term of
any of the Subleases; and shall not have any right to sublet, without the
consent of Service Company, any of the Demised Premises under any Lease. P.A.
further agrees that in the event of any amendment of any of the Leases, it
will, upon the request of Service Company, promptly execute such amendment of
Sublease as is necessary to conform the Sublease to the amended Leases.
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(f) The rights of P.A. under the Subleases shall remain at all times
subject to the rights of Service Company under the Leases and in the event any
of the Leases is terminated for any reason, the respective Sublease shall also
terminate and Service Company shall not incur any liability or obligation to
P.A. as a result of such termination.
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its obligations under this
Agreement and, after written notice from the other party demanding that such
failure be cured, the party on whom such notice is served shall fail to cure
such breach within 30 days after such notice or, if such breach will reasonably
require more than 30 days to cure, such party is not diligently pursuing
efforts to cure such breach; provided, however, that if the party on whom such
demand is made elects to submit such dispute to arbitration, no action to
terminate this Agreement can be taken until such arbitration has been finally
adjudicated and then only if the party guilty of such failure shall fail to
comply with the arbitration award within 60 days after its issuance.
(c) If any bankruptcy, insolvency or receivership proceedings are
instituted by or against the P.A. and not dismissed within sixty (60) days
after the commencement of such proceedings or if the P.A. shall voluntarily
dissolve.
(d) As of any anniversary date of this Agreement, by Service Company
delivering written notice to P.A. of such termination at least 90 days prior to
such anniversary date.
If this Agreement is terminated for any reason, (i) Service Company may,
upon written notice to P.A. specifying the date of termination, terminate any
of the existing leases for premises or personal property between Service
Company and P.A., and (ii) P.A. shall have the right, exercisable within 60
days after the date of termination, to purchase equipment and furnishings
provided by Service Company at the Dental Centers for a purchase price equal to
the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and shall
not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.A.
Service Company's function is limited to providing services as described in
this Agreement on an efficient, competent and satisfactory manner, and Service
Company shall not have or exercise any control over the manner or methods by
which P.A. or its employee or independent contractor dentists carry on the
practice of dentistry. Because the dentists who perform services for the P.A.
are not employees or independent contractors of Service Company, Service
Company shall not withhold on their behalf any amounts for income tax, social
security, unemployment compensation, workers
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compensation or other similar withholding provisions, and all such withholding
shall be the obligation of P.A.; provided, however, that Service Company shall
act as the agent of P.A. with respect to payroll tax matters including the
withholding of income tax, FICA and similar items.
11. Confidential Information. Each of P.A. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.A. acknowledges that Service Company has a proprietary interest
in such information, that such information constitutes trade secrets and that
P.A. does not, by reason of this Agreement, acquire any continuing right or
interest in such proprietary information or trade secrets. P.A. will hold such
proprietary information and trade secrets in confidence and will not disclose
them, either during the term of this Agreement or thereafter, to any person or
entity other than employees or independent contractors of P.A. or Service
Company without the prior written consent of Service Company or as may be
required by law. Service Company will preserve the confidentiality of all files
and records of P.A. including patient records and comply with all federal,
state and local laws, rules and regulations relating to the confidentiality of
P.A.'s files and records (including patient records). Service Company will use
the information in such records only for the limited purposes necessary to
perform the services of Service Company set forth herein (including billing and
collections) and shall not use patient names, addresses or any other patient
information for marketing or any other purpose except as expressly permitted by
this Agreement without the prior written consent of P.A. Each of P.A. and
Service Company acknowledges that it does not have an adequate remedy at law
for a breach of this Section 11, will suffer irreparable harm in the event of
such breach and that, therefore, the other party shall be entitled to
injunctive and other equitable relief for the enforcement of this Section 11.
The provisions of this Section 11 shall survive termination of this Agreement.
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by either party
hereto without the express prior written consent of the other; provided,
however, that this Agreement shall be assignable by Service Company to any of
its affiliates or successors without the consent of P.A.
(b) Waiver. Waiver of any agreement or obligation set forth in this
Agreement by either party shall not prevent that party from later insisting
upon full performance of such agreement or obligation and no course of dealing,
partial exercise or any delay or failure on the part of any party hereto in
exercising any right, power, privilege, or remedy under this Agreement or any
related agreement or instrument shall impair or restrict any such right, power,
privilege or remedy or be construed as
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a waiver therefor. No waiver shall be valid against any party unless made in
writing and signed by the party against whom enforcement of such waiver is
sought.
(c) Amendment. No amendment or change in the provisions of this Agreement
shall be effective unless made in writing and signed by and on behalf of the
parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the entire agreement
between the parties in connection with the subject matter of this Agreement and
supersedes all prior agreements entered into before the effective date of this
Agreement.
(e) Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if delivered, telecopied or
mailed by certified or registered mail:
If to Service Company: United Dental Care, Inc.
4700 West Commercial
North Little Rock, Arkansas 72216
Attn: President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.A.: William T. ("Tom") Harris and Associates
a Professional Dental Corporation
5825 Southern Avenue
Shreveport, Louisiana 71106
Attn: President
or to such other address of which any party may notify the other parties as
provided above. Notices shall be effective as of the date of such delivery or
mailing.
(f) Binding Effect. Subject to the provisions set forth in this
Agreement, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this Agreement shall be
resolved by arbitration; provided, however, that arbitration shall not apply to
the enforcement of the Service Company's rights under Section 11. Any party
electing to submit an action to arbitration shall give written notice to the
other party of such election. The dispute shall be submitted to arbitration in
accordance with the Rules of the American Arbitration Association. Such
arbitration shall be conducted, unless otherwise agreed by the parties, by a
single arbitrator in Little Rock, Arkansas. The
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award of the arbitrator can be confirmed or enforced in any court of competent
jurisdiction. The prevailing party in any arbitration shall be entitled to
recover all costs incurred by such party in connection with such proceedings,
including reasonable attorney fees.
(h) Severability. If any one or more of the provisions of this Agreement
is adjudged to any extent invalid, unenforceable, or contrary to law by a court
of competent jurisdiction, each and all of the remaining provisions of this
Agreement will not be affected thereby and shall be valid and forcible to the
fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by and enforced in
accordance with the laws of the State of Arkansas.
(j) Change in Law. If after the effective date of this Agreement, any new
law, rule or regulation becomes effective which renders illegal the structure
of the relationship between P.A. and the Service Company set forth in this
Agreement, or otherwise substantially impairs the economics of the parties
hereunder, this Agreement shall not terminate, but the parties hereto agree to
exclusively negotiate with each other in good faith for a period of six months
following such change of law or circumstance with respect to the subject matter
hereof. To the maximum extent possible, any amendment hereto shall preserve the
underlying economic and financial arrangements between P.A. and the Service
Company.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
first set forth above.
SERVICE COMPANY: P.A.:
UNITED DENTAL CARE, INC. WILLIAM T. ("TOM") HARRIS AND ASSOCIATES
a Professional Dental Corporation
By:/s/ GARY CAGE By:/s/ WILLIAM T. HARRIS, III
------------------------------- ------------------------------
Name: Gary Cage Name: William T. Harris, III, D.D.S.
Title: Vice President Title: President
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EXHIBIT A
Locations of Dental Centers
5825 Southern Ave.
Shreveport, Louisiana
<PAGE> 1
EXHIBIT 10.13
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made as of
March 31, 1997 by and between United Dental Care Tom Harris D.D.S. & Associates,
a dental corporation organized and existing under the laws of the State of
Arkansas ("P.A."), and United Dental Care, Inc., a corporation organized and
existing under the laws of the State of Arkansas ("Service Company").
RECITALS
A. P.A. is engaged in the practice of dentistry through dentists
licensed by the Oklahoma Board of Governors of Registered Dentists and who are
employed by P.A. or who have entered into independent contractor agreements with
P.A. to provide services to patients of P.A. and conducts such practice at
Dental Centers located in the State of Oklahoma.
B. Service Company is organized for the purpose of providing
comprehensive management and related administrative services to dental practices
and has developed extensive expertise and experience in the operation,
management and marketing of the non-dental aspects of dental centers of the type
operated by P.A.
C. P.A., in order to enable its dental employees and independent
contractors to focus their efforts and time on the practice of dentistry and
the delivery of dental services to the public, has requested, and Service
Company has agreed to provide, comprehensive management and related
administrative services.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
agreements set forth herein, the parties agree as follows:
1. Definitions.
(a) "Act" means the Oklahoma State Dental Act and the
Regulations of the Oklahoma Board of Governors of Dentistry adopted pursuant
thereto.
(b) "Cost of Dental Services" means: the aggregate
compensation of dentists who are employed by or who are independent contractors
with P.A. at the Dental Centers and other licensed personnel who must be
employed by the P.A. under applicable law ("Support Personnel") together with
the cost of expenses, taxes and benefits of such dentists and Support Personnel
including, but not limited to, vacation pay, sick pay, health care expenses,
professional dues, expense reimbursement, discretionary bonuses or incentive
payments, if any, based on profitability or productivity and other expenses and
payments required to be made to or for the benefit of the dentists or the
Support Personnel pursuant to their employment agreements or independent
contractor agreements or otherwise plus P.A.'s portion of
<PAGE> 2
all employment and payroll taxes; other expenses incurred by P.A. in carrying
out its obligations under this Agreement; and the costs of malpractice
insurance; and costs which are paid to Service Company under leases for
premises (including without limitation under Section 8 of this Agreement) or
personal property or under licenses.
(c) "Dental Board" means the Oklahoma Board of Dentistry
established under the Act.
(d) "Dental Center" means the facility or facilities
operated by P.A. and at which Dental Services are, or in the future may be,
rendered by P.A. identified on Exhibit A hereto, as amended, supplemented or
modified from time to time.
(e) "Dental Services" means all services rendered by P.A.
which constitute the practice of dentistry as defined by the Act.
(f) "Net Pre-Tax Income" means Net Revenues less the
total of Service Company Costs and the Cost of Dental Services, but without
regard for the provision for income taxes.
(g) "Net Revenues" means all Revenues net of refunds or
billing adjustments.
(h) "Non-Dental Personnel" means all personnel including,
but not limited to, accountants, bookkeepers and receptionists who perform
services which do not constitute the practice of dentistry or who are not
required by applicable law to be employees of P.A.
(i) "Revenues" means all amounts on an accrual basis
which P.A. receives or becomes entitled to receive for any services or sales of
products or otherwise, including, without limitation, for the performance of
Dental Services for its patients by dentists or Support Personnel who are
employees or independent contractors of P.A. or for the sale of products
including pharmaceuticals.
(j) "Service Company Costs" means all costs incurred by
Service Company, including indirect overhead and other expenses attributable to
the carrying out of its obligations under this Agreement, but excludes costs
which are reimbursed to Service Company under leases for premises or personal
property or licenses.
(k) "Support Personnel" shall have the meaning specified
in the definition of Cost of Dental Services.
2. Engagement to Provide Services. During the term of this
Agreement and all renewals and extensions thereof, P.A. engages Service Company
to provide sole and exclusive development, management and administrative
services with respect to all non-dental functions relating to the operation of
the Dental Centers, and Service Company agrees to furnish to P.A. all of the
non-dental development,
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management, and administrative services needed by P.A. in connection with the
operation of the Dental Centers.
3. Services. The non-dental development, management, and
administrative services to be provided by Service Company shall include the
following:
(a) Bookkeeping and Accounts. Service Company shall
provide all bookkeeping and accounting services necessary or appropriate to the
functioning of the Dental Centers including, but not limited to, maintenance,
custody and supervision of all business records, ledgers, journals and reports,
and the preparation, distribution, and recordation of all bills and statements
for professional services rendered by P.A. including the billing and completion
of reports and forms required by insurance companies, dental maintenance
organizations, governmental agencies or other third-party payors (collectively,
the "Business Records"); provided, however, that such Business Records shall
not be deemed to include patient records and other records or documents which
relate to patient treatment by dentists and, provided further, that all such
Business Records shall remain the property of P.A.
(b) Billing; Collections. Service Company shall be
responsible, for and on behalf of P.A., as its agent, for billing and collecting
the charges made with respect to all Dental Services provided by P.A. at the
Dental Centers unless otherwise agreed in writing. The extent to which Service
Company attempts to collect such charges, the methods of collection and the
amount of settlements with respect to disputed charges, and the determination of
which charges are not collectible, shall be within the sole discretion of the
Service Company; provided that (i) Service Company will comply with all
applicable law, including without limitation, the Federal Fair Debt Collection
Practice Act, and (ii) Service Company will not commence any legal action or
settle or compromise any legal action without P.A.'s approval, which shall not
be unreasonably withheld.
(c) Non-Dental Personnel. Service Company shall,
following consultation with P.A., select for employment and terminate the
employment of all Non-Dental Personnel as Service Company shall deem necessary
or advisable, and shall be responsible for the supervision, direction, training
and assigning of duties of all Non-Dental Personnel, with the exception of
activities carried on by Non-Dental Personnel which must be under the direction
or supervision of licensed dentists in accordance with applicable law and
regulations. Unless otherwise specifically agreed in writing, all Non-Dental
Personnel shall be employees or independent contractors employed or engaged by
Service Company, and the selection and terms of employment or engagement,
including the rates of compensation, supervision, direction, training and
assignment of duties of all Non-Dental Personnel shall be determined and
controlled exclusively by Service Company.
(d) Dental Personnel. Service Company shall provide
assistance to P.A. in recruiting and evaluating prospective dentists and
Support Personnel as employees or independent contractors of P.A.
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(e) Marketing and Advertising Programs. Service Company
shall: develop marketing and advertising programs for P.A.; provide advice and
assistance to P.A. on overall marketing programs, and determine and analyze the
effect of such programs; plan, create, write and prepare advertising materials;
negotiate contracts with advertising media for space and time; and obtain
services necessary in connection with the production and presentation of
advertisements.
(f) Insurance. Service Company shall, following
consultation with P.A., make reasonable efforts to obtain and maintain in full
force and effect during the term of this Agreement, and all extensions and
renewals thereof, public liability and property insurance which Service Company
deems appropriate to protect against loss, claims, and other risks, or which is
necessary to comply with the terms of lease agreements for the Dental Centers,
and Service Company shall assist P.A. and the dentists in obtaining professional
liability insurance.
(g) Supplies. Service Company shall acquire and supply
to P.A. all dental and non-Dental supplies which may be reasonably required in
connection with the operation of the Dental Centers.
(h) Health Plans. Service Company shall provide
assistance to P.A. in developing, negotiating, marketing, and administering
prepaid managed and other health plans for the providing of dental care and
shall obtain licensure as a third-party administrator, and any other
appropriate licenses, registrations or certificates, if and to the extent
required by applicable law.
(i) Bank Accounts, Cash Management. Service Company is
authorized to establish and maintain for and on behalf of P.A. bank accounts
for the collection and disbursement of P.A.'s funds. Service Company is
authorized to disburse funds from such accounts for the payment of costs
incurred by or on behalf of P.A. in accordance with this Agreement, for Service
Company's compensation, and for all other costs, expenses, and disbursements
which are incurred in connection with this Agreement. Service Company shall
manage all cash and cash equivalents of P.A.
(j) Tax Returns, Reports. Service Company shall be
responsible for preparing and filing all tax returns and reports required or
necessary in connection with the operation of the Dental Centers.
(k) Overall Supervision. Service Company shall provide
P.A. with overall supervision and management, including maintenance and repair,
of the Dental Centers and all furniture, fixtures, furnishings, equipment, and
leasehold improvements located in or used at the Dental Centers.
(l) Equipment and Furnishings. Service Company shall
provide and maintain, either directly or through appropriate lease agreements,
all necessary equipment and furnishings for the Dental Centers.
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(m) New Dental Centers. Service Company shall provide
planning and studies to determine the location of new Dental Centers, provide
designs for such new Dental Centers, obtain leases for the space for Dental
Centers, and do all things necessary in connection with equipping of such new
Dental Centers for operation, and shall make such space available to P.A.
pursuant to appropriate subleases, or other documents or agreements, all in such
forms as may be required by Service Company and/or its lessor. Service Company
shall amend, modify or supplement Exhibit A to this Agreement in connection with
the establishment of new Dental Centers, as appropriate.
(n) Financial Statements and Budgets. Service Company
shall prepare monthly and annual financial statements containing a balance
sheet and statement of income for P.A. Annual financial statements shall be
delivered to P.A. within 90 days after the end of each fiscal year and monthly
financial statements shall be delivered to P.A. within 30 days after the end
of each calendar month. Service Company shall prepare, in reasonable detail,
an annual budget for P.A. which shall be delivered to P.A. within 30 days after
the end of each fiscal year.
(o) Litigation Management. Subject to the provisions of
Section 3(b)(ii), Service Company will (i) manage and direct the defense of all
claims, actions, proceedings or investigations against P.C. or any of its
officers, directors or employees in their capacity as such, and (ii) manage and
direct the initiation and prosecution of all claims, actions, proceedings or
investigations brought by P.A. against any person other than the Service
Company.
4. Conduct of Dental Practice and Other Matters.
(a) Practice of Dentistry. P.A. shall be solely and
exclusively in control of all clinical aspects of the practice of dentistry and
the delivery of Dental Services at the Dental Centers and P.A. shall be
responsible for providing all Dental Services and for the payment of all Costs
of Dental Services. P.A. shall be solely and exclusively in control of the
operation of the Dental Centers and any other office or place of business where
dental services are provided by P.A. All persons to whom such Dental Services
are provided shall be patients of P.A. and not of Service Company, and Service
Company shall not have or exercise any control or direction over the manner or
methods with which Dental Services and related duties are performed or
interfere in any way with the exercise by the dentists who are employees or
independent contractors of P.A. of their professional judgment. Nothing in
this Agreement shall be deemed to alter, change or abridge the relationship
between P.A. dentists and P.A. patients. P.A. shall be solely responsible for
assuring that all dentists who are employed by or who are independent
contractors of P.A. at the location listed on Exhibit A hereto hold all
necessary licenses from the State of Oklahoma, that such licenses are current
and in good standing, and that such professional services are performed in
accordance with the applicable ethical standards, laws and regulations relating
to professional practice in the State of Oklahoma. P.A. shall take all actions
necessary to maintain its status as a
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professional corporation including provision for succession so that the
outstanding shares of P.A. are owned at all times by a person licensed to
practice dentistry in the State of Oklahoma.
(b) Patient Referrals. It is not a purpose of this
Agreement to induce or encourage the referral of patients. The parties agree
that the benefits to P.A. and Service Company do not require, are not payment
or inducement for, and are not in any way contingent upon the admission,
referral or any other arrangement for the provisions of any item or service
offered by Service Company to any of P.A.'s patients or for the referral of any
patient.
(c) Noncompetition. P.A. shall enforce the terms of any
employment or independent contractor agreements to which it is a party and any
noncompetition, confidentiality and similar covenants or restrictions
("Non-competition Agreements") of which it is the beneficiary, except to the
extent that such Non-competition Agreements are unenforceable under applicable
law. During the term of this Agreement, P.A. shall not establish, operate or
provide dental services at any dental office, clinic or other health care
facility providing services substantially similar to those provided by P.A.
pursuant to this Agreement anywhere within 100 miles of any facility operated
by Service Company. The provisions of this Section 4(c) shall not in any way
limit or otherwise affect the terms and provisions of the Non-Competition
Agreement dated as of March 31, 1997 by and between Service Company and William
Thomas Harris, III, D.D.S. (the "Harris Non-Competition Agreement"). To the
extent of any conflict between the provisions of this Section 4(c) and the
provisions of the Harris Non-Competition Agreement, the provisions of the
Harris Non-Competition Agreement shall control.
(d) Attorney-in-Fact. P.A. hereby appoints Service
Company for the term of this Agreement to be its true and lawful
attorney-in-fact for all purposes relating to or arising in connection with the
provisions by Service Company of the comprehensive management and related
administrative services as provided in this Agreement, including without
limitation the provisions of Section 3(b) and Section 3(i). This power of
attorney is coupled with an interest and shall be irrevocable and remain in
effect for the term of this Agreement.
5. Compensation of Service Company.
(a) Assignment to Service Company. P.A. assigns to
Service Company all of P.A.'s right and interests in all Revenues; provided,
however, that no assignment shall be made of any such rights or interests, the
assignment of which is prohibited by law (for example, amounts receivable from
Medicare or Medicaid accounts). To the extent that the foregoing assignment of
Revenues shall be ineffective for any reason, P.A. hereby grants a security
interest in all accounts receivable, contract rights, Revenues and general
intangibles of P.A. to Service Company to secure all indebtedness and
obligations of P.A. to Service Company arising under or in connection with this
Agreement. At the request of Service
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<PAGE> 7
Company, P.A. shall execute all documents and instruments necessary to evidence
and perfect the foregoing security interest.
(b) Compensation of Service Company. As consideration for
the services provided by Service Company under this Agreement, Service Company
shall receive a service fee (the "Service Fee") in an amount equal to: (i)
Service Company Costs, plus (ii) an amount equal to the lesser of Net Pre-Tax
Income or 30% of Net Revenues.
(c) Application of Net Revenues. Service Company shall
apply Net Revenues as follows:
(i) First, Service Company shall remit
to P.A., or cause to be paid on
behalf of P.A., from Net Revenues an
amount equal to the Costs of Dental
Services and such other payments or
disbursements as P.A. shall direct
Service Company to make in
accordance with this Agreement;
(ii) Second, Service Company shall retain
out of Net Revenues an amount equal
to the Service Fee; and
(iii) Third, Service Company shall remit
all remaining Net Revenues to P.A.
(d) Adjustment. The Service Fee shall be payable monthly
in arrears based upon Service Company Costs and P.A.'s Net Revenues in the
prior month. Adjustments to the estimated payments shall be made to reconcile
actual amounts due under Section 5(b) by the end of the following month. The
Service Fee shall be reviewed annually and at such other times as may be deemed
appropriate and adjusted in such manner as the parties may agree; in the
absence of such agreement, the Service Fee then in effect shall continue in
effect.
6. Advisory Board and General Obligations of P.A. and Service Company.
(a) Advisory Board. P.A. and Service Company shall
establish an Advisory Board which shall provide advice to the Service Company
concerning the management and administrative policies for the overall operation
of the Dental Centers. The Advisory Board shall consist of four (4) members.
The Service Company shall designate, in its sole discretion, two (2) members of
the Advisory Board. P.A. shall designate, in its sole discretion, two (2)
members of the Advisory Board. Except as may otherwise be provided, the advice
of a majority of the members of the Advisory Board shall be the advice of the
Advisory Board.
(b) General Obligations. P.A. and Service Company each
agrees to cooperate fully with the other in connection with the carrying out of
their respective obligations under this Agreement and to employ their best
efforts to resolve any
7
<PAGE> 8
dispute which may arise under or in connection with the carrying out of this
Agreement.
7. Term. The term of this Agreement shall be for a period of 9
months from March 31, 1997 through December 31, 1997.
8. Subleases.
(a) Service Company hereby subleases (collectively, the
"Subleases") to P.A., for the purpose of conducting and operating a Dental
Center, the "Demised Premises," as described in each of the Leases listed on
Exhibit B attached hereto and incorporated herein by reference (collectively,
the "Leases"). Each such Sublease shall be subject to and upon the terms,
provisions and conditions of the Lease to which it applies. Service Company and
P.A. hereby agree, from time to time upon request of Service Company, to enter
into separate confirmatory Sublease Agreements confirming each of the
Subleases.
(b) The initial term of such Subleases shall begin
(unless otherwise indicated) on the date hereof and continue until the earlier
to occur of (a) the expiration or earlier termination of the Lease to which it
applies, or (b) the expiration or earlier termination of this Agreement. If
Service Company extends the term of the Leases, P.A. shall, at the request of
Service Company, extend the Subleases for such additional period.
(c) P.A. shall pay to Service Company as rent an amount
equal to the rent being paid by Service Company to landlord under the Leases.
(d) P.A. covenants that it will be bound by and will
perform and comply with all the obligations of tenant under the Leases, all of
which are incorporated herein by reference, and agrees that whenever
appropriate, the term "tenant" shall be deemed to refer to P.A. to the same
extent as if P.A. were a party to the Leases; provided, however, that P.A.
shall have no rights against landlord under the Leases and shall have only such
rights against Service Company as are set forth in this Agreement.
(e) Without limiting the foregoing provisions, P.A. shall
not have any right or obligation to enter into agreements directly with
landlord; shall not have any right to extend, without the consent of Service
Company, the term of any of the Subleases; and shall not have any right to
sublet, without the consent of Service Company, any of the Demised Premises
under any Lease. P.A. further agrees that in the event of any amendment of any
of the Leases, it will, upon the request of Service Company, promptly execute
such amendment of Sublease as is necessary to conform the Sublease to the
amended Leases.
(f) The rights of P.A. under the Subleases shall remain
at all times subject to the rights of Service Company under the Leases and in
the event any of the
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<PAGE> 9
Leases is terminated for any reason, the respective Sublease shall also
terminate and Service Company shall not incur any liability or obligation to
P.A. as a result of such termination.
9. Termination. This Agreement may be terminated as follows:
(a) By mutual agreement of the parties.
(b) If either party fails to perform any of its obligations
under this Agreement and, after written notice from the other party demanding
that such failure be cured, the party on whom such notice is served shall fail
to cure such breach within 30 days after such notice or, if such breach will
reasonably require more than 30 days to cure, such party is not diligently
pursuing efforts to cure such breach; provided, however, that if the party on
whom such demand is made elects to submit such dispute to arbitration, no
action to terminate this Agreement can be taken until such arbitration has been
finally adjudicated and then only if the party guilty of such failure shall
fail to comply with the arbitration award within 60 days after its issuance.
(c) If any bankruptcy, insolvency or receivership
proceedings are instituted by or against the P.A. and not dismissed within
sixty (60) days after the commencement of such proceedings or if the P.A. shall
voluntarily dissolve.
(d) As of any anniversary date of this Agreement, by
Service Company delivering written notice to P.A. of such termination at least
90 days prior to such anniversary date.
If this Agreement is terminated for any reason, (i) Service Company
may, upon written notice to P.A. specifying the date of termination, terminate
any of the existing leases for premises or personal property between Service
Company and P.A., and (ii) P.A. shall have the right, exercisable within 60
days after the date of termination, to purchase equipment and furnishings
provided by Service Company at the Dental Centers for a purchase price equal to
the appraised fair market value thereof.
10. Relationship of Parties. This Agreement is not intended to and
shall not be construed as creating the relationship of employer and employee,
partnership, joint venture or association between Service Company and P.A.
Service Company's function is limited to providing services as described in
this Agreement on an efficient, competent and satisfactory manner, and Service
Company shall not have or exercise any control over the manner or methods by
which P.A. or its employee or independent contractor dentists carry on the
practice of dentistry. Because the dentists who perform services for the P.A.
are not employees or independent contractors of Service Company, Service
Company shall not withhold on their behalf any amounts for income tax, social
security, unemployment compensation, workers compensation or other similar
withholding provisions, and all such withholding shall be the obligation of
P.A.; provided, however, that Service Company shall act as the
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<PAGE> 10
agent of P.A. with respect to payroll tax matters including the withholding of
income tax, FICA and similar items.
11. Confidential Information. Each of P.A. and Service Company
acknowledges that it will have access to information of proprietary nature
owned by the other including (i) information on the systems, policies and
procedures developed by Service Company in connection with the providing of
management services for dental centers and dental practices and (ii) patient
information. P.A. acknowledges that Service Company has a proprietary interest
in such information, that such information constitutes trade secrets and that
P.A. does not, by reason of this Agreement, acquire any continuing right or
interest in such proprietary information or trade secrets. P.A. will hold such
proprietary information and trade secrets in confidence and will not disclose
them, either during the term of this Agreement or thereafter, to any person or
entity other than employees or independent contractors of P.A. or Service
Company without the prior written consent of Service Company or as may be
required by law. Service Company will preserve the confidentiality of all files
and records of P.A. including patient records and comply with all federal,
state and local laws, rules and regulations relating to the confidentiality of
P.A.'s files and records (including patient records). Service Company will use
the information in such records only for the limited purposes necessary to
perform the services of Service Company set forth herein (including billing and
collections) and shall not use patient names, addresses or any other patient
information for marketing or any other purpose except as expressly permitted by
this Agreement without the prior written consent of P.A. Each of P.A. and
Service Company acknowledges that it does not have an adequate remedy at law
for a breach of this Section 11, will suffer irreparable harm in the event of
such breach and that, therefore, the other party shall be entitled to
injunctive and other equitable relief for the enforcement of this Section 11.
The provisions of this Section 11 shall survive termination of this Agreement.
12. Miscellaneous.
(a) Assignment. This Agreement shall not be assignable by
either party hereto without the express prior written consent of the other;
provided, however, that this Agreement shall be assignable by Service Company
to any of its affiliates or successors without the consent of P.A.
(b) Waiver. Waiver of any agreement or obligation set
forth in this Agreement by either party shall not prevent that party from later
insisting upon full performance of such agreement or obligation and no course
of dealing, partial exercise or any delay or failure on the part of any party
hereto in exercising any right, power, privilege, or remedy under this
Agreement or any related agreement or instrument shall impair or restrict any
such light, power, privilege or remedy or be construed as a waiver therefor. No
waiver shall be valid against any party unless made in writing and signed by
the party against whom enforcement of such waiver is sought.
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<PAGE> 11
(c) Amendment. No amendment or change in the provisions
of this Agreement shall be effective unless made in writing and signed by and
on behalf of the parties to this Agreement or their successors and assigns.
(d) Entire Agreement. This Agreement constitutes the
entire agreement between the parties in connection with the subject matter of
this Agreement and supersedes all prior agreements entered into before the
effective date of this Agreement.
(e) Notices. All notices, requests, demands and other
communications hereunder shall be deemed to have been duly given if delivered,
telecopied or mailed by certified or registered mail:
If to Service Company: United Dental Care, Inc.
4700 West Commercial
North Little Rock, Arkansas 72216
Attn: President
With a copy to: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
If to P.A.: United Dental Care Tom Harris D.D.S.
& Associates
4700 West Commercial
North Little Rock, Arkansas 72216
Attn: President
or to such other address of which any party may notify the other parties as
provided above. Notices shall be effective as of the date of such delivery or
mailing.
(f) Binding Effect. Subject to the provisions set forth
in this Agreement, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and upon their respective successors and assigns.
(g) Arbitration. Any disputes arising under this
Agreement shall be resolved by arbitration; provided, however, that arbitration
shall not apply to the enforcement of the Service Company's rights under
Section 11. Any party electing to submit an action to arbitration shall give
written notice to the other party of such election. The dispute shall be
submitted to arbitration in accordance with the Rules of the American
Arbitration Association. Such arbitration shall be conducted, unless otherwise
agreed by the parties, by a single arbitrator in Little Rock, Arkansas. The
award of the arbitrator can be confirmed or enforced in any court of competent
jurisdiction. The prevailing party in any arbitration shall be entitled to
recover all
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<PAGE> 12
costs incurred by such party in connection with such proceedings, including
reasonable attorney fees.
(h) Severability. If any one or more of the provisions of
this Agreement is adjudged to any extent invalid, unenforceable, or contrary to
law by a court of competent jurisdiction, each and all of the remaining
provisions of this Agreement will not be affected thereby and shall be valid
and forcible to the fullest extent permitted by law.
(i) Governing Law. This Agreement shall be governed by
and enforced in accordance with the laws of the State of Arkansas.
(j) Change in Law. If after the effective date of this
Agreement, any new law, rule or regulation becomes effective which renders
illegal the structure of the relationship between P.A. and the Service Company
set forth in this Agreement, or otherwise substantially impairs the economics
of the parties hereunder, this Agreement shall not terminate, but the parties
hereto agree to exclusively negotiate with each other in good faith for a
period of six months following such change of law or circumstance with respect
to the subject matter hereof. To the maximum extent possible, any amendment
hereto shall preserve the underlying economic and financial arrangements
between P.A. and the Service Company.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first set forth above.
SERVICE COMPANY: PA.:
UNITED DENTAL CARE, INC. UNITED DENTAL CARE TOM HARRIS
D.D.S. & ASSOCIATES
By:/s/ GARY CAGE By:/s/ WILLIAM THOMAS HARRIS, III
-------------------------------- ---------------------------------
Name: Gary Cage Name: William Thomas Harris, III
Title: Vice President Title: President
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<PAGE> 13
EXHIBIT A
1003 East Ray Fine Blvd.
Roland, Oklahoma
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<PAGE> 1
EXHIBIT 10.18
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE
LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
PRIMARY CARE DENTIST AGREEMENT
(hereinafter called "Agreement")
effective: April 1, 1997
between
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC.
(hereinafter called "The Company")
and
Modern Dental Professionals, PC/Monarch Dental Associates, LP
(Contracting Dentist, hereinafter called "You")
Since The Company has established a managed dental care coverage program
(hereinafter referred to as the "DMO Coverage Plan") and wishes to enter into
an agreement whereby You will provide dental care services under said DMO
Coverage Plan; and,
Since You desire to enter into an agreement to provide said dental care
services and become a Primary Care Dentist;
It is mutually agreed as follows:
ARTICLE I - DEFINITIONS
The meaning of the terms used in this Agreement shall be as defined this
Article, except where the context makes it clear that such meaning is not
intended.
A. "Alternate Dental Plan" means any other dental expense benefit
coverage plan offered to Covered Persons by the employer or other group
contractholder concurrently with the DMO Coverage Plan. This does not
include any dental expense plan offered by a different employer/group
contractholder or any dental expense plan underwritten or administered
by and insurer, third party payer or claims services administrator other
than The Prudential Insurance Company of America and its subsidiaries
and affiliates.
B. "Basic Dental Services" means the dental services shown in the
Dental Office Guide as covered services to be provided by the Primary
Care Dentist.
C. "Contracting Dentist" ("You") means a person who is a Dentist or a
person who is a legal representative of a group dental practice or
corporation with the authority to bind such group dental practice or
corporation to the terms of this Agreement.
D. "Covered Person" means any person covered under a DMO Coverage Plan.
E. "Dental Maintenance Organization" means the prepaid group dental care
program established by The Company under which Primary Care and
Specialty Dentists agree to provide or arrange for covered dental
services to Covered Persons pursuant to DMO Coverage Plans.
F. "Dental Office Guide" means a manual given to Primary Care Dentists
which outlines administrative guidelines and procedures in connection
with providing services to Covered Persons. This shall also include
supplementary written communications including, but not limited to,
letters, memoranda and bulletins which add to or modify the
<PAGE> 2
Effective Date: April 1, 1997
procedures and guidelines in the Dental Office Guide. "Dental Office
Guide" may also be referred to as "Personal Dentist Guide."
G. "Dentist" means a person with an unrestricted license to practice
dentistry in the jurisdiction where the services are provided.
H. "DMO Coverage Plan" means a plan of managed dental care benefits which
is provided through the DMO and is described in individual or group
contracts issued by The Company to one or more individuals or employers
(or to other groups).
I. "Primary Care Dentist" means a Dentist who has entered into a Primary
Care Dentist Agreement with The Company to:
1. Provide Basic Dental Services to Covered Persons;
2. Maintain the appropriate continuity of Covered Persons' dental
care; and,
3. Initiate referral of covered Persons to Specialty Dentists
where appropriate.
"Primary Care Dentist" may also be referred to as "Personal Dentist."
J. "Quality Improvement Program" (QIP) means the process designed to
objectively and systematically monitor and evaluate the quality and
appropriateness of dental care, pursue opportunities to improve dental
care and resolve identified differences.
K. "Regional Dental Director" means a Dentist who is employed by The
Company to coordinate and supervise the delivery of dental care services
for Covered Persons through Personal and Specialty Dentists. Where
approval or authorization of the Regional Dental Director is required by
this Agreement, the Regional Dental Director may designate another
person for that purpose.
L. "Specialty Dentist" means a Dentist with a special practice who has
entered into an agreement with The Company to provide Specialty Dental
Services to Covered Persons. For purposes of this coverage, a Primary
Care Dentist may also be considered a Specialty Dentist when approved by
The Company to perform certain Specialty Services.
M. "Specialty Dental Services" means specialty dental care services which
are covered under DMO Coverage Plans and are provided by Specialty
Dentists.
ARTICLE II - OBLIGATIONS AND
RESPONSIBILITIES OF PRIMARY CARE DENTIST
You agree that your obligations and responsibilities as an independent
contractor to The Company are as described below:
A. You agree to provide Basic Dental Services to those Covered Persons who
have chosen You as their Primary Care Dentist. A roster of such Covered
Persons shall be provided to You by The Company and updated monthly. You
shall provide appropriate treatment and appointment availability for
Covered Persons consistent with existing office policy for patients not
covered by a DMO Coverage Plan. You further agree to accept such Covered
Persons as patients and will not close your practice to such Covered
Persons until You have accepted at least 500 Covered Persons as
patients, unless such requirement has been explicitly waived in writing
by the Regional Dental Director. You
2
<PAGE> 3
Effective Date: April 1, 1997
further agree that You shall accept any current patient of
record as a Covered Person at any time regardless of the total
number of Covered Persons accepted as patients.
B. You may provide appropriate dental services which are not
covered under a DMO Coverage Plan. In such cases, You must
inform the Covered Person that such services are not covered,
that he/she is responsible for payment, and the amount due for
such services. You may charge up to your usual fees for such
services.
C. You agree to submit to The Company encounter information on
forms supplied by or acceptable to The Company. The forms shall
show all Basic Dental Services provided to each Covered Person
and the copayment amounts collected from Covered Persons.
Encounter information shall be submitted at least monthly. The
present method of submitting such information is acceptable.
D. The Primary Care Dentist will not provide covered Specialty
Services to Covered Persons without a written agreement with
The Company to provide such services or express written
approval from the Regional Dental Director. You agree that all
referrals to Specialty Dentists or any other Dentist shall be
made in accordance with guidelines established by The Company.
E. You will provide or arrange for 24 hour per day, seven day per
week emergency care coverage. Emergency care coverage is
defined as those Basic Dental Services needed to relieve pain
or to prevent worsening of a condition when that would be
caused by delay. Emergency care will be provided within 24
hours of request.
F. You agree not to subcontract or otherwise delegate any duties
under this Agreement without the express written consent of
The Company. This provision does not apply to:
1. Any services legally performed by a fully licensed
Dentist associate, dental hygienist or dental assistant
employed by You. It is understood that all Dentist
associates providing services to Covered Persons must
be fully credentialed by The Company.
2. Services performed by a covering Dentist. When You are
absent from your office, You will arrange to have a
covering Dentist available and, if necessary, You will
pay the covering Dentist directly for Basic Dental
Services delivered to Covered Persons. If You will be
absent from the office for more than 14 days, The
Company must be notified in advance and must approve
the covering Dentist.
G. If this Agreement is terminated, You agree to complete all
treatment in progress and, upon request, forward copies of all
Covered Persons' records, radiographs and study models at a
nominal fee for copying to Covered Persons or The Company, to
the Covered Persons' new Primary Care Dentists within 30 days
after completion of treatment in progress. While such treatment
is in progress, all terms of this Agreement, including
reimbursement arrangements, will remain as prior to the
termination of the Agreement.
H. You agree to comply with all administrative requirements,
guidelines and procedures described by The Company in the
Dental Office Guide or any successor document, as well as any
supplemental changes issued in writing by The Company.
I. You agree to participate in the DMO Coverage Plan's Quality
Improvement Program, peer review and complaint resolution
programs as described in the Dental Office Guide. You further
agree to abide by the terms, recommendations and decisions of
these programs.
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<PAGE> 4
Effective Date: April 1, 1997
J. You shall maintain professional liability insurance appropriate to the
professional activities assumed under this Agreement. The amount of such
insurance shall be determined by The Company. You must provide The
Company with evidence of such coverage prior to the effective date of
this Agreement and agree to provide such evidence when and as often as
may be reasonably requested by The Company.
K. You agree to comply with all applicable Federal, State and local laws
and regulations, including, but not limited to, those regarding
employment discrimination.
L. Nothing contained herein shall preclude You from rendering care to
patients who are not Covered Persons, provided that such patients shall
not receive treatment at preferential times or in any other manner
preferential to Covered Persons or in conflict with the terms contained
in this Agreement. You agree not to differentiate or discriminate in the
treatment of Covered Persons as to the quality of services delivered
because of race, sex, age, religion, place of residence or health
status; and to observe, protect and promote the rights of Covered
persons as patients.
ARTICLE III - LEGAL RELATIONSHIP OF THE COMPANY TO PRIMARY CARE DENTISTS
The relationship between You and The Company is that of independent contractor.
None of the provisions of this Agreement are intended to create, or to be
construed as creating, any agency, partnership, joint venture and/or
employee-employer relationships.
As an independent contractor, Primary Care Dentist shall have sole
responsibility for the payment of all self-employment and applicable Federal
and State taxes.
ARTICLE IV - GENERAL PROVISIONS
The following additional conditions and provisions apply:
A. Nothing contained in this Agreement shall be construed to require You
to recommend or perform any procedure or course of treatment which You
deem to be professionally unacceptable.
B. If You are an individual Dentist, You represent and warrant that You are
licensed to practice dentistry in the jurisdiction where services are
provided; that your license to practice dentistry has not been revoked,
suspended or placed on probation during the past five years; that You
shall maintain an unrestricted license to practice dentistry and be
eligible for a Federal Drug Enforcement Agency permit throughout the
term of this Agreement, and that You will notify The Company if your
license has been revoked, suspended, placed on probation, or
surrendered. If You are a legal representative of a group dental
practice or corporation, You represent and warrant for each Dentist in
said group dental practice or corporation who provides Basic Dental
Services to Covered Persons that he/she meets the above requirements.
You further agree to provide evidence of such licensure, your DEA permit
and your Texas Safety Certificate, as well as any other documentation
that may be required by any Federal, State or local law, prior to the
effective date of this Agreement and thereafter when and as often as may
be reasonably requested by The Company. You agree to notify Prudential
immediately of any revocation, suspension, restriction, reprimand or
probationary action taken by any agency or court of competent
jurisdiction.
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<PAGE> 5
Effective Date: April 1, 1997
C. This Agreement, together with any attachments, supplements, addenda,
amendments or modifications, comprise the complete Primary Care Dentist
Agreement. Neither of the parties has made representations or warranties
other than those set forth in this Agreement and such attachments,
supplements, addenda, amendments or notifications, if any.
D. The Company and its representatives shall have the right to conduct
reviews of your dental office operations and dental records of Covered
Persons. All such reviews will be made during normal working hours or at
such other time that is mutually agreed upon.
E. The Company shall indemnify and hold You harmless from any and all
claims, lawsuits, settlements, and liabilities incurred as a result of
actions taken or not taken by The Company in the administration of the
DMO Coverage Plans.
F. You shall indemnify and hold The Company harmless from any and all
claims, lawsuits, settlements, and liabilities incurred as a result of
professional services provided or not provided by You with respect to
any Covered Person.
G. In the event that any portion of this Agreement is found to be void or
illegal, the validity or enforceability of any other portion shall not
be affected.
H. The waiver by either party of a breach or violation of any provision of
this Agreement shall not operate as, nor be construed as, a waiver of
any subsequent breach thereof.
I. All rights and remedies under this Agreement are cumulative and not
alternative. This Agreement shall be construed and governed by the laws
of the State of Texas.
J. The headings of the various Articles of This Agreement are merely for
convenience and do not, expressly or by implication, limit, define or
extend the terms of the Articles to which they apply.
K. This Agreement may be executed in any number of counterparts which, when
read together, shall comprise one instrument.
ARTICLE V - PRIMARY CARE DENTIST REIMBURSEMENT
Your reimbursement shall be subject to the following conditions:
A. Your reimbursement shall be determined as shown in Attachment A to this
Agreement.
B. In no event, including but not limited to non-payment by The Company,
The Company's insolvency, or a breach of this Agreement, will a Covered
Person be liable for any sums owed by The Company. Further, neither You
nor any dental affiliate providing services pursuant to this Agreement
will bill, charge, collect a deposit or other sum, or seek compensation,
remuneration or reimbursement from, or maintain any action or have any
other recourse against, or make any surcharge upon, a Covered Person or
other person acting on the Covered Person's behalf. If the Company
receives notice of any surcharge upon a Covered Person, it is empowered
to take appropriate action. This item B does not prohibit the collection
of copayments described in item V.D. below.
The obligations set forth in this item B. shall survive the termination
of this Agreement regardless of the cause of such termination and shall
be construed for the benefit of Covered Persons. This item B. shall
supersede any oral or written agreement to the
5
<PAGE> 6
Effective Date: April 1, 1997
contrary now existing or hereafter entered into between You and Covered
Persons or any persons acting on their behalf.
Any modifications, addition, or deletion to the provisions of this
clause shall be effective on a date no earlier than fifteen (15) days
after the Commissioner of Insurance has received written notice of such
proposed changes.
C. You may also be paid additional performance payments based on other
data, including, but not limited to, Covered Persons' satisfaction,
results of annual reviews conducted by The Company or its
representatives, Quality Improvement Program results, and compliance
with administrative practices and guidelines established by The
Company.
D. You shall not demand or receive any form of reimbursement for covered
services from Covered Persons, except for copayment amounts as shown in
the Dental Office Guide and/or an Attachment to this Agreement.
E. You agree that, if a Covered Person who is eligible for benefits under
a DMO Coverage Plan is also eligible for benefits under an Alternate
Dental Plan, either currently or in the future, You shall be reimbursed
under the DMO Coverage Plan of benefits in accordance with the terms of
this Agreement. You further agree that no benefits shall be payable
under the Alternate Dental Plan for any services you render to said
Covered Person, unless The Company has given express written consent to
waive this requirement for that Covered Person.
F. You agree that should You choose not to provide certain Basic Dental
Services to Covered Persons, The Company may, at its option, adjust your
monthly compensation accordingly. You further agree that, if You are
deemed responsible for the cost of any services due to unauthorized
referral to another Dentist and if The Company has paid for such
services, The Company may, at its option, recoup such cost by
adjustment(s) to your monthly compensation.
ARTICLE VI - TERM AND TERMINATION
A. Subject to the conditions set forth in this Article, the term of this
Agreement shall commence on the effective date shown on the first page
of this Agreement and shall continue for a period of 24 months unless
terminated in accordance with the following sections of this Article.
This Agreement will automatically renew for additional 12 month periods
beginning April 1, 1999 unless either party gives written notice of
termination as stated in item C of this Article.
B. Any breach of the provisions of this Agreement by either party may
constitute grounds for immediate termination of the Agreement. Notice of
termination by either party shall be mailed to the last known address of
the other party via prepaid, certified mail, return receipt requested.
C. This Agreement may be unilaterally terminated at the end of any month,
by either party, by giving 9 months written notice mailed to the last
known address of the other party, prepaid, certified mail, return
receipt requested. The earliest this provision C may be exercised is 9
months prior to April 1, 1999.
D. Regardless of any other provisions of this Article, this Agreement may
be immediately terminated by The Company if it determines that such
immediate termination is in the best medical/dental interests of a
Covered Person(s). Notice of such termination shall be mailed
6
<PAGE> 7
Effective Date: April 1, 1997
to the last known address of the Contracting Dentist via prepaid,
certified mail, return receipt requested.
ARTICLE VII - CHANGES IN THIS AGREEMENT
This Agreement, may be modified by The Company by giving thirty (30) days
written notice to the Contracting Dentist. Such modification will take effect
at the end of said 30-day period unless, within that period, You send to The
Company written request for termination of this Agreement.
ARTICLE VIII - NOTICES
Any notices required to be given pursuant to the terms and provisions of this
Agreement shall be in writing and shall be sent to:
Contracting Dentist at: 4201 Spring Valley, Suite 320
Dallas, TX 75244
Prudential Dental Maintenance Organization, Inc. at: One Prudential Circle
Sugar Land, TX 77478
ARTICLE IX - MISCELLANEOUS
A. This Agreement replaces and supersedes all prior written and oral
Agreements including but not limited to the Personal Dentist Agreements
dated August 1, 1994.
B. Modern Dental Associates, PC/Monarch Dental Associates, LP agrees to
give Prudential (4) months written notice of intent before closing any
office location to new enrollees. Closing would be effective at the end
of the month.
C. Modern Dental Associates, PC/Monarch Dental Associates, LP agrees not
to disclose any proprietary information to any other party without the
expressed written permission of Prudential.
Either party may, at any time, designate any other address in place of those
given above by written notice to the other party.
7
<PAGE> 8
Effective Date: April 1, 1997
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CONTRACTING DENTIST:
Name: /s/ WARREN F. MELAMED DDS
-------------------------
Date: 3-19-97 By: /s/ WARREN F. MELAMED DDS
--------- ---------------------------
Group Dental Practice or Corporation Name
Monarch Dental Associates
-------------------------------
TIN#: 75-2632188
-------------------------
Witness: /s/ RUSS VENO
-----------------
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION,
INC.
Date: By:
--------- ----------------------------------
Witness:
--------------------------
8
<PAGE> 9
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT A
The Company will reimburse the Primary Care Dentist for Basic Dental Services
provided to Covered Persons in accordance with the provisions below:
A. The Primary Care Dentist will be paid monthly on a capitation basis not
to exceed the Utilization Maximum. The Utilization Maximum will be based
upon the number of Covered Persons and the group contractholder
utilization pattern for each Covered Person's DMO Coverage Plan. The
group contractholder utilization pattern is determined by The Company
pursuant to its utilization review analysis.
B. Supplemental monthly payments on a capitation basis may be made by The
Company to the Primary Care Dentist if, based on analysis of encounter
information, The Company determines that the payment in item A., above,
is inadequate with regard to the services provided by the Primary Care
Dentist pursuant to this Agreement. The Company will determine whether
supplemental monthly payments will be made and the appropriate amount of
such payments.
C. Monthly compensation payment factor is *** for the period April 1, 1997
thru March 31, 1998. Monthly compensation payment factor will be ***
for the period April 1, 1998 thru March 31, 1999.
(Payment includes an allowance *** for Periodontal Scaling and Root
Planing. Therefore, no additional compensation will be paid by The
Company for Periodontal Scaling and Root Planing procedures.)
D. Supplemental compensation of *** per encounter will be paid quarterly.
This compensation will be calculated based on the number of encounters
received by the DMO during a specified quarter, limited to one encounter
per patient, per visit.
E. A minimum income guarantee for the following services, subject to plan
provisions:
Partial Denture ***
Complete Denture ***
Individual Crowns ***
Bridges, Per Unit ***
Therefore, if the patient's applicable co-payment for an eligible crown,
bridge unit, partial or complete denture is less than the amount listed
above, the DMO will supplement your income for the difference on a per
claim basis. These payments will be included in the calculation of your
earnings per hour.
If the patient is covered under Plan Code U10, the total supplemental
guarantee will be considered, less *** for office visit copayments
collected from two visits. To remain consistent, we will use two visits
as the standard for all supplemental payments.
9
<PAGE> 10
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT B
The Company agrees to compensate the Primary Care Dentist, in addition to any
compensation described in Attachment A of the Primary Care Dentist Agreement, to
perform certain specified Specialty Dental Services -- ORAL SURGERY AND
PERIODONTICS as described in this Attachment B.
1. The Primary Care Dentist agrees that all Specialty Dental Services
shall be performed in accordance with guidelines established by The
Company.
2. Primary Care Dentist will annually submit a fee schedule acceptable to
The Company (on a form as supplied or acceptable to The Company)
listing your current fees, as described for those Specialty Dental
Services requiring a copayment.
3. This Attachment may be terminated, without cause, by the Primary Care
Dentist or The Company by giving sixty (60) days advance written
notice. Any breach of the provisions of this Attachment or of the
Primary Care Dentist Agreement will constitute grounds for immediate
termination of this Attachment by The Company.
4. Primary Care Dentist agrees to submit to The Company encounter
information on forms supplied by or acceptable to The Company. The
forms shall show all Specialty Dental Services provided to each Covered
Person and the copayment amounts collected from Covered Persons.
Encounter information shall be submitted at least monthly.
5. If Primary Care Dentist determines that a service is not eligible for
benefits based on DMO guidelines, the patient should be advised before
proceeding. If Primary Care Dentist and the patient agree to proceed
with an ineligible service, the patient will be responsible for your
fee.
6. If a Specialty Dental Service has a copayment, the Primary Care Dentist
is entitled to collect the copayment from the Covered Person. The
copayment is calculated by applying the Covered Person's copayment
percent to the Primary Care Dentist's usual fee for that Specialty
Dental Service. The Primary Care Dentist will collect the copayment
amount directly from the Covered Person. The copayment amounts are in
addition to reimbursements received by the Primary Care Dentist from The
Company. Office visit copayments may also apply to some plans regardless
of the amount of copayment applicable to specific procedures. The
amount, if any, of office visit copayments are as shown in the Dental
Office Guide.
7. If You determine that a specialty service must be referred to a DMO
specialist for completion, compensation to the specialist shall be
handled by your office. Since you have received compensation for the
service, you will be responsible for the compensation paid to the
referring specialist.
<PAGE> 11
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT B CONTINUED
8. You will be paid *** of the base and retroactive compensation paid
to You for Basic Dental Services. The compensation would be applicable
for ORAL SURGERY AND PERIODONTICS Specialty Services. The amount will be
calculated on a monthly basis depending on your base and retroactive
compensation for the applicable month.
IN WITNESS WHEREOF, the parties hereto have executed this Attachment. The
Contracting Dentist will return the signed Attachment to the Regional Dental
Director.
CONTRACTING DENTIST:
Name: Warren F. Melamed DDS
Date 3-19-97 By: /s/ WARREN F. MELAMED DDS
--------------------------------
Group Dental Practice or Corporation Name
Monarch Dental Associates
Witness: /s/ Russ Veno
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC.
Date: By:
------------- --------------------------------------------
Witness
----------------------
<PAGE> 12
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT C
The Company agrees to compensate the Primary Care Dentist, in addition to any
compensation described in Attachment A of the Primary Care Dentist Agreement,
to perform certain specified Specialty Dental Services - ENDODONTICS as
described in this Attachment C.
1. Primary Care Dentist agrees that all Specialty Dental Services shall be
performed in accordance with guidelines established by The Company.
2. This Attachment may be terminated, without cause, by the Primary Care
Dentist or The Company by giving sixty (60) days advance written notice.
Any breach of the provisions of this Attachment or of the Primary Care
Dentist Agreement will constitute grounds for immediate termination of
this Attachment by The Company.
3. Upon completion of Specialty Dental Service(s), a form (as supplied or
acceptable to The Company) listing the Specialty Dental Service(s)
provided to Covered Person and the copayment amount(s) collected from
Covered Persons for such Services, if any, is to be submitted to The
Company. Primary Care Dentist shall, upon request, furnish such
additional information as may reasonably be required by The Company,
including, but not limited to, charts, radiographs and study models.
4. If Primary Care Dentist determines that a service is not eligible for
benefits based on DMO guidelines, the patient should be advised before
proceeding. If Primary Care Dentist and the patient agree to proceed
with an ineligible service, the patient will be responsible for your
fee.
5. The Company will reimburse Primary Care Dentist for Specialty Dental
Services provided to Covered Persons in accordance with the provisions
below.
A. If a Specialty Dental Service does not have a copayment,
The Company will reimburse Primary Care Dentist the
Scheduled Benefit Amount for that Specialty Dental
Service shown below. The Primary Care Dentist agrees to
accept the Scheduled Benefit Amount as the maximum
payment for that Specialty Dental Service.
B. If a Specialty Dental Service has a copayment the
Primary Care Dentist is entitled to collect the
copayment from the Covered Person as specified in the
Dental Office Guide. The copayment amounts for the
listed dental procedures shall be determined as either a
fixed dollar amount per specified procedure or as a
percentage of the Scheduled Benefit Amount shown
below. The Company will reimburse the Primary Care
Dentist the difference between the Scheduled Benefit
Amount and the copayment. The Company will inform the
Primary Care Dentist of the applicable copayment
amount for a particular Covered Person.
C. Office visit copayments may also apply to some plans
regardless of the amount of copayment applicable to
specific procedures. The amount, if any, of office visit
copayments are as shown in the Dental Office Guide.
<PAGE> 13
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT C CONTINUED
LIST OF SPECIALTY DENTAL SERVICES
ENDODONTICS
SERVICE DESCRIPTION SCHEDULED BENEFIT AMOUNT
- ------------------- ------------------------
Molar Root Canal Therapy and Retreatment, started ***
on or after 4/1/97
Other Endodontic Procedures Authorized by Company *
*Scheduled Benefit Amount to be determined by Company on an individual basis.
IN WITNESS WHEREOF, the parties hereto have executed this Primary Care Dentist.
The Contracting Dentist will return the signed Primary Care Dentist to the
Regional Dental Director.
CONTRACTING DENTIST:
Name: Warren F. Melamed DDS
-------------------------
Date 3-19-97 By: /s/ WARREN F. MELAMED DDS
----------------------------
Group Dental Practice or Corporation Name
Monarch Dental Associates
---------------------------
Witness: /s/ Russ Veno
---------------
PRUDENTIAL DENTAL MAINTENANCE ORGANIZATION, INC.
Date: By:
------------------ -------------------------
Witness
----------------
<PAGE> 14
Effective Date: April 1, 1997
PRIMARY CARE DENTAL AGREEMENT
ATTACHMENT D
The following offices will provide dental services under this contract.
Monarch Dental Associates - Monarch Dental Associates -
North Dallas Lewisville
6757 Arapaho Road, Suite 777 1288 West Main #123
Dallas, TX 75248 Lewisville, TX 75067
Monarch Dental Associates - Monarch Dental Associates -
Garland Hulen
3325 E. Beltline Road 6261 Granbury Road
Garland, TX 75044 Ft. Worth, TX 76132
Monarch Dental Associates - Monarch Dental Associates -
Mesquite Denton
3501 Towne Crossing Boulevard, 2201 I-35 E. South
Suite 180 Denton, TX 76205
Mesquite, TX 75150
Monarch Dental Associates - Monarch Dental Associates -
Plano N. Richland Hills
3303 N. Central Expressway, Suite 250 6455 Hilltop Drive
Plano, TX 75023 North Richland Hills, TX 76180
Monarch Dental Associates - Monarch Dental Associates -
Irving Lake Highlands
3401 W. Airport Freeway, Suite 206 10505 Church Road
Irving, TX 75062 Dallas, TX 75238
Monarch Dental Associates - Redbird
3235 W. Camp Wisdom Road
Dallas, TX 75237
Monarch Dental Associates - Ridgmar
6909 Green Oaks Road
Ft. Worth, TX 76116
Monarch Dental Associates - Carrollton
2540 Old Denton Road, Suite 188
Carrollton, TX 75006
Monarch Dental Associates - Downtown
723 North Olive Street
Dallas, TX 75201
Monarch Dental Associates - Bedford
1717 Airport Freeway
Bedford, TX 76021
Monarch Dental Associates - West Plano
5068 West Plano Parkway, Suite 122
Plano, TX 75093
<PAGE> 15
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT E
The Company agrees to compensate the Primary Care Dentist, in addition to any
compensation described in Attachment A of the Primary Care Dentist Agreement,
to perform certain specified Specialty Dental Services - ORTHODONTICS as
described in this Attachment D.
1. The Primary Care Dentist agrees that all Specialty Dental Services
shall be performed in accordance with guidelines established by The
Company.
2. This Attachment may be terminated, without cause, by the Primary Care
Dentist or The Company by giving sixty (60) days advance written notice.
Any breach of the provisions of this Attachment or of the Primary Care
Dentist Agreement will constitute grounds for immediate termination of
this Attachment by The Company.
3. If you determine that a service is not eligible for benefits based on
DMO guidelines, the patient should be advised before proceeding. If you
and the patient agree to proceed with an ineligible service, the patient
will be responsible for your fee.
4. The Company will reimburse the Primary Care Dentist for Specialty
Dental Services provided to Covered Persons in accordance with the
provisions below.
A. If a Specialty Dental Service does not have a copayment, The
Company will reimburse the Primary Care Dentist in accordance
with the Scheduled Benefit Amount for that service shown below.
The Primary Care Dentist agrees to accept the Scheduled Benefit
Amount as the maximum payment for that Specialty Dental
Service.
B. If a Specialty Dental Service has a copayment, the Primary
Care Dentist is entitled to collect the copayment from the
Covered Person as specified in the Specialty Dental Office
Guide. The copayment amounts for the listed dental procedures
shall be determined as either a fixed dollar amount per
specified procedure or as a percentage of the Scheduled Benefit
Amount shown below. The Company will reimburse the Primary Care
Dentist the difference between the Scheduled Benefit Amount and
the copayment. The Company will inform the Primary Care Dentist
of the applicable copayment amount for a particular Covered
Person.
C. The Company's portion of the Scheduled Benefit Amount shall be
considered to be incurred by The Company in equal installments
over the duration of treatment. Company will pay two quarterly
installments to Primary Care Dentist upon installation of the
initial orthodontic appliance and will pay the remaining
installments quarterly thereafter providing treatment continues
and the patient remains covered in the Coverage Plan.
<PAGE> 16
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
Effective Date: April 1, 1997
PRIMARY CARE DENTIST AGREEMENT
ATTACHMENT E (CONTINUED)
LIST OF COVERED SPECIALTY DENTAL SERVICES
ORTHODONTICS
<TABLE>
<CAPTION>
SCHEDULED
DESCRIPTION BENEFIT AMOUNT
- ----------- --------------
<S> <C>
Interceptive Orthodontic Treatment of the $ ***
Primary Dentition*
Interceptive Orthodontic Treatment of the $ ***
Transitional Dentition*
Comprehensive Orthodontic Treatment of the $ ***
Adolescent Dentition*
</TABLE>
[The Comprehensive Orthodontic Treatment case can vary from 18 to 30 months.
Cases that are less than 18 months or more than 30 months will be prorated.]
* Scheduled Benefit Amount includes orthodontic evaluation, treatment plan,
consultation, exam, pre and post treatment records (x-rays, tracings,
photos, models, etc.) and retention.
** The Interceptive Treatment Scheduled Benefit Amount is considered to be
included in the Scheduled Benefit Amount for Comprehensive Treatment unless
a minimum of twelve months has elapsed between the date treatment ends for
interceptive and the date treatment starts for Comprehensive.
IN WITNESS WHEREOF, the parties hereto have executed this Attachment. The
Contracting Dentist will return the signed Attachment to the Regional Dental
Director.
CONTRACTING DENTIST:
Name: /s/ WARREN F. MELAMED MS.
---------------------------------
Date: By: /s/ WARREN F. MELAMED MS.
-------------------------- -----------------------------------
Group Dental Practice or Corporation
Name
MONARCH DENTAL ASSOCIATES
Witness: ---------------------------------------
-----------------------
PRUDENTIAL DENTAL MAINTENANCE
ORGANIZATION, INC.
Date: By:
-------------------------- ------------------------------------
Witness:
-----------------------
<PAGE> 1
EXHIBIT 10.19
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
DENTACARE
DENTAL SERVICE AGREEMENT
BETWEEN
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
ADVANCE DENTAL MANAGEMENT
This Dental Service Agreement ("AGREEMENT") is made and entered into
this first day of January, 1995, by and between Compcare Health Services
Insurance Corporation, a Wisconsin stock insurance corporation ("COMPCARE") and
Advance Dental Management ("DENTAL GROUP"). Compcare and Dental Group recognize
the desirability and need for finding efficient and economical methods of
delivering quality dental care. Accordingly, this Agreement sets forth the
terms under which Dental Group shall so deliver Dental Services to Participants.
ARTICLE 1. DEFINITIONS. The following terms, when used in this Agreement and
all Amendments hereof and Attachments hereto, are defined as follows.
1.1 "CAPITATION" means the monthly amount to be paid to Dental Group for the
Participants entitled to Dental Services, including the supplemental
advance payments made to the Dental Group. In addition, Capitation shall
include the amount to be paid to Dental Group for the Participants
enrolled at the Midwest Dental - LaCrosse location entitled to Specialty
Services. The amount of Capitation is set forth in Attachment A which is
attached hereto and made a part hereof.
1.2 "DENTAL CARE PLAN" means any dental care plan offered by Compcare, doing
business as Dentacare, which makes available to enrolled Participants a
limited range of dental care services performed by Dentists selected by
Compcare. Additional Dental Care Plans may be added upon thirty (30)
days prior written notice to Dental Group, unless within thirty (30)
days following receipt of the notice, Dental Group notifies Compcare in
writing that it does not wish to participate in the additional Dental
Care Plans.
1.3 "DENTAL GROUP" means the service corporation which is party to this
Agreement identified as Advance Dental Management which has taken full
responsibility of the duties herein for those facilities identified on
Attachment B which is attached hereto and made a part hereof.
1.4 "DENTAL SERVICE" means those services, procedures, supplies and
appliances to which a Participant is entitled under a Subscriber
Contract, excluding those services defined as Specialty Services.
1.5 "DENTIST" means a licensed Doctor of Dental Surgery or a licensed
Doctor of Medical Dentistry.
1.6 "DEPENDENT" means the legal spouse of the Subscriber and their children
who are eligible Dependents as Dependent is defined in the Subscriber
Contract.
1.7 "GROUP" means any employer group, association or other entity which
applies and is accepted for coverage under the Dental Care Plan.
1.8 "GROUP DENTIST" means a Dentist who is contractually associated with or
employed by Dental Group or one of its affiliates or subsidiaries.
1.9 "PARTICIPANT" means the Subscriber or any of Subscriber's Dependents
determined by Compcare to be eligible for Dental Service under this
Agreement.
1.10 "SERVICE AREA" means the area within fifty (50) miles of Dental Group's
facilities set forth in Attachment B hereto.
<PAGE> 2
1.11 "SPECIALTY SERVICE" means those services which are classified as
orthodontics, and have been agreed upon by Dental Group and Compcare as
services which will be referred to a Dentist of Compcare's choosing,
with the exception of those Specialty Services required by a Participant
enrolled at the Midwest Dental - Lacrosse facility which are the
responsibility of the Dental Group pursuant to the terms of this
Agreement
1.12 "SUBSCRIBER" means a member of an enrolled Group whom the Group has
reported to Compcare as eligible for Dental Service under a Group
Subscriber Contract or a person with whom Compcare has entered into an
individual Subscriber Contract.
1.13 "SUBSCRIBER CONTRACT" means a Group or individual contract under
which Subscribers and their eligible Dependents are entitled to receive
Dental Service under the Dental Care Plan.
ARTICLE 2. DENTAL GROUP'S RESPONSIBILITIES.
2.1 Dental Group shall provide Dental Services to those Subscribers and
their Dependents who are enrolled in a Dental Care Plan. Dental Group
shall also adhere to the administrative procedures as outlined in the
Dentacare Office Manager's Manual and any Amendments thereto.
2.2 For those Subscribers and their Dependents who have selected the
Midwest Dental - LaCrosse facility (as identified in Attachment B
hereto) to provide their Dental Services, Dental Group shall provide
said Subscribers and Dependents with Specialty Services.
2.3 Dental Group shall provide for the availability of Dental Service at
such time at such locations and upon such terms and conditions as shall
be agreed upon by Dental Group and Compcare. Dental Group specifically
agrees to schedule appointments for routine examinations, recall, and
preventative therapy within six (6) weeks of the request therefor, and
appointments for emergency treatment within twenty-four (24) hours of
the request therefor. Dental Group agrees to maintain twenty-four (24)
hour telephone answering service or other such mechanism to receive
emergency calls.
2.4 With the exception of existing agreements between Dental Group and its
affiliate service corporations Midwest Dental Care Sheboygan, S.C. and
Midwest Dental Care Mondovi, S.C., Dental Group shall not subcontract or
delegate its duties hereunder unless Compcare shall so approve in
writing. Neither the engagement of consultants by Dental Group to assist
Dental Group in providing Dental Service to a Participant nor the
referral of Participants as provided in the Subscriber Contract shall be
deemed to be subcontracting or delegating of Dental Group's duties
hereunder. Dental Group shall be solely responsible for the payment of
the charges of such consultants and of the Dentists to whom such
referrals are made if such referral is necessary for the Dental Group to
fulfill its responsibilities in providing Dental Services. Under no
circumstances shall Dental Group be entitled to any compensation beyond
that specified in Article 4. In the event Dental Group becomes insolvent
or suffers financial difficulties, the claims of such consultants shall
have priority over claims of Dental Group.
2.5 Dental Group shall refer Participants only to licensed Providers
("REFERRAL PROVIDERS") who have both the requisite skill to deliver
the covered Dental Service and the minimum amount of malpractice
insurance required by Compcare in Article 7.1.; or only to Dentists who
have been identified as the Dentist of Compcare's choosing to provide
Specialty Services.
2.6 Dental Group shall provide prostheses and cast restorations to
Participants and, under Subscriber Contracts wherein laboratory charges
are not a Dental Service, shall charge Participants for dental
prostheses and cast restorations the lesser of the laboratory's actual
charges therefor or such amounts as Compcare determines to be the
prevailing fee for such items. In the event Dental Group performs any
work on such items which would otherwise be performed in a dental
laboratory, the total charge to
2
<PAGE> 3
Participants shall be the lesser of Dental Group's actual charges
therefor or the aforementioned prevailing fee.
2.7 With the singular exception of the Midwest Dental - LaCrosse facility
(pursuant to Article 2.2 herein), Dental Group agrees to refer any
Participant requiring Specialty Services to a Dentist of Compcare's
choosing.
2.8 For those Participants enrolled at the Midwest Dental - LaCrosse
facility, Dental Group agrees that its total copayment charge to a
Participant, or to a Subscriber on behalf of a Participant, for the
course of orthodontic treatment shall not exceed the amount specified
as the Participant's liability in the applicable Subscriber Contract.
2.9 Dental Group agrees that during the term of this Agreement neither it
nor any of its partners, officers, directors, or employees will
directly or indirectly try to persuade any Subscriber or enrolled
Group to terminate their participation in this Dental Care Plan or to
obtain their dental care under or from some other plan, program, or
carrier.
2.10 Dental Group agrees that it, its partners, officers, directors,
employees, agents, or any affiliate, including but not limited to
Midwest Dental Plan, Ltd., Midwest Dental Care Sheboygan, S.C., and
Midwest Dental Care Mondovi, S.C., shall not directly or indirectly use
any records or information supplied by Compcare to the Dental Group to
solicit the sale of insurance or other products or services. Either
upon termination of this Agreement or a request by Compcare, the
Dental Group shall destroy or deliver to Compcare, as per the
instructions of Compcare, any records in the possession of the Dental
Group that contain confidential or proprietary information of Compcare
or the Dental Care Plan.
2.11 Dental Group shall not contract to provide services to any other
prepaid dental organization or any prepaid medical plan, or to provide
services on a prepaid basis to any self-funded dental or medical plan,
if such other contract will affect Dental Group's ability to provide
adequate services to either existing Participants or potential new
Participants. Dental Group shall provide Compcare within thirty (30)
days of Compcare's request therefor a listing of all health maintenance
organizations, limited service health organizations, preferred provider
organizations, self-funded dental or medical plans, and other alternate
delivery systems with which Dental Group has contracted to provide
dental services.
2.12 Dental Group agrees not to extend to any such organization or plan
financial arrangements which are more advantageous to such organization
or plan than those arrangements expressed herein.
2.13 Dental Group acknowledges that Compcare is relying on the Dental
Group's ability to provide the services required under this Agreement.
In order to assure the availability of Dental Services to Participants,
the Dental Group agrees to advise Compcare of any limitations upon the
ability of the Dental Group to provide Dental Services to Compcare
Participants as soon as such limitations become known to the Dental
Group. Compcare reserves the right to indicate such limitations in its
marketing materials and efforts, and to request of the Dental Group a
written plan to cure such limitations.
2.14 Dental Group shall notify Compcare of the Dentists who are affiliated
with the Dental Group, and the type of affiliation the Dentist has with
Dental Group. Furthermore, the Dental Group shall provide timely notice
of any changes to these affiliations, including staffing structure
and/or ownership of specific dental offices or dental practices.
2.15 Dental Group agrees that each Participant who has elected Dental Group
should be allowed to select an available Group Dentist as his or her
personal Dentist for coordinating his or her overall dental care. In
the event there is a breach of a satisfactory patient/Dentist
relationship between a Participant and a Group Dentist, Dental Group
may request that Compcare disenroll the Participant. Dental Group
3
<PAGE> 4
acknowledges that Wisconsin insurance regulations require Compcare to
give the Participant an opportunity to select an alternate Group
Dentist, make a reasonable effort to assist the Participant in
establishing a satisfactory patient/Dentist relationship, and inform the
Participant that he or she may file a grievance on the matter. Dental
Group further acknowledges that Compcare is prohibited from disenrolling
any Participant solely on the grounds that the Participant failed to
follow a prescribed course of treatment or because the Participant
failed to keep a scheduled appointment.
2.16 Dental Group shall provide Compcare with advance written notice of
Dental Group's intention to relocate any facility identified on
Attachment B hereto or establish any new office or facility for the
delivery of Dental Services. Such new location or facility shall not be
a part of the Dental Care Plan covered under this Agreement unless and
until Dental Group applies to Compcare for the inclusion of such
location or facility in the Dental Care Plan and Compcare provides
written approval of such inclusion.
2.17 Dental Group shall comply with the proration and transfer of copayments
as specified in the Dentacare Office Manager's Manual as it applies to
the Midwest Dental - LaCrosse facility. This proration and transfer of
copayments shall take place within thirty (30) days of transfer of a
Participant from one Provider to another Provider or within thirty (30)
days of termination of the Participant's coverage. The obligation to
comply with the proration schedule as outlined in the Dentacare Office
Manager's Manual survives the termination of this Agreement as outlined
in Article 9.
2.18 Dental Group specifically acknowledges that Compcare does not practice
dentistry, and that Dental Group is solely responsible for all clinical
decisions regarding treatment of Participants under Dental Group's care,
notwithstanding receipt by Dental Group of any denial, authorization, or
recommendation issued by Compcare.
2.19 Dental Group warrants that it is able to bind Group Dentists to the
terms and conditions expressed herein, and that it acts as the Group
Dentists' agent in the execution of this Agreement.
ARTICLE 3. COMPCARE'S RESPONSIBILITIES.
3.1 Compcare shall perform its usual administrative, accounting, enrollment
and other functions that are necessary and appropriate for the
administration of this Dental Care Plan and this Agreement.
3.2 Compcare shall furnish Dental Group with a list of the names of all
Participants who are eligible for Dental Services under the Subscriber
Contracts and have elected or been assigned to receive Dental Services
from Dental Group, and shall revise and update such lists on a periodic
basis.
3.3 Compcare shall not intervene in any manner with the rendition of Dental
Services by Dental Group, it being agreed that Dental Group shall have
the sole responsibility in connection therewith, subject to Compcare's
Quality Assurance Program and utilization review practices, and that
nothing herein contained shall interfere with the professional
relationship between a Participant and a Participant's Dentist.
3.4 Compcare shall act as final arbiter in the resolution of any financial
dispute between Providers, which dispute arises from the transfer or
termination of a Participant.
3.5 With the exception of the Midwest Dental - LaCrosse facility, Compcare
shall be responsible for the cost of Specialty Services provided the
following two conditions are satisfied:
3.5.1 the referral of such services is provided with a written
referral to a Dentist of Compcare's choosing; and
3.5.2 the referral is specific to services not within the realm of
Dental Services which are the Dental Group's responsibility to
provide.
4
<PAGE> 5
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERICKS.
ARTICLE 4. COMPENSATION OF DENTAL GROUP.
4.1 For any of the Dental Services provided pursuant to this Agreement, and
for Specialty Services provided at the Midwest Dental - LaCrosse
facility, Compcare agrees that on or before the 15th day of each month
that this Agreement is in effect or at such other times as Compcare and
Dental Group may agree, Compcare will pay to Dental Group a Capitation
for each Participant who for more than fifteen (15) days of that month
subscribes to the Dental Care Plan and is served by Dental Group.
4.2 With the exception of any copayments, coinsurance, deductibles, or
charges for noncovered services, Dental Group agrees that fees will not
be collected from or charged to Participants for Dental Services. Dental
Group understands that the Capitation payments it receives from Compcare
pursuant to this Article 4 constitute payment in full for Dental
Services, even in the event such payments prove insufficient to cover
all Dental Group's costs or fees of providing such services.
4.3 Compcare retains the exclusive right to assign Participants to Dental
Group for the provision of Dental Services covered by this Agreement and
to transfer Participants assigned to or served by Dental Group to a
different dental group affiliated with the Dental Care Plan. In the
event Compcare assigns or transfers a Participant to or from Dental
Group, Compcare shall adjust the Capitation paid under Article 4.1 to
account for the change in the number of Participants served by Dental
Group.
4.4 Compcare retains the right to retroactively adjust Capitation payments
to reflect additions and deletions in the Participant count caused by
clerical error such as a group's erroneous or untimely reporting of
covered employees. In the event Compcare recovers Capitation amounts
previously paid resulting in Dental Group having provided services to an
ineligible Participant, Dental Group will pursue payment for its usual
and customary charges directly from the Participant. If reasonable
collection efforts prove to be unsuccessful, then Compcare agrees to
reimburse Dental Group at *** percent (***) of the usual, customary
and reasonable level of payment for such services rendered.
4.5 On an annual basis Compcare and Dental Group will review Capitation and
advance payments contractually agreed upon, and determine the financial
arrangement which will extend the financial terms one additional year
from the period identified in Attachment A of the Agreement. The terms
of Attachment A in effect shall continue in effect until such time as
the parties determine and agree upon the revised financial terms. Any
extension of financial terms shall be identified in an annual amendment
to this Agreement.
4.6 Compcare, at its option, may assume sole responsibility for collecting
coordination of benefits recoveries and shall be allowed to keep any and
all such recoveries. In the event Compcare assumes this responsibility,
Dental Group agrees to cooperate fully with Compcare's collection
efforts, including transferring payments received from other insurers to
Compcare. The foregoing shall not be construed to confer upon Dental
Group any rights to subrogation, workers' compensation, or other third
party claims, it being understood that the rights to all such claims
belong exclusively to Compcare with any resultant recoveries to be
applied towards reduction of future premium.
ARTICLE 5. RECORDS AND REPORTS.
5.1 Compcare shall maintain such records and establish and adhere to such
procedures as shall be reasonably required to ascertain the number and
identity of Participants.
5.2 Compcare and Dental Group shall each maintain in accordance with
standard and accepted accounting practices such financial and accounting
records as shall be necessary, appropriate or convenient for the
determination of the financial experience of each in participating in
this Dental Care Plan.
5
<PAGE> 6
5.3 Dental Group shall provide statistical records to Compcare of
utilization of Dental Services by Participants in such form and detail
as shall be reasonably requested by Compcare. Such utilization records
shall be furnished to Compcare on a timely basis not later than the
month after Dental Services are rendered. Should Dental Group fail to
provide utilization records on a timely basis, Compcare shall have the
right, at Dental Group's expense, to inspect and audit Dental Group's
utilization and dental records at the offices of Dental Group and/or its
Group Dentists.
5.4 Compcare and Dental Group shall each have the right upon request to
inspect at any reasonable time all accounting and administrative books
and records maintained by the other pertaining to this Dental Care Plan
and this Agreement, provided Compcare or Dental Group do not deem such
books and records to be confidential.
5.5 Dental Group shall provide Compcare with financial and accounting
information relating to those aspects of its operation which pertain to
this Dental Care Plan and this Agreement in such form and detail as
Compcare shall reasonably request. Compcare shall at all reasonable
times have access to the books and records in which such financial and
accounting information is recorded.
5.6 Dental Group and Compcare agree that all Participants' dental records
shall be treated as confidential to such extent as to comply with all
State and Federal laws regarding the confidentiality of patient's
records. Subject to the foregoing sentence, Compcare shall have the
right, upon request, to inspect at all reasonable times any dental
records pertaining to Participants.
5.7 To the extent permitted by State and Federal laws and regulations
regarding confidentiality, upon termination of this Agreement, at the
express written request of the Participant and at the expense of the
Participant and Compcare, copies of all patient records in the
possession of Dental Group shall be transferred in accordance with the
directions in the written request. Expenses associated with copying of
patient records shall be limited to the actual costs incurred by Dental
Group. However, in the event this Agreement is terminated by Dental
Group all expenses associated with the copying and transferring of
patient records shall be the responsibility of Dental Group.
ARTICLE 6. NON-PARTICIPANT PATIENTS.
6.1 Dental Group reserves the right to the extent compatible with the
rendition of Dental Service to Participants to provide its services to
persons who are not Participants.
ARTICLE 7. INSURANCE.
7.1 Dental Group shall, at its sole cost and expense, procure and maintain
policies of insurance, including general risk insurance, from an
insurance company approved by Compcare and in amounts adequate and
necessary to perform Dental Group's responsibilities under this
Agreement. Furthermore, Dental Group shall, at its own cost and expense,
procure and maintain malpractice insurance in an amount not less than
$1,000,000 for injury to or death of any one person in any one year, and
in an amount not less than $3,000,000 for injury to or death of more
than one person in any one year. Insurance described in this Article 7
must provide coverage to Dental Group, its Group Dentists, their staff,
agents and employees, as appropriate. Evidence of all such insurance
shall be provided to Compcare upon request. Dental Group shall
immediately notify Compcare of any restrictions, changes, cancellations
or terminations of any of the insurance described in this Article 7.
7.2 Upon request, Dental Group shall provide Compcare a written summary of
how Dental Group is assured that all Group Dentists, their staff, agents
and employees will acquire and maintain adequate liability insurance,
including malpractice insurance and general liability insurance. Dental
Group shall immediately notify Compcare of any restrictions, changes,
cancellations or terminations of such insurance.
6
<PAGE> 7
7.3 Compcare shall, at its own cost and expense, maintain policies of
general liability and other insurance in amounts adequate and necessary
to perform Compcare's responsibilities under this Agreement. Evidence of
such insurance will be provided to Dental Group upon request.
ARTICLE 8. QUALITY ASSURANCE.
8.1 Compcare will establish a Quality Assurance Program for review of the
nature and extent of Dental Services provided by Dental Group to
Participants. Dental Group agrees to comply with reasonable procedures
and recommendations set forth as a result of the Quality Assurance
Program and its associated Quality Assurance Reviews, if any. Dental
Group shall be furnished copies of the findings resulting from such
reviews and shall be entitled to meet with the person or persons who
make such findings. Dental Group consents to the use of any data or
information obtained by virtue of Article 5 as it pertains to this
Dental Care Plan for the purposes of such review.
8.2 Dental Group shall immediately provide Compcare with a copy of any
written complaint or description of any grievance received from a
Participant. Any complaints or grievances received by Compcare with
respect to the provision of Dental Service by Dental Group will be
recorded and resolved in accordance with Compcare's regular grievance
procedures.
8.3 During the term of this Agreement, each Group Dentist and any other
employee, staff member or agent of the Dental Group shall maintain any
licensure required by any state(s) law(s) necessary for performance of
his or her duties under this Agreement, and shall remain in good
standing with any appropriate regulatory agency. Dental Group shall
provide information requested by Compcare pertaining to any Dental Group
member's educational background, clinical experience, satisfaction of
continuing dental education requirements, licensure, and board
qualifications or certification(s).
ARTICLE 9. TERMS OF AGREEMENT.
9.1 This Agreement shall be in effect on January 1, 1995, and shall continue
in effect until either of the parties terminates this Agreement in
accordance with this Article 9.1. Either party may terminate this
Agreement by giving the other party at least ninety (90) days prior
written notice. Notwithstanding the foregoing, Compcare reserves the
right to terminate this Agreement, or prevent the participation of a
specific facility identified on Attachment B in any Dental Care Plan, at
any time upon thirty (30) days prior written notice should Dental Group
or any specific facility identified on Attachment B fail to follow
Compcare's Quality Assurance Program.
9.2 During the period following the delivery of any notice as provided in
this Article 9, and until the time when this Agreement is to terminate
pursuant to such notice, all terms and conditions of this Agreement and
any Amendments hereof or Attachments hereto shall continue in full force
and effect and be binding upon the parties hereto just as if no notice
of termination had been given.
9.3 This Agreement shall terminate in the event of the termination of all
of the Subscriber Contracts assigned to the Dental Group.
9.4 Dental Group shall have no obligation to any Participant after the
termination of this Agreement provided, however, that Dental Group shall
complete any specific Dental Service, such as crowns, endodontics,
and/or prosthodontics, commenced prior to, but incomplete at such
termination. It is further agreed that Dental Group shall continue to
provide Dental Service, including Specialty Services provided at the
Midwest Dental - LaCrosse facility, to Participants covered under
Subscriber Contracts existing on the termination date until the
expiration or renewal of such contracts, as well as for any period of
time the Dental Care Plan is required by state or federal law to provide
an extension of insurance coverage.
7
<PAGE> 8
Compcare shall reimburse Dental Group for Dental Services provided
during such periods of extension at the capitation rate in effect just
prior to the termination of this Agreement.
9.5 The termination of this Agreement shall be survived by all rights,
duties, responsibilities and obligations contained herein relating to
any occurrence prior to termination of this Agreement.
ARTICLE 10. MISCELLANEOUS.
10.1 Dental Group will indemnify and hold harmless Compcare and its
Affiliates and their directors, officers, and employees from any and all
claims, liabilities, damages or other costs in any way resulting from,
incident to, or arising out of acts or omissions of Dental Group
constituting criminal conduct, negligence or willful misconduct. This
indemnification shall survive the termination of this Agreement.
10.2 Compcare will indemnify and hold harmless Dental Group from any and all
claims, liabilities, damages or other costs in any way resulting from,
incident to, or arising out of acts or omissions of Compcare
constituting criminal conduct, negligence or willful misconduct. This
indemnification shall survive the termination of this Agreement.
10.3 This Agreement shall in no way be construed in a manner which shall
provide any rights to Participants or to increase the duties or
responsibilities of the parties hereto beyond the requirements
established by Subscriber Contracts, it being agreed that the sole
purpose of this Agreement is to establish the respective rights and
duties of the parties hereto, each to the other, and that the rights of
each Participant are derived solely from the respective Participant's
Subscriber Contract.
10.4 No provision of this Agreement is intended to create nor shall be deemed
or construed to create any relationship between the parties to this
Agreement other than that of independent contractors contracting with
each other hereunder solely for the purpose of effecting the provisions
of the Agreement and to implement the success of this Dental Care Plan.
10.5 Neither of the parties hereto nor any of their respective employees
shall be construed to be the agent, employee or representative of the
other.
10.6 Dental Group agrees that Compcare may use in Compcare's promotional
advertising and marketing material Dental Group's name, address and
telephone number and the name, address, telephone number and description
of areas of dental practice of Dental Group's Group Dentists. Dental
Group may use Compcare's and/or Dentacare's name(s) and logo(s) provided
Dental Group obtains Compcare's prior written approval as to the
specific use.
10.7 Dental Group shall not assign this Agreement without the prior written
consent of Compcare. This includes, but is not limited to:
10.7.1 an assignment which is part of the sale by the Dental Group of
any of its facilities and/or practice;
10.7.2 an assignment due to operational changes or restructuring of
the Dental Group; and
10.7.3 the sale or transfer of fifty-one percent (51%) or more of
Dental Group's capital stock by any of Dental Group's
shareholders.
An attempted assignment without the prior written consent of Compcare
shall be void.
10.8 All notices which are or may be required to be given by one party to the
other in connection with this Agreement and the transactions
contemplated thereby shall be in writing and shall be deemed to have
been properly given if and when delivered personally or sent by
certified mail, return receipt requested, addressed, if to Compcare, to:
8
<PAGE> 9
President
Compcare Health Services Insurance Compensation
401 West Michigan Street
Milwaukee, Wisconsin 53203
and if to Dental Group, to:
President
Advance Dental Management
680 Hehli Way
Mondovi, WI 54755
10.9 Dental Group shall not commence any action at law against Compcare to
recover on any claim arising out of this Agreement more than two (2)
years after the events which gave rise to such claim occurred.
10.10 This Agreement constitutes the entire agreement between the parties
hereto pertaining to the subject matter hereof and supersedes all prior
and contemporaneous agreements, understandings, negotiations, and
discussions, oral or written, between the parties pertaining to the
subject matter hereof. There are no other warranties, representations or
agreements except as specifically set forth herein.
10.11 The failure of any of the parties to insist upon strict performance of
any of the terms of this Agreement shall not be deemed a waiver of any
of their respective rights or remedies and shall not be deemed a waiver
of any subsequent breach of, or default in, any of the terms contained
in this Agreement.
10.12 This Agreement shall be interpreted under the laws of the State of
Wisconsin. If any clause, phrase, paragraph, section or Article of this
Agreement shall be held to be invalid by any court of competent
jurisdiction, the remaining portions of this Agreement not affected
thereby shall remain in full force and effect so long as the material
rights and obligations of the parties are not adversely affected.
10.13 Neither party shall be liable for any failure or delay in its
performance under this Agreement, which is due in whole or in part to
any cause beyond its control.
10.14 The parties shall keep the terms of the Agreement confidential.
Furthermore, neither party shall disclose or release any data,
information or material obtained in connection with this Agreement to
any other person, natural or corporate, without the prior written
consent of the other party.
10.15 This Agreement may be amended only by a writing signed by the parties
hereto, except that additional Dental Care Plans may be added pursuant
to Article 1.2.
10.16 Any capitalized heading preceding the text of the Articles hereto are
inserted solely for the convenience of reference and shall not
constitute a part of this Agreement or affect its meaning, construction
or effect.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date specified on the first page herein:
COMPCARE HEALTH SERVICES
INSURANCE CORPORATION ADVANCE DENTAL MANAGEMENT
By: /s/ ROGER A. FORMISANO By: [ILLEGIBLE]
----------------------- ----------------------
Roger A. Formisano
President
Title: President
Date: 10-12-95 Date: 9-27-95
10
<PAGE> 11
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
ATTACHMENT A
TO THE
DENTACARE DENTAL SERVICE AGREEMENT
BETWEEN
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
ADVANCE DENTAL MANAGEMENT
Set forth herein are the financial terms for the Agreement between
Compcare and the Dental Group to be effective January 1, 1995.
I. The Capitation to be paid to the Dental Group in each month for each
Participant according to the Dental Care Plan in which such Participant
is enrolled is as follows:
<TABLE>
<CAPTION>
Effective Effective Effective
January 1 January 1 January 1
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
A. Dentacare
1. Dentacare 100 $ *** $ *** $ ***
(Contract Codes 408,
411, 414, 415, 441,
444, 446, 447, 448,
453, 499, 4DN)
2. Dentacare 180 $ *** $ *** $ ***
(Contract Code 479)
B. Smile Plus
1. Smile Plus $ *** $ *** $ ***
(Contract Codes 494,
497, 4DG, 4DJ)
2. Smile Plus II $ *** $ *** $ ***
(Contract Codes 404,
498, 4DH)
C. Dentacare Classic
(Contract Code 4DF) $ *** $ *** $ ***
D. HMO Dental Supplement
(Contract Code 450) $ *** $ *** $ ***
</TABLE>
11
<PAGE> 12
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
II. In addition to the Capitation paid as identified in Section I, the
Dental Group shall be paid a supplemental rate for Specialty Services
each month for each Participant according to the Dental Care Plan in
which such Participant is enrolled at the Midwest Dental - LaCrosse
facility as follows:
<TABLE>
<CAPTION>
Effective Effective Effective
January 1 January 1 January 1
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
A. DENTACARE
1. Dentacare 100 $ *** $ *** $ ***
$ ***/$ *** Ortho Copay
(Contract Codes 411,
414, 415, 446, 448,
453)
2. Dentacare 100 $ *** $ *** $ ***
$ ***/$ *** Ortho Copay
(Contract Codes 408,
441, 444, 447, 499,
4DB, 4DN)
3. Dentacare 180 $ *** $ *** $ ***
$ *** Ortho Copay
(Contract Code 479,
4DC)
B. SMILE PLUS/HMO DENTAL SUPPLEMENT
$ *** Max Ben. $ *** $ *** $ ***
(Contract Codes 404,
450, 494, 497, 498,
4DG, 4DH, and 4DJ)
</TABLE>
III. The Dental Group shall be responsible out of the Capitation for
reimbursement of the following Dental Services subject to the terms and
conditions set forth in this Agreement and the Subscriber Contract:
A. Dental Services provided to a Participant by the Dental Group;
B. Dental Services provided to a Participant by a Dentist to whom
the Participant was referred by a member of the Dental Group;
C. The first $ *** of fees under a Subscriber Contract when such
fees are for emergency Dental Services provided to a Participant
by a Dentist located outside the Service Area; and
Reimbursement for Specialty Services provided for Participants enrolled
at the Midwest Dental - LaCrosse facility shall also be the
responsibility of the Dental Group out of the Capitation.
12
<PAGE> 13
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
IV. In the event this Agreement is terminated by either party or should any
facility set forth in Attachment B discontinue the provision of Dental
Services, Compcare retains the right to withhold *** percent (***%) of
the Dental Group's Capitation payment applicable to the last month
Dental Services are provided by the terms of this Agreement. This amount
shall be held in reserve for six (6) months to account for any
retroactivity in enrollment. Should adjustments to Capitation be less
than the amount held in reserve or result in a reserve exceeding the
original withhold of *** percent (***%), Compcare shall pay Dental Group
the amount of the reserve within thirty (30) days of the end of the six
(6) month period. Should the adjustments to Capitation exhaust the
aforementioned reserve and result in a balance due to Compcare, Dental
Group shall reimburse Compcare this amount within thirty (30) days of
the end of the six (6) month period. The rights, duties,
responsibilities, and obligations contained in this Section IV. of
Attachment A shall survive termination of this Agreement.
V. Within ten days of the start of 1995, Compcare shall pay to the Dental
Group the sum of $***. Within ten days of the start of 1996,
Compcare shall pay to the Dental Group the sum of $***. Within ten
days of the start of 1997, Compcare shall pay to the Dental Group the
sum of $***. Such payments are based on the volume of participants
enrolled with the Dental Group, and reflect the discounted capitation
rates set forth in Section I and Section II above.
VI. Should the provision of Dental Services, by Dental Group or any
facility(s) set forth in Attachment B to the Agreement, discontinue for
any reason, Dental Group shall pay to Compcare a penalty. Such penalty
shall be calculated as follows. Compcare shall first calculate the
period of time to be applicable to such a penalty. This period shall be
defined by the initial month when Dental Group or any facility(s) set
forth in Attachment B discontinue(s) the provision of Dental Services,
through the month of December, 1997. Compcare shall then calculate the
total dollar penalty attributable to the number of months in such period
multiplied by $***. The resulting total shall then be multiplied by
the percentage that the number of Participants who were enrolled at the
affected facility(s) bears to the total number of Participants enrolled
with the Dental Group during the last month Dental Services were
provided at the facility(s) to arrive at the actual penalty to be paid
by the Dental Group. Dental Group must pay such penalty within thirty
(30) days of notification by Compcare of the amount of the penalty.
Compcare reserves the right to recover such penalty by way of an offset
against the Dental Group's future Capitation payments.
VII. On or before May 1, 1995, Compcare shall evaluate January 1995 through
March 1995 enrollment levels at the Dental Group's four (4) facilities
located in Madison, Wisconsin for the following groups: Meriter
Hospital, St. Mary's Hospital, and U.W. Board of Regents. These
enrollment levels will be compared to an evaluation of January 1994
through March 1994 enrollment levels of the same facilities and employer
groups to determine a ratio. This ratio will be multiplied by $*** to
determine an amount to be paid to the Dental Group before May 1, 1995.
To illustrate this calculation, if such ratio is equivalent to one
(1.00), Compcare shall pay to the Dental Group $***($*** x 1.00 =
$***); if such ratio is equivalent to .75, Compcare shall pay to the
Dental Group $***($*** x .75 = $***); and if such ratio is
1.50, Compcare shall pay to the Dental Group $***($*** x 1.50 =
$***).
VIII. On or before August 15, 1995, Compcare shall evaluate the weighted
average member satisfaction levels specifically for appointment
availability for all facilities of the Dental Group based on the
Dentacare member satisfaction surveys issued during 1995. The weighting
of the average shall be dependant on enrollment levels at each facility
during the month surveys are mailed to Members. If the weighted average
satisfaction level meets or exceeds an *** level, Compcare shall pay a
bonus to the Dental Group on or before August 15, 1995, as follows:
Less than *** .......... ***
*** ............ ***
13
<PAGE> 14
CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE
SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE COMMISSION. THE LOCATIONS
OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
*** ............ $ ***
*** ............ $ ***
*** and above .......... $ ***
IX. On or before August 15, 1996, Compcare shall evaluate the weighted
average member satisfaction levels specifically for appointment
availability for all facilities of the Dental Group based on the
Dentacare member satisfaction surveys issued during 1996. The weighting
of the average shall be dependent on enrollment levels at each facility
during the month surveys are mailed to Members. If the weighted average
satisfaction level meets or exceeds an *** level, Compcare shall pay
a bonus to the Dental Group on or before August 15, 1996, as follows:
*** .......... ***
*** ........... $ ***
*** ........... $ ***
*** ........... $ ***
*** .......... $ ***
X. On or before August 15, 1997, Compcare shall evaluate the weighted
average member satisfaction levels specifically for appointment
availability for all facilities of the Dental Group based on the
Dentacare member satisfaction surveys issued during 1997. The
weighting of the average shall be dependent on enrollment levels at
each facility during the month surveys are mailed to Members. If the
weighted average satisfaction level meets or exceeds an *** level,
Compcare shall pay a bonus to the Dental Group on or before August 15,
1997 as follows:
*** .......... ***
*** .......... ***
*** .......... ***
*** .......... ***
*** .......... ***
XI. The financial arrangements set forth in this Attachment A shall extend
to and be binding upon the successors and assignees of the respective
parties hereto, however, Dental Group may only assign its rights,
responsibilities or obligations under this Agreement in accordance
with Article 10.7 of the Agreement.
14
<PAGE> 15
ATTACHMENT B
TO THE
DENTACARE DENTAL SERVICE AGREEMENT
BETWEEN
COMPCARE HEALTH SERVICES INSURANCE CORPORATION
AND
ADVANCE DENTAL MANAGEMENT
Midwest Dental - Appleton
418 College Avenue
Appleton, WI 54916
Midwest Dental - Eau Claire (South)
2115 East Clairmont Avenue
Eau Claire, WI 54701
Midwest Dental - Eau Claire North
3300 Birch Street
Eau Claire, WI 54701
Midwest Dental - Fond du Lac
885 Western Avenue, Suite 300
Fond du Lac, WI 54935
Midwest Dental - Fox River Mall
4301 West Wisconsin Avenue
Appleton, WI 54915
Midwest Dental - Green Bay (West)
844 Willard Drive
Green Bay, WI 54304
Midwest Dental - Green Bay East
1825 South Webster Avenue
Green Bay, WI 54301
Midwest Dental - Kiel
603 Fremont Street
Kiel, WI 53042
Midwest Dental - LaCrosse
1210 Horton Street
LaCrosse, WI 54601
Midwest Dental - Madison East
4793 Hayes Road
Madison, WI 53704
Midwest Dental - Madison West
648 South Gammon Road
Madison, WI 53719
15
<PAGE> 16
Midwest Dental - Manitowoc
1010 Maritime Drive
Manitowoc, WI 54220
Midwest Dental - Menomonie
700 Wolske Bay Road, Suite 150
Menomonie, WI 54751
Midwest Dental - Merrill
2402 East Main Street
Merrill, WI 54452
Midwest Dental - Mondovi
680 Hehli Way
Mondovi, WI 54755
Midwest Dental - Neenah
852 Fox Point Plaza
Neenah, WI 54956
Midwest Dental - Oshkosh
1050 South Koeller Street
Oshkosh, WI 54901
Midwest Dental - Plymouth
1415 Eastern Avenue
Plymouth, WI 53073
Midwest Dental - Sheboygan
3709 Kohler Memorial Drive
Sheboygan, WI 53081
Midwest Dental - Stevens Point
2740A Stanley Street
Stevens Point, WI 54481
Midwest Dental - Wausau
605 24th Avenue South
Suite 10
Wausau, WI 54401
First Dental - Madison
4200 University Avenue, Suite 2010
Madison, WI 53705
16
<PAGE> 1
EXHIBIT 11.1
MONARCH DENTAL CORPORATION, INC. AND SUBSIDIARIES
UNAUDITED NET INCOME PER COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Primary and fully diluted earnings per
share
Net income.............................. $ 674,654 $ 232,523
========== ==========
Shares:
Weighted average common shares
issued............................. 3,620,094 3,620,094
Assuming exercise of options, reduced
by the number of common shares
which could have been purchased
with the proceeds from exercised of
such options....................... 23,282 23,282
Assuming conversion of Convertible
Participating Preferred Stock...... 2,400,000 2,400,000
Assuming conversion of Series A
preferred stock.................... 852,275 852,275
---------- ----------
Weighted average number of common
shares outstanding, as adjusted.... 6,895,651 6,895,651
========== ==========
Net income per common share............. $ 0.10 $ 0.03
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas
June 23, 1997
