<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1997
REGISTRATION STATEMENT NO. 333-24409
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 3
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 JULY 17, 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, 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 consist of management fees under the
Management Agreements and 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). The revenues of the Company in all markets
other than Wisconsin consist of management fees derived from the Management
Agreements which have been in effect since February 6, 1996. Revenue of the
dental group practices practicing at the Company's Dallas-Fort Worth Dental
Offices 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. Revenue of the
dental group practices practicing at the Company's Dallas-Fort Worth Dental
Offices constitutes revenue of the P.C. operating at these Dental Offices for
all periods after February 6, 1996. Operating income at the Company's
Dallas-Fort Worth Dental Offices 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 at the Dallas-Fort Worth Dental Offices consists of dental group
practices revenue, net received by the P.C. operating at these Dental Offices
less amounts retained by dental group practices (i.e., amounts retained by the
P.C. for the salaries and benefits of the dentists and hygienists) and operating
expenses of the Company, 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
$37.9 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)
------- --------------
<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 and specialists employed by or
contracted with the Company (in the case of Midwest Dental Care) or the
applicable P.C. (in the case of each dental practice group other than
Midwest Dental Care).
(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. The revenues
of the Company in all markets other than Wisconsin consist of management fees
derived from the Management Agreements which have been in effect since February
6, 1996. Revenue of the dental group practices practicing at the Company's
Dallas-Fort Worth Dental Offices 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. Revenue of the dental group
practices practicing at the Company's Dallas-Fort Worth Dental Offices
constitutes revenue of the P.C. operating at these Dental Offices for all
periods after February 6, 1996. Operating income at the Dallas-Fort Worth Dental
Offices consists of dental group practices revenue, net received by the P.C.
operating at these Dental Offices less amounts retained by dental group
practices (i.e., amounts retained by the P.C. for the salaries and benefits of
the dentists and hygienists) and operating expenses of the Company, 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. Because the Company was wholly-owned by a
licensed dentist during this period, the Company generally did not operate its
business pursuant to management agreements with the P.C.s except in the case of
one dental practice which was 50% owned by the Company prior to February 1996 at
which time the Company acquired the remaining interest in this dental practice.
The results of operations of this dental practice were consolidated with the
Company for all periods prior to February 6, 1996. 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
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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
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
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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 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
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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, 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
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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 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
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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."
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
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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 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
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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 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 5,457,578 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 1,008,515
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 242,630 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.
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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."
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 $37.9 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; 3,212,708 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............................. 3,907 33,262
Retained deficit....................................... (7,266) (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 $(4,134,000), or $(0.44) per share. This
represents an immediate increase in net tangible book value of $8.54 per share
to existing stockholders and an immediate dilution of $11.44 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....... 8.54
------
Pro forma net tangible book value per share after the
offering.................................................. (0.44)
------
Dilution per share to new investors......................... $11.44
======
</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 $31.9 million at March 31, 1997 and are being amortized over
a composite average period of 25 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, together with recorded goodwill amounts, are being amortized
over a composite life of 25 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
DENTAL GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS(1) 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>
- ------------------------------
(1) Includes full-time general dentists and specialists employed by or
contracted with the Company (in the case of Midwest) or the applicable P.C.
(in the case of each dental group practice other than Midwest).
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 $201,250 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
30
<PAGE> 32
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 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."
31
<PAGE> 33
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 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.
The total management fees paid to the Company by the P.C.s in all markets
(other than Wisconsin, where no Management Agreement is in place) increased from
$4.3 million for the first quarter of 1996 to $6.8 million for the first quarter
of 1997, an increase of $2.5 million, or 58.9%. The Cost Portion (as defined
below) of such management fees increased from $3.3 million for the first quarter
of 1996 to $5.5 million for the first quarter of 1997, an increase of $2.2
million, or 67.8%. The Net Pre-Tax Income Portion (as defined below) of such
management fees increased from $969,000 for the first quarter of 1996 to $1.2
million for the first quarter of 1997, an increase of $280,000, or 28.9%.
The total management fees paid to the Company by the Texas P.C. with
respect to the Dallas-Fort Worth practices increased from $2.4 million for the
first quarter of 1996 to $2.8 million for the first quarter of 1997, an increase
of $400,000, or 16.7%. The portion of the management fee attributable to the
Company's costs in performing its obligations under the Management Agreements
(the "Cost Portion") with respect to the Dallas-Fort Worth practices increased
from $1.7 million for the first quarter of 1996 to $2.1 million for the first
quarter of 1997, an increase of $389,000, or 23.0%. The remainder of the
management fee, representing the lesser of 30% of the revenues or the net
pre-tax income of the practice (the "Net Pre-Tax Income Portion"), increased
from $670,000 for the first quarter of 1996 to $758,000 for the first quarter of
1997, an increase of $88,000 or, 11.6%. The total management fee paid to the
Company with respect to the Houston practices increased from $1.1 million for
the first quarter of 1996 to $1.8 million for the first quarter of 1997, an
increase of $669,000, or 59.3%. The Cost Portion of the management fee with
respect to the Houston practices increased from $907,000 for the first quarter
of 1996 to $1.4 million for the first quarter of 1997, an increase of $533,000,
or 58.8%. The Net Pre-Tax Income Portion of the management fee, representing the
lesser of 30% of the revenues of the practice, increased from $221,000 for the
first quarter of 1996 to $257,000 for the first quarter of 1997, an increase of
$316,000, or 61.5%.
For the year ended 1996, total management fees paid to the Company by the
P.C.s in all markets (other than Wisconsin) was $20.9 million, the Cost Portion
of such management fees was $18.5 million and the Net Pre-Tax Income Portion was
$2.3 million. With respect to the Dallas-Fort Worth practices, for 1996 the
total management fee was $12.3 million, the Cost Portion was $10.7 million and
the net pre-tax income portion was $1.5 million. With respect to the Houston
practices, for 1996 the total management fee was $9.0 million, the Cost Portion
was $8.3 million and the net pre-tax income portion was $719,000. Prior to
February 6, 1996, the Company did not generally operate pursuant to management
agreements.
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
34
<PAGE> 36
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
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 $31,000 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 $309,000 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 $89,000 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
35
<PAGE> 37
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. 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
36
<PAGE> 38
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.
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
37
<PAGE> 39
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
$805,000 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.
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
38
<PAGE> 40
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.
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
43
<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. The revenues of the Company in all markets other
than Wisconsin consist of management fees derived from the management agreements
which have been in effect since February 6, 1996. Revenue of the dental group
practices practicing at the Company's Dallas-Fort Worth Dental Offices 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. Revenue of the dental group practice practicing
at the Company's Dallas-Fort Worth Dental offices constitutes revenue of the
P.C. operating at these Dental offices for all periods after February 6, 1996.
Operating income at the Company's Dallas-Fort Worth Dental Offices 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
44
<PAGE> 46
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 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.
45
<PAGE> 47
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 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 approximately 163,636 shares of Common Stock (assuming an
initial public offering price of $11.00 per share) 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.
46
<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
DENTAL 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 and specialists employed by or
contracted with the Company (in the case of Midwest) or the applicable P.C.
(in the case of each dental group practice other than Midwest).
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
47
<PAGE> 49
complex procedures and patient satisfaction. The Company operates as
"Monarch(TM) Dental" or under 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
revenues of the dental group practices practicing at the Company's Dental
Offices for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1997 and the sources of the revenues of the dental group
practices practicing at the Company's Dental Offices in each of the Company's
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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<PAGE> 51
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
50
<PAGE> 52
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.
51
<PAGE> 53
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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<PAGE> 54
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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<PAGE> 55
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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<PAGE> 56
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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<PAGE> 57
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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<PAGE> 58
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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<PAGE> 59
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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<PAGE> 60
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 September 1, 1997
and end on December 31, 1997. 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
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<PAGE> 63
of 5% of the 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. 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.
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<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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<PAGE> 68
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.,
67
<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 33,333 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 2,708 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.
68
<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.
69
<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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<PAGE> 72
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, 5,457,578 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
1,008,515 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 242,630 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
72
<PAGE> 74
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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<PAGE> 75
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
74
<PAGE> 76
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.
75
<PAGE> 77
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.
76
<PAGE> 78
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 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 the dental
practice
F-9
<PAGE> 87
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations) other than the provision of dental services and retains a 100%
residual interest in the net income of the dental group practices. 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. If net pre-tax
income exceeds 30% of the P.C.'s net revenues, the P.C. would retain the amount
of pre-tax income over 30% of the P.C.'s net revenues. The Company's net revenue
is dependent upon the revenue of the dental group practices.
A summary of the dental group practices revenue, net, amounts retained by
dental group practices and management fee 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
------- ------ -------
Management fee revenue........................ $20,870 $ -- $20,870
======= ====== =======
Net revenue................................... $ -- $3,308 $ 3,308
======= ====== =======
1995
Dental group practices revenue, net........... $13,222 $ -- $13,222
Amounts retained by dental group practices.... 4,300 -- 4,300
------- ------ -------
Management fee revenue........................ $ -- $ -- $ --
======= ====== =======
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
------- ------ -------
Management fee revenue........................ $ -- $ -- $ --
======= ====== =======
Net revenue................................... $ 6,489 $ -- $ 6,489
======= ====== =======
</TABLE>
The Company began earning management fee revenue upon acquisition of each
dental group practice, except for the Company's dental group practices existing
prior to February 6, 1996. The Company began earning management fee revenue for
those practices except in the case of one Dental Office on February 6, 1996.
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.
F-10
<PAGE> 88
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Management Agreements
cannot be terminated by the related professional corporation without cause,
consisting primarily of bankruptcy or material default. At December 31, 1996,
the weighted average life assigned to all intangible assets was approximately 25
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
F-11
<PAGE> 89
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-12
<PAGE> 90
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 -- operating expenses:
Clinical salaries and benefits........ 3,103 2,322
Other salaries and benefits........... 1,681 1,149
Dental supplies....................... 1,062 740
Laboratory fees....................... 833 818
Occupancy............................. 801 830
Advertising........................... 872 362
Depreciation and amortization......... 517 768
General and administrative............ 1,876 1,313
Management fee -- lesser of (i) 30% of
P.C.'s net revenue or (ii) P.C.'s net
pre-tax income........................ 1,530 719
------- -------
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>
<S> <C>
Management Agreements....................................... $17,276,138
Goodwill.................................................... 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>
Additional Information............. 2
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>
<CAPTION>
<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
(excluding exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request)
+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>
<C> <S>
+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 -- Amended and Restated Non-Competition Agreement dated as
of July 1, 1997 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>
<C> <S>
+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.
10.23 -- Employment Agreement dated as of July 1, 1997 by and
among the Registrant, Monarch Dental Associates, L.P. and
Warren F. Melamed, D.D.S.
10.24 -- Employment Agreement dated as of July 1, 1997 by and
among the Registrant, Monarch Dental Associates, L.P. and
Mr. Gary W. Cage.
10.25 -- Non-Competition Agreement dated as of July 1, 1997 by and
between the Registrant and Mr. Gary W. Cage.
+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.
(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
II-6
<PAGE> 143
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 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. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Dallas, Texas, on
July 17, 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. 3 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, July 17, 1997
- ----------------------------------------------------- Chief Dental Officer and Director
Warren F. Melamed
/s/ GARY W. CAGE Chief Executive Officer and Director July 17, 1997
- -----------------------------------------------------
Gary W. Cage
* Executive Vice President and Director July 17, 1997
- -----------------------------------------------------
Charles G. Shears
* Chief Financial Officer (principal July 17, 1997
- ----------------------------------------------------- accounting officer)
Steven G. Peterson
* Director July 17, 1997
- -----------------------------------------------------
Glenn E. Hemmerle
* Director July 17, 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
(excluding exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
+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 -- Amended and Restated Non-Competition Agreement dated as
of July 1, 1997 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.
10.23 -- Employment Agreement dated as of July 1, 1997 by and
among the Registrant, Monarch Dental Associates, L.P. and
Warren R. Melamed, D.D.S.
10.24 -- Employment Agreement dated as of July 1, 1997 by and
among the Registrant, Monarch Dental Associates, L.P. and
Mr. Gary W. Cage.
10.25 -- Non-Competition Agreement dated as of July 1, 1997 by and
between the Registrant and Mr. Gary W. Cage.
+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.
<PAGE> 1
EXHIBIT 2.6
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is entered into
on the 19th day of June, 1997, by and among Monarch Dental Corporation, a
Delaware corporation ("Monarch"), Dental Centers of Indiana (Monarch), Inc., an
Indiana corporation and a wholly-owned subsidiary of Monarch (the "Purchaser"),
or its assigns, Dental Centers of Indiana, Inc., an Indiana corporation
("Company"), and James W. Willis ("Willis"), Mark R. Johnson ("Johnson") and
Thurman H. Brown, II ("Brown"), all individuals residing in Indiana and
collectively referred to as the "Seller" or "Sellers."
R e c i t a l s
Willis, Johnson and Brown each own 33 1/3% of the outstanding common
stock, no par value, of the Company (formerly known as Wadsworth, Willis &
Frey, D.D.S., Inc.).
Purchaser desires to acquire all of the issued and outstanding shares
of capital stock of the Company (the "Stock") by means of a Merger (defined
below) of the Company with and into Purchaser whereby Purchaser is the
surviving corporation in the Merger, for the consideration and on the terms set
forth in this Agreement.
NOW, THEREFORE, for and in consideration of the above premises and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby expressly acknowledged, the parties hereto do hereby agree as follows:
ARTICLE 1. THE MERGER; TERMS OF THE MERGER.
1.1 The Merger.
1.1.1 The Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Indiana
Business Corporation Law (the "IBCL"), at the Effective Time (defined below),
the Company shall be merged with and into Purchaser (the "Merger"), in
accordance with the terms set forth in this Agreement. From and after the
Effective Time, the separate corporate existence of the Company shall cease,
and Purchaser shall continue as the surviving corporation in the Merger and
shall continue to be governed by the laws of the State of Indiana. The Merger
shall be consummated by filing a Certificate of Merger with the Secretary of
State of the State of Indiana, together with all other documents, notices and
filings required by the IBCL.
1.1.2 Effect of the Merger. At the Effective Time, the
effect of the Merger shall be as provided in Section 23-1-40-6 of the IBCL. If
at any time the Purchaser shall consider or be advised that any further
assignments, assurances in law, or other acts or instruments are necessary or
desirable to vest, perfect, or confirm to the Purchaser the title to any
property or rights of the Company and the Purchaser (collectively, the
"Constituent Corporations"), the Constituent Corporations and their proper
officers and directors shall and will do all such acts and things as may be
necessary or proper to vest, effect, or confirm title to such property or
rights of the Purchaser and otherwise to carry out the purposes of this
Agreement.
1.1.3 Certificate of Incorporation; Bylaws; Directors and
Officers. The Certificate of Incorporation and Bylaws of Purchaser, in each
case as in effect at the Effective Time, shall be the Certificate of
Incorporation and Bylaws of the Purchaser after the Merger. At the Effective
Time, the
______ _______ _______
<PAGE> 2
directors and officers of the Purchaser after the Merger shall be comprised of
the directors and officers of Purchaser, to hold office until their respective
successors are duly elected or appointed and qualified.
1.1.4 Tax Consequences. It is intended that the Merger
shall constitute a reorganization described in Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended (the "Code") and that this Agreement
shall constitute a "plan of reorganization" for the purposes of Section 368 of
the Code. It shall not be a condition to the consummation of the Merger that
any party hereto shall have received a ruling of the Internal Revenue Service
as to the federal income tax consequences of the Merger.
1.1.5 Ownership of Certain Assets. As a result of the
Merger, the Purchaser will acquire all of Company's right, title and interest
in (i) the following partnerships: Drs. Johnson, Terry & Associates and
DCI-Lee (the "Partnerships"), and (ii) Indiana Dental Provider Alliance
("Alliance"); provided, however, that Sellers shall receive twenty percent
(20%) of the revenue received by the Company from Alliance, less any expenses
incurred by the Company with respect to Alliance (the "Alliance Expenses"), for
a period of five (5) years following the Closing; and further provided that if
the revenue received by the Company from Alliance less Alliance Expenses shall
equal or exceed $2,000,000 during the fifth year following the Closing, then,
in addition to the Sellers receiving twenty percent (20%) of the revenue
received by the Company from Alliance less Alliance Expenses, the Sellers shall
also receive an additional amount equal to twenty-five percent (25%) of the
revenue received by the Company from Alliance less Alliance Expenses.
1.2 Terms of the Merger.
1.2.1 Merger Consideration.
(a) At the Effective Time, by virtue of the
Merger and without any action by the Seller, all Stock issued
and outstanding immediately prior to the Effective Time shall
be canceled and retired and converted into and become rights
to receive the Merger Consideration (defined below) in the
manner described in subsection 1.2.1(c) below.
(b) The aggregate consideration provided for in
this subsection (b) (the "Merger Consideration") shall be
payable by delivery of:
(i) $1,838,500 in cash, less the amount
of Seller's expenses paid by
Purchaser under Section 9.1(a),
without any interest thereon (the
"Cash Merger Consideration"), which
shall be payable by wire transfer
(pursuant to the wire transfer
instructions set forth on Exhibit A)
or other immediately available
funds; and
(ii) the number of shares of common
stock, par value $.01 per share, of
Monarch (the "Monarch Common Stock")
determined by dividing $1,800,000 by
the per share price set forth in the
"Price to Public" column on the
front cover page of the final
prospectus filed with the Securities
and Exchange Commission in
connection with its initial public
offering of Monarch Common Stock
(the "IPO Price"), rounded to the
nearest whole share of Monarch
Common Stock (the "Stock Merger
Consideration").
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<PAGE> 3
(c) The Merger Consideration shall be allocated
among the Sellers equally. At the Effective Time, all of the
issued and outstanding Stock held by each Seller shall be
converted without any action on the part of the holder thereof
into and be exchangeable for:
(i) 33 1/3% of the aggregate amount of
the Cash Merger Consideration; and
(ii) 33 1/3% of the aggregate number of
shares of Monarch Common Stock
comprising the Stock Merger
Consideration.
(d) At the Closing, the Cash Merger Consideration
and the Stock Merger Consideration shall be distributed
pursuant to subsection 1.2.1 and Section 1.2.2 hereof.
(e) At the Closing, and in accordance with the
terms of this Agreement, Monarch agrees to deliver a
sufficient number of shares of Monarch Common Stock necessary
to satisfy its obligations set forth in this Section 1.2.1.
1.2.2 Exchange Procedure for the Sellers. At the Closing,
each Seller shall surrender each certificate or certificates evidencing the
Stock to the Purchaser, duly endorsed and executed as the Purchaser may
require, to the Purchaser for cancellation, at which time the Cash Merger
Consideration and the Stock Merger Consideration applicable to such Stock shall
be delivered to such Seller. At the Effective Time, each Seller shall cease to
have any rights with respect to the Stock, and their sole right shall be to
receive their respective portions of the Merger Consideration set forth above.
All rights to receive the Cash Merger Consideration or the Stock Merger
Consideration (or cash in lieu of fractional shares of Monarch Common Stock),
shall be deemed, when paid or issued hereunder, to have been paid or issued, as
the case may be, in full satisfaction of all rights pertaining to the Stock.
Notwithstanding any other provision of this Agreement, no certificates or scrip
representing fractional shares of Monarch Common Stock shall be issued upon the
surrender for exchange of certificates which prior to the Effective Time shall
have represented any of the Stock. In lieu of any fractional shares, there
shall be paid to each Seller who would be entitled to receive a fractional
share of Monarch Common Stock an amount of cash (without interest) determined
by multiplying such fraction by the IPO Price.
1.2.3 Purchaser Capital Stock; Company Treasury Stock.
Each share of common stock of Purchaser issued and outstanding immediately
prior to the Merger shall continue to be issued and outstanding and evidence
ownership of the same number of shares of common stock of the Purchaser after
the Merger, and the Merger shall effect no change in any of such shares, and no
shares of Purchaser common stock shall be converted in the Merger. Any shares
of the Stock held in the treasury of the Company immediately prior to the
Effective Time shall be canceled as of the Effective Time, without payment of
any consideration therefor.
ARTICLE 2. CLOSING.
Subject to the terms hereof, the Merger shall be consummated at a
closing (the "Closing"), to take place on the first business day of the month
immediately following the month that Monarch's initial public offering is
commenced, at the offices of Haynes and Boone, L.L.P. at 901 Main Street,
Dallas, Texas 75202, or such other time or place as the parties may agree upon.
If all of the conditions of the Merger set forth in Articles 11 and 12 shall
have been fulfilled or waived in accordance herewith and this Agreement shall
not have been terminated in accordance with Article 13 hereof, the parties
hereto shall
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<PAGE> 4
cause a Certificate of Merger, together with all other documents and
instruments required by law, together with all required fees, to be properly
executed, filed or paid, as applicable, in accordance with the IBCL on the date
of Closing. The Merger shall be effective as of the time of filing of the
Certificate of Merger (the "Effective Time").
ARTICLE 3. MERGER CONSIDERATION; COLLATERAL AGREEMENTS.
The consideration to be paid by Purchaser to Seller at the Closing in
connection with the Merger (the "Closing Purchase Price") shall be paid
pursuant to and as set forth in Sections 1.2, 3.1 and 3.2.
3.1 Deferred Payments. On or before March 31, 1998, Purchaser
shall pay to Seller an amount equal to five (5) times the amount that
Purchaser's EBITDA (defined below) for the 1997 calendar year exceeds $712,000
(which shall be allocated equally among the Sellers). Such amount, if any,
shall be paid one-half in cash and one-half in Monarch Common Stock unless
Seller requests in writing a different allocation of cash and Monarch Common
Stock on or before March 15, 1998. For this purpose, the fair market value of
the Monarch Common Stock shall be deemed to be the average closing price of
Monarch's Common Stock for the ten (10) trading days beginning March 16, 1998
and continuing through and including March 27, 1998, on the primary national
securities exchange or system where the Monarch Common Stock is then traded.
For purposes of this Agreement, EBITDA shall mean the earnings of the
business operations conducted by the Company as it existed before the Closing
(specifically excluding the Beechgrove and West 10th offices) (the "Acquired
Business") before interest, taxes, depreciation and amortization, determined
using generally accepted accounting principles, consistently applied, and
specifically including (i) deductions for direct expenses reasonably incurred
by Purchaser and its affiliates for or on behalf of the Acquired Business; (ii)
the monthly costs of operating Purchaser's information systems; and (iii)
$26,000 of expenses excluded in the recast income statement of the Company as
of December 31, 1996, dated March 21, 1997 and shall specifically exclude
$67,000 of revenue included in the recast income statement of the Company as of
December 31, 1996, dated March 21, 1997; and specifically excluding (iv) any
deduction for the allocation of Purchaser's or its affiliates' overhead or
other expenses relating to the operation of Monarch's headquarters; (v) the
capital costs of upgrading the Acquired Business' information systems; (vi) any
capitalized expenditures; (vii) any expenses incurred by the Company in
connection with the transactions contemplated by this Agreement in an amount
not exceeding $10,000; and (viii) all net revenues received by the Company from
or with respect to Alliance. In addition, for purposes of this Agreement,
EBITDA of the Acquired Business shall not be reduced as a result of Purchaser's
change of accounting methods (i.e., from cash to accrual); provided, however,
that for this purpose, all of the Purchaser's accounts payable shall be deemed
to have been paid twenty (20) days following their receipt by Purchaser.
Finally, for purposes of calculating EBITDA for the 1997 calendar year, no more
than a proportional amount (subject to an allowed variance of ten percent
(10%)) of the 1997 EBITDA may accrue before the date of Closing. If more than
a proportional amount subject to the above-described variance) accrues before
the date of Closing, then any amount in excess of such proportional amount
shall specifically be excluded from the calculation of 1997 EBITDA. The
Purchaser shall prepare, with the assistance and cooperation of Seller, a
financial statement stating the Company's EBITDA for the period ended June 30,
1997. The principles used in such financial statement to establish the
Company's EBITDA through June 30, 1997, shall be used on a consistent basis to
establish EBITDA for purposes of this Agreement. In the event that a dispute
arises regarding any calculation of EBITDA under this Agreement, such dispute
shall be settled by an audit partner at Arthur Andersen & Company,
Indianapolis, Indiana.
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3.2 Stock Options. Seller believes that the Acquired Business is
capable of producing higher revenues and greater profitability than has been
achieved by the Company prior to the Closing Date. Therefore, in further
consideration of the Stock sold by Seller to Purchaser pursuant to this
Agreement and, without regard to the continuing employment status of Willis,
Johnson and Brown by Purchaser or its affiliates, Seller shall be entitled to
receive from Monarch options to purchase shares of Monarch's Common Stock as
described herein (which shall be allocated equally among the Sellers).
Subject to the provisions of this Section 3.2, Seller shall be
entitled to receive from Monarch options to purchase up to an aggregate of
40,000 shares of Monarch Common Stock (based on the total shares of Monarch
Common Stock outstanding as of April 28, 1997) as set forth in the matrix
attached as Exhibit B. Such options will be granted ratably following the end
of each of the first five (5) calendar years following the date of Closing,
commencing with the period January 1, 1998 through December 31, 1998 (each such
period being referred to as an "Earnout Period") subject to the achievement of
the performance goals based on annual revenue and EBITDA over each of such five
(5) calendar years as set forth in the matrix attached as Exhibit B.
For this purpose, revenues mean, for the applicable Earnout Period,
the gross revenues of the Acquired Business which shall be determined in
accordance with generally accepted accounting principles, consistently applied,
excluding capital or extraordinary gains or losses and any gain or loss from
sales of investments, receivables, goodwill or agreements not to compete.
Options granted hereunder, if any, shall be granted pursuant to
Monarch's 1996 Equity Acquisition Option Plan (the "Plan"), and shall be
subject to all limitations of such Plan, including the aggregate number of
options which may be granted thereunder. Any options granted pursuant to this
Section 3.2 shall be at an exercise price equal to the IPO Price of Monarch
Common Stock. Options granted pursuant to this Section 3.2 shall be fully
vested on the date of grant and shall expire ten (10) years from the date of
grant.
Monarch shall grant the options to Seller for the applicable Earnout
Period pursuant to this Section 3.2 on or before the one hundred twentieth
(120th) day following the end of each of the applicable Earnout Periods.
Options not earned by Seller during each applicable Earnout Period(s) shall not
be available for grant to Seller in a subsequent Earnout Period. The items in
the attached matrix (Exhibit B) shall be determined from Purchaser's financial
records for the applicable Earnout Period and set forth in a statement (the
"Statement"), represented by Purchaser that such Statement was prepared in
accordance with this Agreement and generally accepted accounting principles. A
copy of such Statement shall be delivered to Seller not later than forty-five
(45) days after the end of each Earnout Period. Such Statements may be
reviewed for accuracy by the accountants employed by Seller. If within thirty
(30) days after delivery of the Statement to Seller, Brown (or any other
representative designated by Seller in writing to Purchaser), on behalf of
Seller, has not given written notice to Monarch disputing such Statement and
stating the basis of such dispute, Monarch shall thereafter have no further
liability to grant options to Seller with respect to that Earnout Period except
as set forth in such Statement. If Monarch receives notice disputing the
Statement within such thirty (30) day period, Seller's accountants and
Purchaser's auditors shall use their best efforts to settle the dispute within
ninety (90) days after the giving of such dispute notice. If Purchaser's
auditors and the accountants representing Seller are unable to resolve the
dispute within the ninety (90)-day period, the dispute shall be submitted to an
independent firm of certified public accountants of recognized national
standing, reasonably satisfactory to Monarch and Seller, whose decision on such
dispute shall be binding on all parties.
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3.3 Collateral Agreements. In connection and simultaneously with
the Closing, Seller, Purchaser, the Company and/or other appropriate persons
will enter into the following agreements, among others, with terms and
conditions as are set forth in such agreements: (i) Employment Agreements in
the form attached hereto as Exhibit C; (ii) Non-Competition Agreements in the
form attached hereto as Exhibit D; (iii) Management Services Agreement in the
form attached hereto as Exhibit E; (iv) Succession Agreement in the form
attached hereto as Exhibit F; (v) Working Group Director Service Agreement in
the form attached hereto as Exhibit G; (vi) General Releases in the form
attached hereto as Exhibit H; and (vii) real property leases substantially in
the form attached hereto as Exhibit I (collectively, the "Collateral
Agreements"). Subject to the terms and conditions of this Agreement, as a
material inducement to and a condition precedent of Purchaser's acquisition of
the Stock, Seller shall execute and deliver at the Closing the Non- Competition
Agreements.
3.4 Further Assurances. Sellers, from time to time, both before
and after the Closing, at the request of the Purchaser and without further
consideration, shall execute and deliver to Purchaser such further documents
necessary to memorialize the transactions contemplated hereby and take such
other actions as the Purchaser may reasonably require as are contemplated
herein.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER AND COMPANY.
4.1 Making of Representations and Warranties. As a material
inducement to the Purchaser to enter into this Agreement and to consummate the
transactions contemplated hereby, Seller and Company, jointly and severally,
hereby make to the Purchaser the representations and warranties contained in
this Article 4.
For the purposes of this Agreement, references to "knowledge" of
Seller or "known" by Seller or words of similar import, shall be deemed to
include such knowledge as Seller or executive officers of the Company actually
has or reasonably ought to have in the ordinary course of performing their
duties. For purposes of this Agreement, references to the "Disclosure
Schedule" shall mean the Disclosure Schedule delivered by Seller to the
Purchaser on the date hereof. For the purposes of this Article 4, (i) Seller
is deemed to have knowledge of each of the documents entered into in connection
with the transactions contemplated hereby, and (ii) Seller's and Company's
representations and warranties with respect to the Company shall be deemed to
include the Partnerships.
4.2 Organization and Qualification; Capital Stock. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the state of Indiana with full corporate power and authority to own or
lease its properties and to conduct its business in the manner and in the
places (including qualifications to do business) where such properties are
owned or leased or such business is currently conducted. The copies of the
charter documents of the Company as amended to date and certified by the
Secretary of State of each relevant jurisdiction, and of the by-laws of the
Company, as amended to date, certified by its Secretary, and heretofore
delivered to the Purchaser, have been duly adopted and are current, complete
and correct, no amendments thereto are pending, and the Company is not in
violation thereof.
The Company is duly qualified to do business as a corporation only in
the state of Indiana and is not required to be licensed or qualified to conduct
its business or own its properties in any other jurisdiction in which the
failure to be so qualified would have an adverse effect on the business,
operations, results of operations, assets, condition (financial or other) or
prospects of the Company. All of the issued and outstanding capital stock or
other equity interests of the Company are duly and validly authorized and
issued, fully paid and non-assessable and are owned beneficially and of record
as set forth in Section 4.2
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of the Disclosure Schedule, free and clear of all liens, mortgages, pledges,
encumbrances, security interests, charges, restrictions on transfer,
stockholder or similar agreements, conditional sales agreements, equities and
other claims of any kind (collectively, "Liens"), and there are no outstanding
options, warrants, rights, commitments, pre-emptive rights or agreements of any
kind for the issuance or sale of, or outstanding securities convertible into,
any additional shares of capital stock of any class or other equity interests
of the Company. The total authorized capital stock of the Company is set forth
on Section 4.2 of the Disclosure Schedule.
All of the Stock is duly and validly authorized, is validly issued,
fully paid and nonassessable and is held equally by each Seller free and clear
of Liens. To Seller's and Company's knowledge, the Company has materially
complied with all applicable statutes, laws, regulations, orders or rules of
any federal or state governmental agency or body or of any other type of
regulatory body in connection with the issuance of the Stock.
4.3 Subsidiaries. Except as provided in Section 4.3 of the
Disclosure Schedule, the Company has no subsidiaries (as defined in Section
9.10 hereof), nor owns any securities issued by any other business organization
or governmental authority, nor has any direct or indirect interest in or
control over any corporation, partnership, joint venture or entity of any kind.
4.4 Authority; Noncontravention. Seller and Company each has full
and unrestricted individual and/or corporate capacity, as the case may be, (i)
to enter into (a) this Agreement and (b) each agreement, document and
instrument to be executed and delivered by them pursuant to or contemplated by
this Agreement, including, but not limited to, the Collateral Agreements, and
(ii) to carry out the transactions contemplated hereby and thereby. The
execution, delivery and performance by Seller and Company of this Agreement,
the Collateral Agreements and each such other agreement, document and
instrument have been duly authorized by all necessary action of the Company and
each Seller (including, without limitation, approval of the Merger as a
shareholder of the Company), and no other action on the part of Seller or the
Company is required in connection therewith. This Agreement, the Collateral
Agreements and each such agreement, document and instrument executed and
delivered by Seller and Company pursuant to or in connection with this
Agreement constitute valid and binding obligations of Seller and Company
enforceable in accordance with its respective terms, subject to bankruptcy,
reorganization, insolvency and other similar laws affecting the enforcement of
creditors' rights in general and to general principles of equity (regardless of
whether considered in a proceeding in equity or an action at law).
The execution, delivery and performance by Seller of this Agreement,
the Collateral Agreements and each such agreement, document and instrument
pursuant to or in connection with this Agreement to which they are a party:
(i) do not and will not violate any provision of
the charter, by-laws or equivalent constituent documents of the
Company;
(ii) do not and will not violate in any material
respect any laws of the United States or any state or other
jurisdiction applicable to Seller or the Company or require Seller or
the Company to obtain any approval, consent or waiver of, or make any
filing with, any person or entity (governmental or otherwise) that has
not been obtained or made; and
(iii) do not and will not (a) result in a breach
of, (b) constitute a default under, (c) accelerate any obligation
under, (d) give rise to a right of termination of any indenture,
loan or credit agreement or any other agreement, contract, instrument,
mortgage, lien, lease, permit,
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<PAGE> 8
authorization, order, writ, judgment, injunction, decree,
determination or arbitration award, whether written or oral, to which
Seller or the Company is a party or by which the property of Seller or
the Company is bound or affected, or (e) result in the creation or
imposition of any Liens on any of the Stock, except to the extent that
any of the foregoing would not have a material adverse effect on the
business, operations, results of operations, assets, condition
(financial or other) or prospects of Seller or the Company.
4.5 Status of Property.
(a) Real Property. The Company owns no real estate.
(b) Leased Real Property. All of the real property
leased in connection with the Company's business is identified in Section
4.5(b)(i) of the Disclosure Schedule (collectively referred to herein as the
"Leased Real Property"). Section 4.5(b)(ii) of the Disclosure Schedule sets
forth any other real estate previously owned, leased or otherwise operated by
the Company or Seller in connection with the Company at any time during the
immediately preceding five years and the time periods of any such ownership,
lease or operation, except for any offices in personal residences of employees
of the Company. Further:
(i) Leases. All of the leases of any of the
Leased Real Property (collectively, the "Leases") are listed in
Section 4.5(b)(i) of the Disclosure Schedule. The copies of the
Leases heretofore delivered or furnished to the Purchaser are
complete, accurate, true and correct copies of each of the Leases,
including any amendments to such Leases, except as set forth in
Section 4.5(b)(i) of the Disclosure Schedule. With respect to each of
the Leases, except as set forth in Section 4.5(b)(i) of the Disclosure
Schedule:
(A) each of the Leases is in full force and
effect on the terms set forth therein and has not been
modified, amended, or altered, in writing or otherwise;
(B) all obligations of the landlord or lessor
under the Leases which have accrued have been performed, and
to Seller's and Company's knowledge, no landlord or lessor is
in default under or in arrears in the payment of any sum or in
the performance of any obligation required of it under any
Lease, and no circumstance presently exists which, with notice
or the passage of time, or both, would give rise to a default
by the landlord or lessor under any Lease, except for any
default which would not have an adverse effect on the
business, operations, results of operations, assets, condition
(financial or other) or prospects of the Company's business;
(C) all obligations of the tenant or lessee under
the Leases which have accrued have been performed in all
material respects, and neither Seller nor the Company is in
default under or in arrears in the payment of any sum or in
the performance of any material obligation required of them or
it under any Lease, and no circumstance presently exists
which, with notice or the passage of time, or both, would give
rise to a default by Seller or the Company; and
(D) Seller and the Company have obtained the
consent of each landlord or lessor under any Lease whose
consent is required in connection with the transactions
contemplated by this Agreement and each other transaction
referred to herein or the collateral assignment of any Lease
by Seller or the Company or their or its assignees.
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(ii) Title and Description. The Company holds a
good, clear, valid and enforceable leasehold interest in the Leased
Real Property leased by it pursuant to the Leases, subject only to the
right of reversion of the landlords or lessors under such Leases, in
all cases, such leasehold interests being free and clear of all other
prior or subordinate interests, including, without limitation,
mortgages, deeds of trust, subleases, security interests or similar
encumbrances, liens, assessments, tenancies, licenses, claims, rights
of first refusal, options, covenants, conditions, restrictions,
judgments or other encumbrances or matters affecting title to such
leasehold interests.
(iii) Compliance with Law; Government Approvals.
To Seller's and Company's knowledge, except as set forth in Section
4.5(b)(iii) of the Disclosure Schedule, Seller and the Company have
not received notice from any municipal, state, federal or other
governmental authority of any violation of any zoning, building, fire,
water, use, health, or other law, ordinance, code, regulation,
license, permit or authorization issued in respect of any of the
Leased Real Property. To Seller's and Company's knowledge,
improvements located on or constituting a part of the Leased Real
Property and the use and operation thereof (including, without
limitation, the use and operation of any signs located thereon) are in
compliance with all applicable municipal, state, federal or other
governmental laws, ordinances, codes, regulations, licenses, permits
and authorizations, including, without limitation, applicable zoning,
building, fire, water, use or health laws, ordinances, codes,
regulations, licenses, permits and authorizations, and there are
presently in effect all certificates of occupancy, licenses, permits
and authorizations required by law, ordinance, code or regulation or
by any governmental or private authority having jurisdiction over any
of the Leased Real Property or any portion thereof, or the occupancy
thereof or any present use thereof (collectively, "Governmental
Approvals"), which are necessary or otherwise material to the conduct
of the Company's business. The Leased Real Property has at least the
minimum access required by applicable subdivision or similar law.
(c) Personal Property. Except as specifically
disclosed in Section 4.5(c) of the Disclosure Schedule or in the Base Balance
Sheet (as defined in Section 4.6(a)(ii)), the Company owns and has good, valid
and (if applicable) marketable title to all of the personal property used in
connection with the conduct of the Company's business, and none of such
personal property or assets is subject to any Lien, except as specifically
disclosed in said Schedule or in the Base Balance Sheet. The Base Balance
Sheet reflects all personal property used in connection with the conduct of the
Company's business, subject to dispositions and additions in the ordinary
course of business and consistent with this Agreement. Except as otherwise
specified in Section 4.5(c) of the Disclosure Schedule, all of the tangible
personal property of the Company is in generally good operating condition and
repair, normal wear and tear excepted, has been well maintained, and conforms
in all material respects with all applicable ordinances, regulations and other
laws.
4.6 Financial Statements; Undisclosed Liabilities.
(a) Seller has previously delivered to Purchaser the
following financial statements, copies of which are attached hereto as Section
4.6(a) of the Disclosure Schedule:
(i) Unaudited balance sheets for the Company as
of December 31, 1996 (herein the "Base Balance Sheet"), and December
31, 1995 and unaudited statements of income, retained earnings and
cash flows for the years then ended prepared in accordance with the
cash method of accounting; and
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<PAGE> 10
(ii) An unaudited balance sheet for the Company as
of April 30, 1997 (herein the "Interim Base Balance Sheet"), and an
unaudited statement of income and retained earnings for the four month
period then ended prepared in accordance with the cash method of
accounting.
Said financial statements have been prepared by the Company from its books and
records, and present fairly in all material respects the financial condition of
the Company at the dates of said statements and the results of their operations
for the periods covered thereby in accordance with the cash method of
accounting.
(b) As of the date of the Base Balance Sheet, there were
no liabilities or obligations of any nature, whether accrued, absolute,
contingent or otherwise, asserted or unasserted, known or unknown, relating to
the Company, except liabilities (i) stated or adequately reserved against on
the Base Balance Sheet or the notes thereto, (ii) specifically disclosed in
Section 4.6(b) of the Disclosure Schedule furnished to Purchaser hereunder on
the date hereof and attached hereto, or (iii) incurred in the ordinary course
of business consistent with the terms of this Agreement subsequent to the date
of the Base Balance Sheet.
(c) There are no liabilities or obligations of any
nature, whether accrued, absolute, contingent or otherwise, asserted or
unasserted, known or unknown, relating to the Company, except liabilities (i)
stated or adequately reserved against on the Base Balance Sheet or the notes
thereto, (ii) specifically disclosed in Section 4.6(c) of the Disclosure
Schedule, or (iii) incurred in the ordinary course of business consistent with
the terms of this Agreement subsequent to the date of the Base Balance Sheet.
(d) As of the date of the Interim Base Balance Sheet,
there were no liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise, asserted or unasserted, known or unknown,
relating to the Company, except liabilities (i) stated or adequately reserved
against on the Interim Base Balance Sheet or the notes thereto, (ii)
specifically disclosed in Section 4.6(d) of the Disclosure Schedule furnished
to Purchaser hereunder on the date hereof and attached hereto, or (iii)
incurred in the ordinary course of business consistent with the terms of this
Agreement subsequent to the date of the Interim Base Balance Sheet.
(e) There are no liabilities or obligations of any
nature, whether accrued, absolute, contingent or otherwise, asserted or
unasserted, known or unknown, relating to the Company, except liabilities (i)
stated or adequately reserved against on the Interim Base Balance Sheet or the
notes thereto, (ii) specifically disclosed in Section 4.6(e) of the Disclosure
Schedule, or (iii) incurred in the ordinary course of business consistent with
the terms of this Agreement subsequent to the date of the Interim Base Balance
Sheet.
4.7 Taxes.
(a) Except as disclosed in Section 4.7(a) of the
Disclosure Schedule, the Company and its predecessors have paid or caused to be
paid all federal, state, local, foreign, and other taxes, including, without
limitation, income taxes, estimated taxes, alternative minimum taxes, excise
taxes, sales taxes, use taxes, value-added taxes, gross receipts taxes,
franchise taxes, capital stock taxes, employment and payroll-related taxes,
withholding taxes, stamp taxes, transfer taxes, windfall profit taxes,
environmental taxes, property taxes and business and license fees and taxes,
whether or not measured in whole or in part by net income and all deficiencies,
and other additions to tax, interest, fines, charges and penalties owed by it
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<PAGE> 11
(collectively, "Taxes") shown to be due on all tax returns required to be filed
through the date hereof, whether disputed or not.
(b) The Company and its predecessors have in accordance
with applicable law timely filed all federal, state, local and foreign tax
returns, information returns and reports required to be filed through the date
hereof, and all such returns and reports are true, correct and complete.
Complete and correct copies of all federal, state, local and foreign income tax
returns filed with respect to the Company and its predecessors for taxable
periods ended on or after December 31, 1992, have been previously provided to
Purchaser, together with any Internal Revenue Service or other governmental
examination reports and statements of deficiencies assessed or agreed to with
respect to said returns.
(c) Neither the Internal Revenue Service nor any other
governmental authority is now asserting (in a suit, action, proceeding,
investigation, claim or otherwise) or, to Seller's or Company's knowledge,
threatening to assert against the Company or its predecessors any deficiency or
claim for additional Taxes. No claim has ever been made by an authority in a
jurisdiction where the Company and its predecessors do not file reports and
returns that the Company or its predecessors are or may be subject to taxation
by that jurisdiction. There are no security interests or liens on any of the
assets of the Company that arose in connection with any failure (or alleged
failure) to pay any Tax. Neither the Company nor its predecessors have entered
into a closing agreement pursuant to Section 7121 of the Internal Revenue Code
of 1986, as amended, or any predecessor statutes (the "Code").
(d) There has not been during the past five years any
audit of any tax return filed by the Company or its predecessors, no audit of
any tax return of the Company or its predecessors in progress, and neither the
Company nor its predecessors have been notified by any tax authority that any
such audit is contemplated or pending. No extension of time with respect to
any date on which a tax return was or is to be filed by the Company or its
predecessors is in force, and no waiver or agreement by any of the Company or
its predecessors is in force for the extension of time for the assessment or
collection of any Taxes.
(e) The Company and its predecessors have never been (and
have never had any liability for unpaid Taxes because they once were) a member
of an "affiliated group" (as defined in Section 1504(a) of the Code). Neither
the Company nor its predecessors have ever filed, or have ever been required to
file, a consolidated, combined or unitary tax return with any other entity.
Neither the Company nor its predecessors are parties to any tax sharing or
similar agreement.
(f) Neither the Company nor its predecessors is a
"foreign person" within the meaning of Section 1445 of the Code and Treasury
Regulations Section 1.1445-2.
(g) Neither the Company nor its predecessors has made any
payments, is obligated to make any payments, or is a party to any agreement
that under certain circumstances could obligate it to make any payments that
will not be deductible under Section 280G of the Code.
(h) The Company and its predecessors have treated all of
their workers as employees for purposes of federal, state, local and foreign
employment, social security, withholding, unemployment and all other payroll
related taxes.
(i) The Base Balance Sheet reflects and includes adequate
charges, accruals, reserves and provisions for the payment in full of all Taxes
relating to the Company for any and all periods (i)
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ending on or before the date the Interim Base Balance Sheet and (ii) ending
subsequent to the date of the Interim Base Balance Sheet and through and
including the Closing Date.
(j) The Company is an "S corporation" within the meaning
of Section 1361(a)(1) of the Code.
(k) Except as is set forth on Section 4.7(k) of the
Disclosure Schedule, neither the Company nor its predecessors own or have ever
owned a direct or indirect interest in any trust, partnership, corporation or
other entity, and no assets of the Company include an interest in any such
entity.
(l) For purposes of this Agreement, all references to
sections of the Code shall include any predecessor provisions to such sections
and any similar provisions of federal, state, local or foreign law.
4.8 Collectibility of Accounts Receivable. All of the accounts
receivable of the Company's business (subject to contractual allowances
consistent with the past practices of the Company's business) as described in
Section 4.8 of the Disclosure Schedule are reflected properly in the Company's
books and records and are valid and enforceable claims, are current (consistent
with aging practice of the Company) and, to Seller's and Company's knowledge,
are collectible (subject to reasonable allowance for doubtful accounts as
reflected on the balance sheets of the Company) and are not subject to set off
or counterclaim (and not covered by insurance), provided that the foregoing
representation is not a guarantee of collectibility. A complete and accurate
summary of the amount of accounts receivable has previously been provided to
Company. The Company has no accounts receivable or loans receivable from any
person, firm or corporation which is affiliated with Seller or the Company or
from any stockholder, director, officer or employee of Seller or the Company or
any affiliate thereof.
4.9 Absence of Certain Changes. Except as disclosed in Section
4.9 of the Disclosure Schedule, since the date of the Base Balance Sheet,
there has not been:
(a) Any adverse change in the properties, assets,
liabilities, business, operations, condition (financial or other), personnel or
prospects of the Company, which change by itself or in conjunction with all
other such changes, whether or not arising in the ordinary course of business,
has been material;
(b) Any contingent liability relating to the Company as
guarantor or otherwise with respect to the obligations of others or any
cancellation of any material debt or claim owing to, or waiver of any material
right of, the Company's business;
(c) Any Lien placed on any of the properties of the
Company which remains in effect on the date hereof;
(d) Any material obligations or liability of any nature,
whether accrued, absolute, contingent or otherwise, asserted or unasserted,
known or unknown, incurred by the Company other than obligations and
liabilities incurred in the ordinary course of business and otherwise
consistent with the terms of this Agreement;
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(e) Any purchase, sale or other disposition, or any
agreement or other arrangements for the purchase, sale or other disposition, of
any of the properties or assets of the Company other than in the ordinary
course of business;
(f) Any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting any of the properties,
assets or business of the Company;
(g) Any declaration, set aside or payment of any dividend
by the Company or the making of any other distribution in respect of the
capital stock or other equity interest of the Company or any direct or indirect
redemption, purchase or other acquisition by the Company of its own capital
stock or other equity interest;
(h) Any change in the compensation (in the form of
salaries, wages, incentive arrangements or otherwise) or benefits payable by
the Company to any officers, employees, agents, independent contractors,
dentists or dental professional corporations other than normal merit increases
in accordance with its usual practices, or any bonus payment or arrangement
made to or with any such person or Company; or any entering into any
employment, deferred compensation or other similar agreement (or any
employment, deferred compensation or other similar agreement (or any amendment
to any such existing agreement)) with any such person or entity;
(i) Any material change, or the obtaining of written
information concerning a prospective change, with respect to any officers,
management employees or dentists (including professional corporations) of the
Company, any grant of any severance or termination pay to any officer,
employee, agent, independent contractor, dentist or dental professional
corporation of the Company or any increase in benefits payable under any
existing severance or termination pay policies or employment agreement or
relationship;
(j) Any payment or discharge of a material Lien or
liability relating to the Company which was not shown on the Base Balance Sheet
or incurred in the ordinary course of business thereafter;
(k) Any change in accounting methods or practices, credit
practices, collection policies or payment policies used by the Company
including, without limitation, any change in the discharge or recording of
accounts payable relative to past practices;
(l) Any material cancellation or loss of any material
right or asset, or waiver of any right, of the Company;
(m) Any other material transaction relating to the
Company other than transactions in the ordinary course of business and
consistent with past practices; or
(n) Any agreement or understanding, whether in writing or
otherwise, by the Company or any other person that would result in any of the
transactions or events or require the Company to take any of the actions
specified in paragraphs (a) through (m) above.
4.10 Ordinary Course. Since the date of the Base Balance Sheet,
the Company has conducted its business only in the ordinary course and in a
manner consistent with prior practices.
4.11 Banking Relations. All of the accounts with any banking
institution relating to the Company are accurately and in all material respects
described in Section 4.11 of the Disclosure Schedule,
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indicating with respect to each of such accounts the name of the institution,
the account number(s), the type of arrangement maintained (such as checking
account, borrowing, etc.) and the person or persons authorized in respect
thereof.
4.12 Intellectual Property.
(a) The Company has exclusive ownership of, or exclusive
license to use, all computer software, patent, copyright, trade secret
(including, without limitation, customer lists, production processes and
inventions), trademark, service mark and other proprietary rights
(collectively, "Intellectual Property"), used in the Company's business as
presently conducted. The Company's rights in all of such Intellectual Property
are freely transferable. No representation or warranty is made as to licensed
software which is generally commercially available and used in the ordinary
course of business with respect to Intellectual Property which is not freely
assignable at the date hereof. No proceedings have been instituted, or are
pending or threatened, which challenge the rights of the Company in respect of
any Intellectual Property, and to the knowledge of Seller, no other person has
or alleges any rights in or to the Intellectual Property.
(b) All patents, patent applications, trademarks, service
marks, trademark and service mark applications and registrations and registered
copyrights related to the conduct of the Company's business as presently
conducted or contemplated to be conducted, are listed in Section 4.12(b) of the
Disclosure Schedule.
(c) All licenses or other agreements under which the
Company is granted rights in Intellectual Property are listed in Section
4.12(c) of the Disclosure Schedule. All said licenses or other agreements are
in full force and effect, there is no default by the Company, or any other
party thereto, and, except as set forth in Section 4.12(c) of the Disclosure
Schedule and as provided in Section 4.12(a) above, all rights thereunder are
freely assignable.
(d) To Seller's and Company's knowledge, the conduct of
the Company's business has not and does not infringe any Intellectual Property
of any other person. No proceeding charging the Company with infringement of
any adversely held Intellectual Property has been filed or, to the knowledge of
Seller or Company, is threatened to be filed. There exists no unexpired patent
or patent application which includes claims that would be infringed by or
otherwise adversely affect the services, activities or business of the Company.
The conduct of the Company's business does not involve the unauthorized use of
any confidential information or trade secrets of any person including, without
limitation, any former employer of any past or present employee. Neither the
Company, nor to Seller's or Company's knowledge, any of its employees, has any
agreements or arrangements with any persons other than the Company related to
confidential information or trade secrets of such persons or restricting any
such employee's engagement in business activities of any nature, other than
those relating to patient confidentiality as required by law.
(e) As of the Closing, the Company will possess the valid
right to use the name "Dental Centers of Indiana" and all similar names and
derivations thereof and all related trademarks and trade names used in its
business. To Seller's and Company's knowledge, the Company's use of such names
does not infringe upon the rights of any other person.
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4.13 Contracts.
(a) Except for contracts, commitments, plans, agreements
and licenses described in Section 4.13(a) of the Disclosure Schedule (true and
complete copies of which have been delivered to the Purchaser), the Company is
not a party to or subject to:
(i) any plan or contract providing for bonuses,
pensions, options, stock purchases, deferred compensation, retirement
payments, profit sharing, collective bargaining or the like, or any
contract or agreement with any labor union;
(ii) any employment contract, or any contract for
services which requires the payment of more than $100,000 annually or
which is not terminable within 30 days without liability for any
penalty or severance payment;
(iii) any contract or agreement for the purchase of
any commodity, material, equipment or service except purchase orders
in the ordinary course of business for less than $5,000 each, provided
that such orders do not exceed $50,000 in the aggregate;
(iv) any other contracts or agreements creating an
obligation or receivable of $50,000 or more with respect to any such
contract;
(v) any contract or agreement which by its terms
does not terminate or is not terminable without penalty within one
year after the date hereof;
(vi) any contract or agreement for the sale or
lease of its products not made in the ordinary course of business;
(vii) any contract containing covenants limiting
its freedom to compete in any line of business or with any person or
entity;
(viii) any contract or agreement for the purchase of
any fixed asset for a price in excess of $50,000, whether or not such
purchase is in the ordinary course of business;
(ix) any license agreement (as licensor or
licensee) for a total consideration exceeding $50,000 for any one such
license;
(x) any agreement involving a lease or license of
real property or any "capitalized" or "financing" lease;
(xi) any indenture, mortgage, promissory note,
loan agreement, guaranty or other agreement or commitment for the
borrowing of money and any related security agreement;
(xii) any contract or agreement with any Company
officer, employee, director, or stockholder or with any persons or
organizations controlled by or affiliated with any of them;
(xiii) any contract or agreement with any
governmental authority, insurance company, third- party fiscal
intermediary or carrier administering any Medicaid program of any
state, the Medicare program, any clinic or other in-patient health
care facility, dental or health
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<PAGE> 16
maintenance organization, preferred provider organization,
self-insured employer or other third-party payor of any kind or
nature;
(xiv) any power of attorney; or
(xv) any judgment, decree or order affecting the
Company.
(b) All contracts, agreements, leases and instruments to
which the Company is a party and as are set forth in Section 4.13(a) of the
Disclosure Schedule are valid and are in full force and effect, and constitute
legal, valid and binding obligations of the Company and the other parties
thereto, enforceable in accordance with its respective terms, subject to
bankruptcy, reorganization, insolvency and other similar laws affecting the
enforcement of creditors' rights in general and to general principles of equity
(regardless of whether considered in a proceeding in equity or an action at
law). Neither the Company nor, to the knowledge of Seller or Company, any
other party to any contract, agreement, lease or instrument to which the
Company is a party or any judgment, decree or order applicable to the Company
is in default in complying with any provisions thereof, and no condition, event
or facts exist which, with notice, lapse of time or both, would constitute a
default thereof on the part of the Company or on the part of any other party
thereto in any such case that could have a material adverse effect on the
business, operations, results of operations, assets, condition (financial or
other) or prospects of the Company. The Company is not subject to or bound by
any agreement, judgment, decree or order which materially adversely affects the
business, operations, results of operations, assets, condition (financial or
other) or prospects of its business.
(c) There are no contracts, agreements, arrangements or
understandings (each, an "HCP Agreement") with any dentist, dental assistant,
nurse, technician, or other health care provider (each a "Health Care
Provider"), pursuant to which any Seller receives revenues or compensation
regarding the provision of dental services to patients in connection with such
business.
4.14 Litigation. Section 4.14 of the Disclosure Schedule sets
forth a detailed listing of all currently pending litigation and governmental
or administrative proceedings or investigations to which Seller or the Company
is a party. Except for matters described in Section 4.14 of the Disclosure
Schedule, there are no claims, actions, suits or proceedings and there is no
litigation or governmental or administrative proceeding or investigation
pending or threatened against the Company which may have a material adverse
effect on the business, operations, results of operations, assets, condition
(financial or other) or prospects of the Company or which could prevent or
hinder the consummation of the transactions contemplated by this Agreement or
any other transaction contemplated by or referred to herein. With respect to
each matter set forth therein, Section 4.14 of the Disclosure Schedule sets
forth a description of the forums for the matter, the parties thereto and the
type and amount of relief sought. The Company is not presently subject to any
injunction, order or other decree of any court.
Without limitation of the foregoing, except as set forth in Section
4.14 of the Disclosure Schedule, there are no pending or threatened malpractice
claims, Indiana Regulatory Board investigations, suits, notices of intent to
institute arbitrations or proceedings, either administrative or judicial,
involving the Company including, without limitation, any of the Health Care
Providers.
4.15 Permits; Compliance with Laws; Licensing and Credentialing;
Health Care Providers.
(a) General Compliance. Except as set forth in Section
4.15(a) of the Disclosure Schedule, the Company has all franchises,
authorizations, approvals, orders, consents, licenses,
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<PAGE> 17
certificates, permits, registrations, qualifications or other rights and
privileges (collectively "Permits") necessary to permit the ownership of its
properties and the conduct of such business as the same is presently conducted.
To Seller's and Company's knowledge, a listing of such Permits is set forth in
Section 4.15(a) of the Disclosure Schedule, and all such Permits are valid and
in full force and effect except to the extent the absence of any such Permit
would not have a material adverse effect on the business, operations, results
of operations, assets, condition (financial or other) or prospects of the
Company's business. No Permit is subject to termination as a result of the
performance of the Agreement or consummation of the transactions contemplated
hereby or referred to herein.
The Company is now and has heretofore been in full compliance
with all applicable statutes, ordinances, orders, rules and regulations
promulgated by any federal, state, municipal or other governmental authority
involving the corporate practice of dentistry. In addition, the Company is now
and has heretofore been in compliance with all other applicable statutes,
ordinances, orders, rules and regulations (including, without limitation,
material compliance with OSHA and regulations thereunder and all applicable
environmental laws and regulations) promulgated by any federal, state,
municipal or other governmental authority which apply to the conduct of the
Company's business, except for any such non-compliance or violation that,
individually or in the aggregate, would not have a material adverse effect on
the business, operations, results of operations, assets, condition (financial
or other) or prospects of the Company. Since January 1, 1993, neither Seller
nor the Company has ever entered into or been subject to any judgment, consent
decree, compliance order or administrative order with respect to any insurance,
consumer protection, environmental or health and safety law, or received any
request for information, notice, demand letter, administrative inquiry or
formal or informal complaint or claim with respect to any environmental or
health and safety matter or the enforcement of any such law.
(b) Licensing and Credential Information. Each Health
Care Provider is duly licensed under the laws of the State of Indiana (except
for license revocation or suspension proceedings currently in process of which
Seller and Company have no knowledge), and each Health Care Provider has
complied in all material respects with all laws, rules and regulations relating
to the rendering of services including without limitation OSHA. Except as set
forth in Section 4.15(b) of the Disclosure Schedule, no Health Care Provider
since January 1, 1992: (i) has had his or her professional license, Drug
Enforcement Agency number, Medicare or Medicaid provider status, or staff
privileges at any hospital or dental facility suspended, relinquished,
terminated or revoked, (ii) has been reprimanded, sanctioned or disciplined by
any licensing board or any federal, state or local society, agency, regulatory
body, governmental authority, hospital, third-party payor or specialty board;
or (iii) has had a final judgment or settlement entered against him or her in
connection with a malpractice or similar action. The names and dental license
numbers of the Health Care Providers who provide services in connection with
the Company's business are set forth in Section 4.15(b) of the Disclosure
Schedule.
To the best of Seller's and Company's knowledge, all of the
employed and engaged Health Care Providers are in good physical and mental
health and do not suffer from any illnesses or disabilities which could prevent
any of them from fulfilling their responsibilities under the respective
contracts, agreements or understandings with Company. To the best of Seller's
and Company's knowledge, none of the employed and engaged Health Care Providers
uses (without a physician's approval) or abuses any controlled substances at
any time or is under the influence of alcohol or is affected by the use of
alcohol during the time period required to perform his or her duties and
obligations under any contracts, agreements or understandings with Company.
(c) Medicare/Medicaid. INTENTIONALLY OMITTED.
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(d) Other. The Company is not required to make filings
under any insurance holding company or similar state statute, or to be licensed
or authorized as an insurance holding company in any jurisdiction in order to
conduct its business as presently conducted. The dental plan services and
related products offered and provided by the Company have been and are offered
and provided in compliance with the requirements of all relevant laws and
regulations, in each case, with such exceptions, individually or in the
aggregate, as would not have an adverse effect on the business, operations,
assets, condition (financial or other) or prospects of such business and the
Company has not received any notification from any governmental regulatory
authority to the effect that any Permit from such regulatory authority is
needed to be obtained by it in order to conduct its business.
To the knowledge of Seller and Company, there exists no legislation,
rule or regulation which shall either (i) have been proposed and be in Seller's
reasonable judgment reasonably likely to be adopted in Indiana in the
foreseeable future, or (ii) have been adopted in Indiana in either case that,
individually or in the aggregate, has a material adverse effect or could
reasonably be anticipated to have a material adverse effect on the business,
operations, results of operations, assets, (financial or otherwise) or
prospects of the Company.
4.16 Insurance. The physical properties and assets of the Company
are insured to the extent disclosed in Section 4.16 of the Disclosure Schedule,
and all insurance policies, binders and arrangements relating to the Company
are disclosed in said Schedule. Said insurance policies and arrangements are
in full force and effect, all premiums with respect thereto are currently paid,
and the Company is in compliance in all material respects with the terms
thereof. To Seller's and Company's knowledge, said insurance is adequate and
customary for the Company's business and is sufficient for compliance with all
requirements of law and all agreements and leases to which the Company's
business is subject. There is no default with respect to any such policy or
binder, nor has there been any failure to give any notice or present any claim
under any such policy or binder in a timely fashion or in the manner or detail
required by the policy or binder, except for any of the foregoing that would
not, individually or in the aggregate, have a material adverse effect on the
Company and all said insurance policies will be in full force and effect after
giving effect to the transactions contemplated by this Agreement and the
transactions referred to herein.
4.17 Finder's Fees. Except as set forth in Section 4.17 of the
Disclosure Schedule, neither Seller nor the Company has incurred or become
liable for any broker's commission, or finder's fee or investment banker's fee
relating to or in connection with the transactions contemplated by this
Agreement or the transactions referred to herein.
4.18 Transactions with Interested Persons. Except as set forth in
Section 4.18 of the Disclosure Schedule, no present or former supervisory
employee, officer, director, stockholder or independent contractor (including
any dentist or professional corporation) and no affiliate (as defined in
Section 9.12(a)) of any such person, is currently a party to any transaction
with the Company, including, without limitation, any contract, agreement or
other arrangement providing for the employment of, loan to or from, furnishing
of services by or to, rental of real or personal property to or from, or
otherwise requiring payments to any such person, and to the knowledge of Seller
and Company no such person owns directly or indirectly on an individual or
joint basis any material interest in, or serves as an officer or director or in
another similar capacity of, any competitor or supplier of the Company, or any
organization which has a contract or arrangement with the Company. There are
no obligations or commitments to, and no income reflected in the financial
statements referred to in Section 4.6 has been derived from, any affiliate of
Seller or the Company, and, following the Closing, the Company shall not have
any obligation or commitment of any kind or description to any such affiliate.
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4.19 Employee Benefit Programs and ERISA. Section 4.19 of the
Disclosure Schedule sets forth all employee benefit plans as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintained by the Company under which the Company has any present or
future obligations or liability (the "Benefit Plans"). The Company does not
sponsor nor participate in any "defined benefit plan" as defined in section
3(35) of ERISA or any "multiemployer plan" as defined in Section 3(37) of ERISA
or any "multiemployer plan" as defined in Section 3(37) of ERISA.
To Seller's and Company's knowledge: (i) each Benefit Plan which is an
"employee pension benefit plan" as defined in Section 3(2) of ERISA has
received a favorable determination letter from the Internal Revenue Service;
(ii) all of the Benefit Plans have been maintained and administered, in all
material respects, in accordance with their terms and the applicable provisions
of ERISA and the Internal Revenue Code of 1986 (the "Code"); (iii) no facts
exist which would adversely affect the qualified status of any of the Benefit
Plans; (iv) no prohibited transaction under ERISA has occurred under any of the
Benefit Plans for which there exists neither a statutory nor a regulatory
exception and which would result in any material liability to the Purchaser;
(v) all contributions required under the Benefit Plans have been made, and all
contributions made to or accrued with respect to all Benefit Plans are
deductible under Section 404 or 162 of the Code; (vi) no facts exist which
could result in a material increase in premium costs of the Benefit Plans for
which benefits are insured or a material increase in benefit costs of Benefit
Plans which provide self-insured benefits; and (vii) no Benefit Plan provides
(or has any obligation or commitment to provide) health, medical, disability,
life or other similar benefits with respect to any current or former employees
(or any beneficiary thereof) of Seller beyond their retirement or other
termination of service (other than coverage mandated by Title I, Subtitle B,
Part 6 of ERISA, which coverage is fully paid by the former employee or their
dependents). Other than claims for benefits submitted by participants or
beneficiaries or appeals from denial thereof, to the knowledge of Seller and
Company, there is no litigation, legal action, suit, investigation, claim,
counterclaim or proceeding pending or threatened against any Benefit Plan.
4.20 Environmental Matters. To Seller's and Company's knowledge,
(i) neither Seller nor the Company has any liability under, nor has either ever
violated in any material respect, any Environmental Law (as defined below);
(ii) Seller and the Company and each property owned, operated, leased, or used
in connection with the Company's business, and any facilities and operations
thereon are presently in compliance in all material respects with all
applicable Environmental Laws; (iii) neither Seller nor the Company has ever
entered into or been subject to any judgment, consent decree, compliance order,
or administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect
to any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) none of the items enumerated in clause (iii) of
this paragraph will be forthcoming. For purposes of this Agreement, (i)
"Environmental Law" shall mean any environmental or health-and-safety-related
law, regulation, rule, ordinance, or by-law at the federal, state, or local
level; and (ii) "the Company's business" shall include the Company and any
predecessor to the Company.
4.21 List of Certain Employees and Suppliers. Section 4.21 of the
Disclosure Schedule lists all managers, employees, consultants and independent
contractors (including dentists and related professional corporations) of the
Company who, individually, have received for the fiscal year ended December 31,
1996, or are scheduled to receive for the fiscal year ended December 31, 1997,
compensation or payments in excess of $100,000. In each case, such Schedule
includes the current job title and aggregate annual compensation of each such
individual. Section 4.21 of the Disclosure Schedule also lists all suppliers
to whom the Company made payments aggregating $50,000 or more during the fiscal
year ended December 31, 1995, showing, with respect to each such supplier, the
name, address and dollar volume involved. To
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the knowledge of Seller and Company, no supplier has any plan or intention to
terminate or reduce its business with the Company or to materially and
adversely modify its relationship therewith.
4.22 Employees; Labor Matters. The Company's business (i) employs
approximately 28 full-time non-dentist employees and 15 part-time non-dentist
employees, (ii) employs approximately 10 dentists (including both full-time and
part-time) (all dentists are employed pursuant to a written agreement between
the Company and the dentist) and (iii) generally enjoys a good
employer-employee relationship. The Company is not delinquent in payments to
any of its employees or dentists for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed for it to the date
hereof or amounts required to be reimbursed to such employees. Except as
provided in Section 4.22 of the Disclosure Schedule, upon termination of the
employment of any of said employees or dentists, no severance or other payments
(including without limitation payments required by the Workers' Adjustment,
Retraining, and Notification Act) will become due.
The Company has no policy, practice, plan or program of paying
severance pay or any form of severance compensation in connection with the
termination of employment or services. The Company is in compliance in all
material respects with all applicable laws and regulations respecting labor,
employment, fair employment practices, terms and conditions of employment, and
wages and hours. There are no, and within the last three years there have not
been, any written or otherwise alleged charges of employment discrimination or
unfair labor practices. The Company is, and at all times since November 6,
1986 has been, in compliance in all material respects with the requirements of
the Immigration Reform Control Act of 1986.
4.23 Material Relationships and Government Contracts.
(a) To the knowledge of Seller and Company, the
relationships of the Company with its customers, Health Care Providers and the
parties to the contracts referred to in Section 4.13(a)(xv) are good patient
and/or commercial working relationships. To the knowledge of Seller and
Company, no Health Care Provider or dental health maintenance organization
("DHMO") with which the Company does business has any plan or intention to
terminate, to cancel or otherwise materially and adversely modify its
relationship with such business or to decrease materially or limit its purchase
of the services of such business. No DHMO relationship or material contract or
other material business relationship of the Company has been terminated since
January 1, 1995.
(b) The Company has no contracts or subcontracts with any
government (including any municipal government) or governmental agency or
activity, and the Company is eligible to submit bids to any DHMO.
4.24 Disclosure. The representations, warranties and statements
contained in this Agreement and in the certificates, exhibits and schedules
delivered by Seller and the Company pursuant to this Agreement, together with
all materials provided by Seller and the Company or its agents with respect to
the Company, do not contain any untrue statement of a material fact and, when
taken together, do not omit to state a material fact required to be stated
therein or necessary in order to make such representations, warranties or
statements not misleading in light of the circumstances under which they were
made. There are no facts known to Seller or Company which presently or may in
the future have a material adverse effect on the business, operations, results
of operations, assets, condition (financial or other) or prospects of the
Company which have not been specifically disclosed herein or in a Schedule
furnished herewith.
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4.25 Corporate Records. The corporate files and records maintained
by the Company accurately record in all material respects all corporate action
taken by its board of directors, governing bodies and committees. The copies
of the corporate records of the Company provided to the Purchaser for review,
are true and complete copies of the originals of such documents.
4.26 List of Directors and Officers. Section 4.26 of the
Disclosure Schedule contains a true and complete list of all current directors
and officers of the Company.
4.27 Additional Financial Representations.
(a) [INTENTIONALLY OMITTED]
(b) Company Accounts Receivable. As of the Closing, the
Company's aggregate accounts receivable shall be at least equal to ninety-five
percent (95%) the average of the Company's accounts receivable as of the last
day of February 1997, March 1997 and April 1997, all of which have been
calculated by Seller in accordance with the cash method of accounting.
(c) Company Accounts Payable. As of the Closing, the
Company aggregate accounts payable (in accordance with the cash method of
accounting) shall be zero.
(d) No Other Indebtedness. As of the Closing, the
aggregate outstanding indebtedness (i.e., indebtedness which is not an account
payable as described in Section 4.27(c)), together with the amount of
indebtedness the payment of which has been guaranteed by Company, is zero.
(e) Net Asset Value of Company. As of the date of
Closing, the net asset value of the Company will be at least $500,000.00. For
purposes of this provision, Purchaser's change of accounting methods (from cash
to accrual) shall not adversely effect the calculation of the Company's net
asset value as of the Closing.
4.28 Investment Representations. Seller, in connection with their
acquisition of the Monarch Common Stock, represents that each of them is an
"accredited investor" as such term is defined in Rule 501 under the Securities
Act of 1933, as amended (the "Securities Act"). Seller represents to the
Purchaser that they are acquiring the Monarch Common Stock for their own
account, for investment only and not with a view to, or any present intention
of, effecting a distribution of such securities or any part thereof except
pursuant to a registration or an available exemption under applicable law.
Seller acknowledges that the Monarch Common Stock has not been registered under
the Securities Act or the securities laws of any state or other jurisdiction
and cannot be disposed of unless it is subsequently registered under the
Securities Act and any applicable state laws or exemption from such
registration is available. Seller represents that each of them has such
knowledge and experience in financial and business matters, that they are
capable of evaluating the merits and risks of the investment contemplated by
this Agreement and the transactions contemplated hereby and the transactions
referred to herein and making an informed investment decision with respect
thereto.
Seller acknowledges and agrees that the following legend shall be
typed on each certificate evidencing shares of the Monarch Common Stock issued
hereunder:
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
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<PAGE> 22
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.
ARTICLE 5. COVENANTS OF SELLER.
5.1 Making of Covenants and Agreements. Seller hereby makes the
covenants and agreements set forth in this Article 5.
5.2 Cooperation. Seller shall cooperate with all reasonable
requests of the Purchaser and any of its representatives and agents to more
effectively consummate the transactions contemplated hereby and the
transactions referred to herein.
5.3 Consents. Seller shall obtain any and all consents,
authorizations and approvals, in a form reasonably acceptable to Purchaser,
required or necessary in connection with the consummation of the transactions
contemplated hereby or referred to herein, including, without limitations, any
consents, authorizations or approvals required or necessary under, among other
things, real property leases, capital leases and operating leases, in
connection with the transfer of the Stock. With respect to the leases
described in the previous sentence, Seller covenants and states that such
leases are in full force and effect and no defaults exist with respect to such
leases.
5.4 Notice of Default. Promptly upon the occurrence of, or
promptly upon Seller becoming aware of the impending or threatened occurrence
of, any event or condition which would cause or constitute a breach or default
of any of the representations, warranties or covenants of Seller contained in
or referred to in this Agreement or in any Schedule or Exhibit referred to in
this Agreement had such representation, warranty or covenant been made as of
the time of discovery of such event or condition, or would have caused or
constituted a breach or default of any of such representations, warranties or
covenants of Seller had such event occurred or been known to Seller prior to
the date hereof, Seller shall give detailed written notice thereof to the
Purchaser, and Seller shall use their best efforts to prevent or promptly
remedy the same. Should any fact or condition require any change in the
Disclosure Schedule, Seller will promptly deliver to Purchaser a supplement to
the Disclosure Schedule specifying such change.
5.5 Operation of the Business of the Company. Between the date of
this Agreement and the date of Closing, Seller will, and will cause the Company
to:
(a) conduct the business of the Company only in the
ordinary course of business consistent with past practices;
(b) use their best efforts to preserve intact the current
business organization of the Company, keep available the services of the
current officers, employees, and agents of the Company, and maintain the
relations and good will with suppliers, customers, landlords, creditors,
employees, agents, and others having business relationships with the Company;
(c) make available promptly to Purchaser, its
accountants, attorneys and financial advisors such information regarding the
Company's business, as well as selected employees and dentists of the Company,
as reasonably may be necessary for Purchaser to conduct and complete timely its
due diligence investigation of the Company;
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<PAGE> 23
(d) confer with Purchaser concerning operational matters
of a material nature; and
(e) otherwise report periodically to Purchaser concerning
the status of the business, operations, and finances of the Company.
5.6 Negative Covenants. Except as otherwise expressly permitted
by this Agreement, between the date of this Agreement and the date of Closing,
Seller will not, and will cause the Company not to, without the prior consent
of Purchaser, take any affirmative action, or fail to take any reasonable
action within their control, as a result of which any of the changes or events
listed in Section 4.9 is likely to occur. Each Seller agrees not to transfer
the Stock or any interest in the Stock to any person or entity (or enter into
any agreement or understanding to do so) without the prior consent of
Purchaser.
5.7 Payment of Indebtedness by Related Persons. Seller will cause
all indebtedness owed to the Company by Seller or any affiliate of Seller to be
paid in full prior to Closing.
5.8 No Negotiation. Until such time, if any, as this Agreement is
terminated pursuant to Article 13, Seller will not, and will cause the Company
and each of their representatives and affiliates not to, directly or indirectly
solicit, initiate, or encourage any inquiries or proposals from, discuss or
negotiate with, provide any non- public information to, or consider the merits
of any unsolicited inquiries or proposals from, any person or entity (other
than Purchaser) relating to any transaction involving the sale of the business
or assets (other than in the ordinary course of business consistent with past
practices) of the Company, or any of the capital stock of the Company, or any
merger, consolidation, business combination, or similar transaction involving
the Company.
5.9 Best Efforts. Between the date of this Agreement and the date
of Closing, Seller will use its best efforts to cause the conditions in
Articles 11 and 12 to be satisfied.
5.10 Agreement to Vote in Favor of Merger. Seller shall take all
actions necessary to vote as a holder of the Stock to approve the Merger and
shall sign all documents as may be reasonably requested by Purchaser to
evidence such approval of the Merger.
ARTICLE 6. COVENANTS OF THE PURCHASER.
6.1 Making of Covenants and Agreements. The Purchaser hereby
makes the covenants and agreements set forth in this Article 6.
6.2 Cooperation. The Purchaser shall cooperate with all
reasonable requests of Seller and their representatives and agents to more
effectively consummate the transactions contemplated hereby or the transactions
referred to herein.
6.3 Consents. Purchaser shall assist Seller and the Company in
obtaining any and all consents, authorizations and approvals necessary in
connection with the consummation of the transactions contemplated hereby or
referred to herein.
6.4 Removal of Seller as a Guarantor. Following the Closing, the
Purchaser and its affiliates shall use their best reasonable efforts, with the
strong cooperation of Seller, to cause each lessor of property to the Company
to remove Seller as a guarantor and release them from any liability to each
such lessor; provided, however, that Seller shall not be removed as a guarantor
if such removal will prevent the
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<PAGE> 24
Seller from obtaining any consent, authorization or approval required or
necessary in connection with the transfer of the Stock.
6.5 Notice of Default. Promptly upon the occurrence of, or
promptly upon Purchaser becoming aware of the impending or threatened
occurrence of, any event or condition which would cause or constitute a breach
or default of any of the representations, warranties or covenants of Purchaser
contained in or referred to in this Agreement or in any Schedule or Exhibit
referred to in this Agreement had such representation, warranty or covenant
been made as of the time of discovery of such event or condition, or would have
caused or constituted a breach or default of any of such representations,
warranties or covenants of Purchaser had such event occurred or been known to
Purchaser prior to the date hereof, Purchaser shall give detailed written
notice thereof to the Seller, and Purchaser shall use its best efforts to
prevent or promptly remedy the same. Should any fact or condition require any
change in the Disclosure Schedule, Purchaser will promptly deliver to Seller a
supplement to the Disclosure Schedule specifying such change.
6.6 Best Efforts. Between the date of this Agreement and the date
of Closing, Purchaser will use its best efforts to cause the conditions in
Articles 11 and 12 to be satisfied; provided, however, that Monarch shall have
no obligation to consummate its initial public offering of Monarch Common
Stock, and Monarch and Purchaser shall not, under any circumstances, be liable
to any Seller for any failure to consummate such initial public offering.
6.7 Delivery of Quarterly Earnings Release. Monarch shall deliver
to Seller on a quarterly basis through the end of 1998 its quarterly earnings
release.
ARTICLE 7. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ARRANGEMENTS, COVENANTS
AND OBLIGATIONS.
All representations, warranties, agreements, covenants and obligations
herein or in any Schedule, exhibit or certificate delivered by any party to the
other party incident to the transactions contemplated hereby are material,
shall be deemed to have been relied upon by the other party and shall survive
the Closing and the Merger regardless of any investigation and shall not merge
in the performance of any obligation by either party hereto, subject to the
provisions of Article 8 hereof.
ARTICLE 8. INDEMNIFICATION.
8.1 Indemnification by Seller. Seller, on behalf of themselves
and their successors, executors, administrators, estates, heirs and assigns
(collectively, for purposes of this Article 8, "Sellers"), agrees to defend,
indemnify and hold Purchaser, all subsidiaries and affiliates of any of the
foregoing (including without limitation stockholders of any of the foregoing
(other than themselves) and persons serving as officers, directors, partners,
employees or agents of Purchaser, or such subsidiaries or affiliates thereof
(in each case, other than themselves)) (individually a "Purchaser Indemnified
Party" and collectively the "Purchaser Indemnified Parties"), harmless from and
against any and all damages, liabilities, losses, taxes, fines, penalties,
costs, and expenses (including, without limitation, reasonable fees of counsel)
of any kind or nature whatsoever (whether or not arising out of third-party
claims and including all amounts paid in investigation, defense or settlement
of the foregoing) which may be sustained or suffered by any such Purchaser
Indemnified Party, based upon, arising out of, by reason of or otherwise in
respect of or in connection with: (a) any inaccuracy in or breach of any
representation or warranty made by Seller in this Agreement, or in any
Schedule, Exhibit or certificate delivered by or on behalf of Seller or the
Company as part of or pursuant to this Agreement, or any claim, action or
proceeding asserted, instituted or arising
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<PAGE> 25
out of any matter or thing covered by such representations or warranties; or
(b) any breach of any covenant or agreement made by or on behalf of Seller in
this Agreement, or in any Schedule, Exhibit or certificate delivered by or on
behalf of Seller as part of or pursuant to this Agreement. The rights of
Purchaser Indemnified Parties to recover indemnification in respect of any
occurrence referred to in clause (b) of this Section 8.1 shall not be limited
by the fact that such occurrence may not constitute an inaccuracy in or breach
of any representation or warranty referred to in clause (a) of this Section
8.1.
8.2 Indemnification by Purchaser. Purchaser, on behalf of itself
and its successors and assigns (collectively, for purposes of this Article 8,
"Purchasers"), agrees to defend, indemnify and hold Seller, and their
successors, executors, administrative, estates, heirs and assigns
(individually, a "Seller Indemnified Party" and collectively, the "Seller
Indemnified Parties"), harmless from and against any and all damages,
liabilities, losses, taxes, fines, penalties, costs and expenses (including,
without limitation, reasonable fees of counsel) of any kind or nature
whatsoever ("Claims") (whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing) which may be sustained or suffered by any such Seller Indemnified
Party, based upon, arising out of, by reason of or otherwise in respect of or
in connection with: (a) any inaccuracy in or breach of any representation or
warranty made by Purchaser in this Agreement, or in any Schedule, Exhibit or
certificate delivered by or on behalf of Purchaser as part of or pursuant to
this Agreement, or any claim, action or proceeding asserted, instituted or
arising out of any matter or thing recovered by such representations or
warranties; or (b) any breach of any covenant or agreement made by or on behalf
of Purchaser in this Agreement, or in any Schedule, Exhibit or certificate
delivered by or on behalf of Purchaser as part of or pursuant to this
Agreement. The rights of Seller Indemnified Parties to recover indemnification
in respect of any occurrence referred to in clause (b) of this Section 8.2
shall not be limited by the fact that such occurrence may not constitute an
inaccuracy in or breach of any representation or warranty referred to in clause
(a) of this Section 8.2.
8.3 Notice; Defense of Claims.
(a) Promptly after receipt by an indemnified party of
notice of any third-party or other claim, liability or expense to which the
indemnification obligations hereunder would apply, including in connection with
any governmental, employer or malpractice related proceeding, the indemnified
party shall give notice thereof in writing to the indemnifying party or
parties, but the omission to so notify the indemnifying party or parties
promptly will not relieve the indemnifying party or parties from any liability
except to the extent that the indemnifying party or parties shall have been
materially prejudiced as a result of the failure or delay in giving such
notice. Such notice shall state the information then available regarding the
amount and nature of such claim, liability or expense and shall specify the
provision or provisions of this Agreement under which the liability or
obligation is asserted.
(b) In the case of any third-party claim, if, within
twenty (20) days after receiving the notice described in the preceding
sentence, the indemnifying party or parties (i) give written notice to the
indemnified party or parties stating that they intend to defend in good faith
against such claim, liability or expense at their own cost and expense and (ii)
provide assurance and security reasonably acceptable to such indemnified party
or parties that such indemnification will be paid fully and promptly if
required and such indemnified party or parties will not incur cost or expense
during the proceeding, then counsel for the defense shall be selected by the
indemnifying party or parties (subject to the consent of such indemnified party
or parties, which consent shall not be unreasonably withheld) and such
indemnified party or parties shall not be required to make any payment with
respect to such claim, liability or expense as long as the indemnifying party
or parties are conducting a good faith and diligent defense at their own
expense; provided, however, that the assumption of defense of any such matters
by the indemnifying party or parties
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<PAGE> 26
shall relate solely to the claim, liability or expense that is subject or
potentially subject to indemnification. If the indemnifying party or parties
assume such defense in accordance with the preceding sentence, they shall have
the right, with the consent of such indemnified party or parties, which consent
shall not be unreasonably withheld, to settle all indemnifiable matters related
to claims by third parties which are susceptible to being settled provided the
indemnifying party's or parties' obligation to indemnify such indemnified party
or parties therefor will be fully satisfied and the settlement includes a
complete release of such indemnified party or parties.
(c) The indemnifying party or parties shall keep such
indemnified party or parties apprised of the status of the claim, liability or
expense and any resulting suit, proceeding or enforcement action, shall furnish
such indemnified party or parties with all documents and information that such
indemnified party or parties shall reasonably request and shall consult with
such indemnified party or parties prior to acting on major matters, including
settlement discussions.
(d) Notwithstanding anything herein stated, such
indemnified party or parties shall at all times have the right fully to
participate in such defense at its own expense directly or through counsel;
provided, however, if the named parties to the action or proceeding include
both the indemnifying party or parties and the indemnified party or parties and
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, the expense of separate counsel
for such indemnified party or parties shall be paid by the indemnifying party
or parties. If no such notice of intent to dispute and defend is given by the
indemnifying party or parties, or if such diligent good faith defense is not
being or ceases to be conducted, such indemnified party or parties shall, at
the expense of the indemnifying party or parties, undertake the defense of
(with counsel selected by such indemnified party or parties), and shall have
the right to compromise or settle such claim, liability or expense. If such
claim, liability or expense is one that by its nature cannot be defended solely
by the indemnifying party or parties, then such indemnified party or parties
shall make available all information and assistance that the indemnifying party
or parties may reasonably request and shall cooperate with the indemnifying
party or parties in such defense.
8.4 Right of Set-off. Upon notice to Seller specifying in
reasonable detail the basis for such set-off, the Purchaser Indemnified Parties
may set off any amounts to which it may be entitled under Section 8.1 against
amounts otherwise payable under the deferred payments provided for in Section
3.1. The exercise of such right of set-off by Purchaser in good faith, whether
or not ultimately determined to be justified, will not constitute a default of
Purchaser under Section 3.1. Neither the exercise of nor the failure to
exercise such right of set-off will constitute an election of remedies or limit
Purchaser in any manner in the enforcement of any other remedies that may be
available to it.
8.5 Satisfaction of Indemnification Obligations. Any indemnity
payable pursuant to this Article 8 shall be paid within the later of (a) ten
(10) days after the indemnified party's request therefor or (b) ten (10) days
prior to the date on which the Loss upon which the indemnity is based is
required to be satisfied by the indemnified party.
ARTICLE 9. MISCELLANEOUS.
9.1 Fees, Expenses and Certain Taxes.
(a) Purchaser will assume and pay Seller's fees and
expenses in connection with this Agreement and the transactions contemplated
hereby and thereby up to an amount not in excess of
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<PAGE> 27
$250,000.00. The Purchaser also will pay its fees and expenses in connection
with this Agreement and the transactions contemplated hereby and thereby.
(b) Subject to Section 9.1(a) above, Seller will pay all
costs (i) incurred, whether at or subsequent to the Closing, in connection with
the transfer of the Stock to the Purchaser as contemplated by this Agreement,
including without limitation, all transfer taxes and charges applicable to such
transfer, and (ii) of obtaining all necessary permits, waivers, registrations
or consents with respect to any assets, rights or contracts of the Purchaser in
connection with or as a result of transactions contemplated by this Agreement
and the transactions referred to herein.
(c) Purchaser will pay all costs incurred, whether at or
subsequent to the Closing, in connection with the transfer of the Monarch
Common Stock to the Seller as contemplated by this Agreement, including without
limitation, all transfer taxes and charges applicable to such transfer.
9.2 Governing Law. This Agreement shall be construed under and
governed by the internal laws of the State of Texas without regard to its
conflict of laws provisions.
9.3 Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon confirmation of
receipt, or if sent by registered or certified mail, upon the sooner of the
expiration of three days after deposit in United States post office facilities
properly addressed with postage prepaid or acknowledgment of receipt. All
notices and payments to a party will be sent to the addresses set forth below
or to such other address or person as such party may designate by notice to
each other party hereunder:
<TABLE>
<S> <C> <C>
TO THE PURCHASER: Dental Centers of Indiana (Monarch), Inc.
c/o Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
Fax: (972) 702-0824
With a copy to: Monarch Dental Corporation Haynes and Boone, L.L.P.
4201 Spring Valley, Suite 320 901 Main Street, Suite 3100
Dallas, Texas 75244 Dallas, Texas 75202
Attn: Chief Executive Officer Attn: Kenneth K. Bezozo
Fax: (972) 702-0824 Fax: (214) 651-5940
TO THE SELLER: James W. Willis Mark R. Johnson
126 South Mulberry 3900 East Private Road 390 South
Rising Sun, Indiana 47040 North Vernon, Indiana 47265
Fax: (812) 537-0737 Fax: (812) 346-3990
Thurman H. Brown, II
486 South Woodlawn
North Vernon, Indiana 47265
Fax: (812) 689-3151
</TABLE>
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<PAGE> 28
Any notice given hereunder may be given on behalf of any party by their or its
counsel or other authorized representatives.
9.4 Entire Agreement. This Agreement, including the Disclosure
Schedule referred to herein and the other writings specifically identified
herein or contemplated hereby or delivered in connection with the transactions
contemplated hereby, is complete, reflects the entire agreement of the parties
with respect to its subject matter, and supersedes all previous written or oral
negotiations, commitments and writings, including, without limitation, the term
sheet dated April 28, 1997.
9.5 Severability. In the event any section or part of this
Agreement or any of the attached exhibits or parts thereof should be adjudged
invalid, such adjudication shall in no manner affect the other sections or
exhibits, which shall remain in full force and effect as if the section or
exhibit so declared or adjudged invalid were not originally a part hereof.
9.6 Assignability; Binding Effect. This Agreement and any rights
hereunder shall be assignable by the Purchaser, upon written notice to Seller,
(i) to one or more corporations or partnerships controlling, controlled by or
under common control with the Purchaser, directly or indirectly, provided the
Purchaser shall remain liable for its obligations hereunder in connection with
any such assignment, (ii) with Seller's approval, to any successor or acquiror
of the Purchaser or its affiliates provided such entity assumes or agrees to be
bound by the Purchaser's obligations hereunder, or (iii) with Seller's
approval, to the entity providing financing in connection with the transactions
contemplated hereby or to any successor or assign or such an entity (including
without limitation any such successor or assign in connection with any
refinancing, renewal or extension of such refinancing). This Agreement may not
be assigned by Seller without the prior written consent of the Purchaser. This
Agreement shall be binding upon and enforceable by, and shall inure to the
benefit of, the parties hereto and their respective successors, heirs and
permitted assigns (including without limitation the estate and heirs of Seller
in the event of their death).
9.7 Waiver of Breach or Violation Not Deemed Continuing. The
waiver by either party of a breach or violation of any provision of this
Agreement shall not operate as, or be construed to be, a waiver of any
subsequent breach or violation of any provision thereof. No breach or
violation of any provision hereof may be waived except by an agreement in
writing signed by the waiving party.
9.8 Captions and Gender. The captions in this Agreement are for
convenience only and shall not affect the construction or interpretation of any
term or provision 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 pronoun, as the context may require.
9.9 Execution in Counterparts. For the convenience of the parties
and to facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
9.10 Amendments. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by each of the parties hereto or
in the case of a waiver, the party or parties waiving compliance.
9.11 Certain Remedies. If any party should default in the
performance of its obligations hereunder, the other party or parties, as
applicable, shall, in addition to any other of its rights and remedies
hereunder or otherwise, be entitled to seek the remedy of specific performance,
and each of the parties hereto expressly waives the defense that a remedy in
damages will be adequate.
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<PAGE> 29
9.12 Certain Definitions. For purposes of this Agreement, the
term:
(a) "affiliate" of a person shall mean (i) with respect
to a person, any member of such person's family (including any child,
step-child, parent, step-parent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law); (ii) with
respect to the Company, any officer, director, stockholder, partner or investor
in such Company or of or in any affiliate of such Company; and (iii) with
respect to a person or Company, any person or Company which directly or
indirectly controls, is controlled by, or is under common control with such
person or Company.
(b) "breach," when used in connection with the breach of
a representation, warranty, covenant, obligation, payment or other provision of
this Agreement or any instrument delivered pursuant to this Agreement, will be
deemed to have occurred if there is or has been (i) any inaccuracy in or breach
of, or any failure to perform or comply with, such representation, warranty,
covenant, obligation, or other provision, or (ii) any claim (by any person) or
other occurrence or circumstance that is or was inconsistent with such
representation, warranty, covenant, obligation, or other provision, and the
term "breach" means any such inaccuracy, breach, failure, claim, occurrence, or
circumstance; provided, however, that the determination of whether a breach has
occurred shall be subject to materiality provisions, if any, included in
particular representations, warranties, covenants, obligations and other
provisions of this Agreement.
(c) "control" (including the terms "controlled by" and
"under common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management policies of a person, whether through the ownership of stock, as
trustee or executor, by contract or credit arrangement or otherwise;
(d) "person" means an individual, corporation,
partnership, limited liability association, trust or any unincorporated
organization; and
(e) "subsidiary" of a person means any corporation more
than 50 percent of whose outstanding voting securities, or any partnership,
joint venture or other Company more than 50 percent of whose total equity
interest, is directly or indirectly owned by such person.
9.13 Public Announcements. Any public announcement or similar
publicity with respect to this Agreement or the transactions contemplated by
this Agreement will be issued, if at all, at such time and in such manner as
Purchaser determines. Unless consented to by Purchaser in advance or required
by applicable law, rule, regulation, ruling or order, prior to the Closing,
Seller shall, and shall cause the Company to, keep this Agreement strictly
confidential and may not make any disclosure of this Agreement to any person.
Seller and Purchaser will consult with each other concerning the means by which
the Company's employees, customers, and suppliers and others having dealings
with the Company will be informed of the transactions contemplated by this
Agreement, and Purchaser will have the right to be present for any such
communication.
9.14 Confidentiality. Between the date of this Agreement and the
date of Closing, Purchaser and Seller will maintain in confidence, and will
cause the directors, officers, employees, agents, and advisors of Purchaser,
Seller and the Company to maintain in confidence any written, oral, or other
information obtained in confidence from another party or the Company in
connection with this Agreement or the transactions contemplated by this
Agreement, unless (a) such information is already known to such party or to
others not bound by a duty of confidentiality or such information becomes
publicly available through no fault of such party, (b) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the transactions
contemplated
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<PAGE> 30
by this Agreement, or (c) the furnishing or use of such information is required
by legal proceedings. Notwithstanding anything in this Agreement to the
contrary, Monarch is expressly permitted to disclose fully this transaction,
and append a copy of this Agreement and the Disclosure Schedules, including,
but not limited to the Company's financial statements, the Collateral
Agreements and related documents, in any filings with the Securities and
Exchange Commission.
If the transactions contemplated by this Agreement are not
consummated, each party will return or destroy as much of such written
information as the other party may reasonably request. Whether or not the
Closing takes place, Seller waives, and will upon Purchaser's request, cause
the Company to waive, any cause of action, right, or claim arising out of the
access of Purchaser or its representatives to any trade secrets or other
confidential information of the Company except for the intentional competitive
misuse by Purchaser of such trade secrets or confidential information.
9.15 Litigation. In the event of any litigation between the
parties hereto to enforce any provision or right hereunder, the unsuccessful
party to such litigation covenants and agrees to pay to the successful party
herein all costs and expenses reasonably including, but not limited to,
reasonable attorney's fees incurred therein by such successful party, which
costs, expenses and attorney's fees shall be included in and as a part of any
judgment rendered in such litigation.
9.16 Damage for Sellers' Breach or Default. In the event that the
transactions contemplated by this Agreement are not consummated in accordance
with the terms hereof due to Sellers' breach of or default under this
Agreement, Sellers shall pay to Purchaser immediately upon its demand an amount
equal to two hundred fifty thousand dollars ($250,000.00) which is a fair and
reasonable estimate of Purchaser's expenses and losses if Sellers breach or
default under this Agreement.
ARTICLE 10. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
10.1 Making of Representations and Warranties. As a material
inducement to Seller to enter into this Agreement and to consummate the
transactions contemplated hereby, Purchaser hereby makes the representations
and warranties to Seller contained in this Article 10.
For the purposes of this Agreement, references to "knowledge" of
Purchaser or "known" by Purchaser or words of similar import, shall be deemed
to include such knowledge as Purchaser or the following executive officer of
Monarch (i.e., Warren F. Melamed, Gary W. Cage and Steven G. Peterson) actually
has or reasonably ought to have in the ordinary course of performing their
duties. For the purposes of this Article 10, Purchaser is deemed to have
knowledge of each of the documents entered into in connection with the
transactions contemplated hereby.
10.2 Organization of Purchaser. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of Indiana with
full corporate power and authority to own or lease its properties and to
conduct its business in the manner and in the places where such properties are
owned or leased or such business is currently conducted by it.
10.3 Authority of Purchaser. Purchaser has full corporate power
and authority (i) to enter into (a) this Agreement and (b) each agreement,
document and instrument to be executed and delivered by Purchaser pursuant to
or contemplated by this Agreement, including, but not limited to, the
Collateral Agreements, and (ii) to carry out the transactions contemplated
hereby and thereby. The execution, delivery and performance by Purchaser of
this Agreement and the Collateral Agreements have been duly authorized by all
necessary action of Purchaser, and no other action on the part of Purchaser is
required
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<PAGE> 31
in connection therewith. This Agreement, the Collateral Agreements and each
such agreement, document and instrument executed and delivered by Purchaser
pursuant to this Agreement constitute valid and binding obligations of
Purchaser enforceable in accordance with their respective terms, except as may
be limited by bankruptcy, reorganization, fraudulent conveyance, insolvency or
similar laws of general application relating to or affecting the rights of
creditors, and subject to general principles of equity.
The execution, delivery and performance by Purchaser of this
Agreement, the Collateral Agreements and each such agreement, document and
instrument pursuant to or in connection with this Agreement to which it is a
party:
(i) do not and will not violate any provision of the
charter, by-laws or equivalent constituent documents
of Purchaser;
(ii) do not and will not violate in any material respect
any laws of the United States or any state or any
other jurisdiction applicable to Purchaser or require
Purchaser to obtain any approval, consent or waiver
of, or make any filing with, any person or entity
(governmental or otherwise) which has not been
obtained or made;
(iii) do not and will not (a) result in a breach of, (b)
constitute a default under, (c) accelerate any
obligation under or (d) give rise to a right of
termination of any indenture, loan or credit
agreement, or other agreement, contract, instrument,
mortgage, lien, lease, permit, authorization, order,
writ, judgment, injunction, decree, determination or
arbitration award, whether written or oral, to which
Purchaser is a party or by which the property of
Purchaser is bound or affected; and
(iv) do not and will not result in the creation or
imposition of any Lien on any of the Monarch Common
Stock.
10.4 Litigation. There is no litigation pending or, to the
knowledge of Purchaser, threatened against Purchaser which would have a
material adverse effect on the business, operations, results of operations,
assets, condition (financial or other) or prospects of Purchaser or which could
prevent or hinder the consummation of the transactions contemplated by this
Agreement.
10.5 Finder's Fees. Purchaser has not incurred or become liable
for any broker's commission or finder's fee or investment banker's fee relating
to or in connection with the transactions contemplated by this Agreement.
10.6 Warranties and Representations Concerning the Company's
Business. Purchaser acknowledges that no warranties or representations
concerning the Company's business have been made by Seller or its agents, or
from any other party in this transaction, and that no understanding has been
had or agreement has been made between the parties, except as set forth in this
Agreement.
10.7 Disclosure. The representations, warranties and statements
contained in this Agreement and in the certificates, exhibits and schedules
delivered by Purchaser pursuant to this Agreement, together with all materials
provided Purchaser or its agents, do not contain any untrue statement of a
material fact and, when taken together, do not omit to state a material fact
required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made.
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<PAGE> 32
10.8 Common Stock. Upon consummation of the transactions
contemplated hereby, the shares of Monarch Common Stock issued to Seller
pursuant to Section 1.2.1 and 3.1 (if any) shall be duly authorized, validly
issued, fully paid, non-assessable, and free and clear of all Liens. All
shares of Monarch Common Stock, if any, issued pursuant to any stock options
granted under Section 3.2 shall be, when issued, duly authorized, validly
issued, fully paid and non- assessable. In reliance upon Seller's
representations and warranties in Section 4.28, the issuance of all shares of
Monarch Common Stock to Seller by Purchaser complies with applicable federal
and state securities laws.
10.9 Financial Statements; Undisclosed Liabilities. Purchaser has
previously delivered to Seller the audited balance sheet for Monarch as of
December 31, 1996 and an audited statement of income, retained earnings and
cash flows for the year then ended including full generally accepted accounting
principles disclosures, a copy of which is attached hereto as Section 10.9 of
Purchaser's Disclosure Schedule. Said financial statement has been prepared by
Monarch from its books and records, and presents fairly in all respects the
consolidated financial condition of Monarch at the dates of said statement and
the consolidated results of operations for the period covered thereby in
accordance with generally accepted accounting principles in the United States.
10.10 Payment of Obligations. Subsequent to the Closing, Purchaser
shall pay, or cause to pay, all of the Company's liabilities in the ordinary
course of business as such liabilities become due except as may be contested in
good faith.
10.11 Ordinary Course. Since the date of the Monarch's audited
balance sheet, Monarch has conducted its business only in the ordinary course
and in a manner consistent with prior practices.
ARTICLE 11. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION TO CLOSE.
Purchaser's obligation to acquire the Stock and to take the other
actions required to be taken by Purchaser at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Purchaser, in whole or in part):
11.1 Accuracy of Representations. All of Seller's representations
and warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all respects as of the date of this Agreement, and must be accurate
in all material respects as of the date of Closing as if made on the date of
Closing, without giving effect to any supplement to the Disclosure Schedule.
11.2 Seller's Performance.
(a) All of the covenants and obligations that Seller is
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all respects.
(b) Seller must have delivered each of the Collateral
Agreements and other documents required to be delivered by Seller pursuant to
the provisions of this Agreement.
11.3 Consent of NationsBank. The consent of NationsBank of Texas,
N.A. to the consummation of the transactions contemplated by this Agreement
must have been executed and obtained and must be in full force and effect.
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<PAGE> 33
11.4 Additional Documents. Each of the following documents must
have been executed and delivered to Purchaser:
(a) a certificate executed by each Seller representing
and warranting to Purchaser that each of Seller's representations and
warranties in this Agreement was accurate in all respects as of the date of
this Agreement and is accurate in all material respects as of the date of
Closing as if made on the date of Closing (giving full effect to any
supplements to the Disclosure Schedule that were delivered by Seller to
Purchaser prior to the date of Closing in accordance with Section 5.4);
(b) a Certificate of Merger; and
(c) such other documents as Purchaser may reasonably
request for the purpose of (i) evidencing the accuracy of any of Seller's
representations and warranties, (ii) evidencing the performance by Seller of,
or the compliance by Seller with, any covenant or obligation required to be
performed or complied with by Seller, (iii) evidencing the satisfaction of any
condition referred to in this Article 11, or (iv) otherwise facilitating the
consummation or performance of any of the transactions contemplated by this
Agreement, including, without limitation, resignations of the directors and
officers of the Company requested by Purchaser.
11.5 No Proceedings. Since the date of this Agreement, there must
not have been commenced against Purchaser, or against any person or entity
affiliated with Purchaser, any proceeding (a) involving any material challenge
to, or seeking substantial damages or other substantial relief in connection
with, any of the transactions contemplated by this Agreement, or (b) that has
the effect of making illegal any of the transactions contemplated by this
Agreement.
11.6 No Claim Regarding Stock Ownership or Merger Proceeds. There
must not have been made or threatened by any person any claim asserting that
such person (a) is the holder or the beneficial owner of, or has the right to
acquire or to obtain beneficial ownership of, the Stock or any stock of, or any
other voting, equity, or ownership interest in, the Company, or (b) is entitled
to all or any portion of the Closing Purchase Price.
11.7 No Prohibition. Neither the consummation nor the performance
of any of the transactions contemplated by this Agreement will, directly or
indirectly (with or without notice or lapse of time), materially contravene, or
conflict with, or result in a material violation of, or cause Purchaser or any
person affiliated with Purchaser to suffer any material adverse consequence
under, any applicable law, rule, regulation, ruling or order.
11.8 Consent of Indiana Securities Board. The consent of the
Indiana Securities Board to the sale of the Monarch Common Stock by Purchaser
to Seller shall have been obtained if required by applicable law or regulation.
11.9 Monarch Initial Public Offering. Monarch shall have
consummated the initial public offering of Monarch Common Stock on or before
October 31, 1997.
ARTICLE 12. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE.
Seller's obligation to sell the Stock and to take the other actions
required to be taken by Seller at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Seller, in whole or in part):
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<PAGE> 34
12.1 Accuracy of Representations. All of Purchaser's
representations and warranties in this Agreement (considered collectively), and
each of these representations and warranties (considered individually), must
have been accurate in all respects as of the date of this Agreement and must be
accurate in all material respects as of the date of Closing as if made on the
date of Closing.
12.2 Purchaser's Performance.
(a) All of the covenants and obligations that Purchaser
is required to perform or to comply with pursuant to this Agreement at or prior
to the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been performed and complied
with in all respects.
(b) Purchaser must have delivered each of the Collateral
Agreements and other documents required to be delivered by Purchaser and must
have made the payments required to be made by Purchaser pursuant to the
provisions of this Agreement.
12.3 Additional Documents. Each of the following documents must
have been executed and delivered to Seller:
(a) A certificate executed by Purchaser representing and
warranting to Seller that each of Purchaser's representations and warranties in
this Agreement was accurate in all respects as of the date of this Agreement
and is accurate in all material respects as of the date of Closing as if made
on the date of Closing;
(b) a Certificate of Merger; and
(c) Such documents as Seller may reasonably request for
the purpose of (i) evidencing the accuracy of any representation or warranty of
Purchaser, (ii) evidencing the performance by Purchaser of, or the compliance
by Purchaser with, any covenant or obligation required to be performed or
complied with by Purchaser, (iii) evidencing the satisfaction of any condition
referred to in this Article 12, or (iv) otherwise facilitating the consummation
of any of the transactions contemplated by this Agreement.
12.4 No Proceedings. Since the date of this Agreement, there must
not have been commenced against Seller, or against any person or entity
affiliated with Seller, any proceeding (a) involving any material challenge to,
or seeking substantial damages or other substantial relief in connection with,
any of the transactions contemplated by this Agreement, or (b) that has the
effect of making illegal any of the transactions contemplated by this
Agreement.
12.5 No Prohibition. Neither the consummation nor the performance
of any of the transactions contemplated by this Agreement will, directly or
indirectly (with or without notice or lapse of time), materially contravene, or
conflict with, or result in a material violation of, or cause Seller or any
person affiliated with Seller to suffer any material adverse consequence under,
any applicable law, rule, regulation, ruling or order.
12.6 Monarch Initial Public Offering. Monarch shall have
consummated its initial public offering of Monarch Common Stock on or before
October 31, 1997.
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<PAGE> 35
ARTICLE 13. TERMINATION
13.1 Termination Events. This Agreement may, by notice given prior
to or at the Closing, be terminated:
(a) by either Purchaser or Seller if a material breach of
any provision of this Agreement has been committed by the other party and such
breach has not been waived;
(b) (i) by Purchaser if any of the conditions in Article
11 has not been satisfied as of the date of Closing or if satisfaction of such
a condition is or becomes impossible (other than through the failure of
Purchaser to comply with its obligations under this Agreement) and Purchaser
has not waived such condition on or before the date of Closing; or (ii) by
Seller, if any of the conditions in Article 12 has not been satisfied of the
date of Closing or if satisfaction of such a condition is or becomes impossible
(other than through the failure of Seller to comply with their obligations
under this Agreement) and Seller has not waived such condition on or before the
date of Closing;
(c) by mutual consent of Purchaser and Seller; or
(d) by either Purchaser or Seller if the Closing has not
occurred (other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before November 15, 1997, or such later date as the parties may agree upon.
13.2 Effect of Termination. Each party's right of termination
under Section 13.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not be
an election of remedies. If this Agreement is terminated pursuant to Section
13.1, all further obligations of the parties under this Agreement will
terminate, except that the obligations in Sections 9.1, 9.13 and 9.14 will
survive; provided, however, that if this Agreement is terminated by a party
because of the breach of the Agreement by the other party or because one or
more of the conditions to the terminating party's obligations under this
Agreement is not satisfied as a result of the other party's failure to comply
with its obligations under this Agreement, the terminating party's right to
pursue all legal remedies will survive such termination unimpaired.
* * * * *
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<PAGE> 36
IN WITNESS WHEREOF the parties hereto have executed this Agreement or
caused this Agreement to be executed as of the date set forth above by their
duly authorized representatives.
PURCHASER:
DENTAL CENTERS OF INDIANA (MONARCH), INC.
By: /s/ GARY W. CAGE
----------------------------------------
Gary W. Cage, Vice President
MONARCH:
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
----------------------------------------
Warren F. Melamed, D.D.S., President
COMPANY:
DENTAL CENTERS OF INDIANA, INC.
By: /s/ JAMES W. WILLIS
----------------------------------------
James W. Willis, D.D.S., President
SELLER:
/s/ JAMES W. WILLIS
---------------------------------------------
James W. Willis, D.D.S.
/s/ MARK R. JOHNSON
---------------------------------------------
Mark R. Johnson, D.D.S.
/s/ THURMAN H. BROWN, II
---------------------------------------------
Thurman H. Brown, II
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<PAGE> 1
EXHIBIT 10.6
AMENDED AND RESTATED
NON-COMPETITION AGREEMENT
(Warren F. Melamed, D.D.S.)
NON-COMPETITION AGREEMENT dated this 1st day of July, 1997 by and
between Monarch Dental Corporation, a Delaware corporation (the "Company"), and
Warren F. Melamed, D.D.S. ("Dr. Melamed").
WITNESSETH
WHEREAS, the Company and Dr. Melamed previously entered into that
certain employment agreement and non-competition agreement, both dated February
5, 1996 (the "Original Agreements"); and
WHEREAS, the Company and Dr. Melamed each desire to amend and restate
the Original Agreements; and
WHEREAS, the Company and Dr. Melamed have entered into that certain
Employment Agreement dated as of July 1, 1997 (the "Employment Agreement"); and
WHEREAS, the execution and delivery by Dr. Melamed of this Agreement is
a condition to the Company's willingness to execute and deliver the Employment
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
Section 1. Non-Competition. In view of the fact that any activity of
Dr. Melamed in violation of the terms hereof would deprive the Company and its
subsidiaries (as defined below) of the benefit of the Company's bargain under
the Employment Agreement, as a material inducement to and a condition precedent
of the Company's execution and delivery of the Employment Agreement, and in
consideration of the other covenants set forth herein, Dr. Melamed hereby
agrees to the following restrictions on his activities:
(a) Non-Competition Agreement. Dr. Melamed hereby agrees that
during the period commencing on the date hereof and ending on the date that is
the later of: (i) five (5) years after the date hereof or (ii) the date on
which Dr. Melamed receives his final severance payment pursuant to the
Employment Agreement (provided that if the Company elects to pay Dr. Melamed's
severance payment in a lump sum, then Dr. Melamed shall be deemed to receive
his final severance payment on the same date that he would have received his
final payment on a non-lump sum payout), he will not, without the express
written consent of the Company, directly or indirectly, anywhere in the
geographic area set forth in Section 1(c) below, engage, participate or invest
in any activity which is, or provide or facilitate the provision of financing
to, or assist (whether as owner, part-owner, shareholder, partner, director,
officer, trustee, employee, agent
<PAGE> 2
or consultant, or in any other capacity), any business, organization or person
other than the Company (or any affiliate of the Company), and including
particularly any such business, organization or person involving, or which is,
a family member of Dr. Melamed, whose business, activities, products or
services are competitive with any of the business, activities, products or
services conducted or offered by the Company and its subsidiaries (including
for purposes of this Agreement any associated professional corporation and the
employees and independent contractors thereof which or who provide dental
services in connection with the business of the Company and its subsidiaries
(herein, "Dental Providers")), which business, activities, products and
services shall include in any event the provision of dental health care
services (including, without limitation, the acquisition, ownership and/or
operation of one or more dental health care practices including group
practices). Without implied limitation, the forgoing covenant shall include
hiring or engaging or attempting to hire or engage for or on behalf of himself
or any such competitor any officer or employee of, or any Dental Provider who
provides services in connection with the business of the Company or any of its
direct and/or indirect subsidiaries, encouraging for or on behalf of himself or
any such competitor, any such officer, employee or Dental Provider to terminate
his, her or its relationship or employment with the Company or any of its
direct or indirect subsidiaries (including Dental Providers), soliciting for or
on behalf of himself or any such competitor any client of the Company or any of
its direct or indirect subsidiaries (including Dental Providers) and diverting
to any person (as hereinafter defined) any client or business opportunity of
the Company or of any of its direct or indirect subsidiaries (including Dental
Providers).
Notwithstanding anything herein to the contrary, (i) the provision of
dental services by Dr. Melamed as a sole practitioner shall be exempt from the
provisions of this Agreement, and (ii) Dr. Melamed may make passive investments
in any enterprise competitive with the Company, the shares of which are
publicly traded, if such investment constitutes less than five percent (5%) of
the equity of such enterprise.
Neither Dr. Melamed nor any business entity controlled by him is a party
to any contract, commitment, arrangement or agreement which could, following
the date hereof, restrain or restrict the Company or any subsidiary or
affiliate of the Company from carrying on its business or restrain or restrict
Dr. Melamed from performing his obligations under his Employment Agreement with
the Company, and as of the date of this Agreement Dr. Melamed has no business
interests in the health care industry whatsoever other than his interest in the
Company, other than interests in public companies of less than five percent
(5%).
For purposes of this Agreement, any reference to the subsidiaries of the
Company shall be deemed to include all entities directly or indirectly
controlled by it through an ownership of more than fifty percent (50%) of the
voting interests, as well as any Dental Provider, and the term "person" shall
mean an individual, a corporation, an association, a partnership, an estate, a
trust, and any other entity or organization.
(b) Non-Competition Consideration. In consideration of the
execution and delivery by Dr. Melamed of this Agreement, on the date hereof the
Company shall enter into, execute and deliver to Dr. Melamed the Employment
Agreement.
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<PAGE> 3
(c) Geographic Area. The provisions of Section 1 of this
Agreement shall apply in the following geographic areas:
(i) The state of Texas; and
(ii) All other states in which the Company or any of its
subsidiaries (including acquired businesses) commence conducting
business activities during the period during which Dr. Melamed serves as
an officer or employee of the Company or any of its subsidiaries, or in
which any company or business acquired or to be acquired by the Company
or any of its subsidiaries pursuant to an agreement entered into during
the period during which Dr. Melamed serves as an officer or employee of
the Company or any of its subsidiaries conducts business, provided that
the Company shall notify Dr. Melamed promptly upon commencement of
business activities in any new market, whether on a de novo basis or
through acquisition.
(d) Consulting. As additional consideration for the covenants
hereunder, the Company shall engage Dr. Melamed as a consultant upon any
termination of his employment for any reason other than death or disability
prior to the fourth anniversary of the date hereof. Such engagement shall
continue until the fourth anniversary of the date hereof and Dr. Melamed shall
be paid $500 per month during such period, subject to withholding (if
applicable), by the Company or a subsidiary of the Company for his consulting
services. Dr. Melamed shall not be required to devote more than one (1) hour
per week to the performance of consulting services nor to travel from his
principal location in his performance of such services, and any consulting
services performed shall otherwise be mutually agreeable.
Section 2. Scope of Agreement. The parties acknowledge that the
time, scope, geographic area and other provisions of this Agreement have been
specifically negotiated by sophisticated commercial parties and agree that (a)
all such provisions are reasonable under the circumstances of the transactions
contemplated by the Employment Agreement, (b) are given as an integral and
essential part of the transactions contemplated by the Employment Agreement and
(c) but for the covenants of Dr. Melamed contained in this Agreement, the
Company would not have entered into the Employment Agreement or consummated the
transactions contemplated thereby. Dr. Melamed has independently consulted
with his counsel and has been advised in all respects concerning the
reasonableness and proprietary of the covenants contained herein, with specific
regard to the business to be conducted by Company and its subsidiaries.
Section 3. Certain Remedies; Severability. It is specifically
understood and agreed that any breach of the provisions of this Agreement by
Dr. Melamed or any of his affiliates will result in irreparable injury to the
Company and its subsidiaries, that the remedy at law alone will be an
inadequate remedy for such breach and that, in addition to any other remedy it
may have, the Company and its subsidiaries shall be entitled to enforce the
specific performance of this Agreement by Dr. Melamed through both temporary
and permanent injunctive relief without the necessity of proving actual
damages, but without limitation of their right to damages and any and all other
remedies available to them, it being understood that injunctive relief is in
addition to, and not in lieu of, such other remedies. In the event that any
covenant contained in this Agreement
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<PAGE> 4
shall be determined by any court of competent jurisdiction to be unenforceable
by reason of its extending for too great a period of time or over too great a
geographical area or by reason of its being too extensive in any other respect,
it shall be interpreted to extend only over the maximum period of time for
which it may be enforceable and/or over the maximum geographical area as to
which it may be enforceable and/or to the maximum extent in all other respects
as to which it may be enforceable, all as determined by such court in such
action. The existence of any claim or cause of action which Dr. Melamed may
have against the Company or any of its subsidiaries or affiliates shall not
constitute a defense or bar to the enforcement of any of the provisions of this
Agreement.
Section 4. Jurisdiction. The parties hereby irrevocably submit to
the non-exclusive jurisdiction of the courts of the State of Texas to construe
and enforce the covenants contained in this Agreement. In the event that the
courts of any state shall hold such covenants unenforceable (in whole or in
part) by reason of the breadth of such scope or otherwise, it is the intention
of the parties hereto that such determination shall not bar or in any way
affect the right of the Company or any its subsidiaries to the relief provided
for herein in the courts of any other state within the geographic scope of such
covenants, as to breaches of such covenants in such other respective states,
the above covenants as they relate to each state being, for this purpose,
severable into diverse and independent covenants.
Section 5. 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:
To the Company: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, TX 75244
Attn: Chief Executive Officer
With a copy to: Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: Kenneth K. Bezozo, Esq.
To Dr. Melamed: Warren F. Melamed, D.D.S.
17723 Cedar Creek Canyon Road
Dallas, Texas 75252
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.
Section 6. Miscellaneous. This Agreement shall be governed by and
construed under the laws of the State of Texas, and shall not be modified or
discharged in whole or in part except by an agreement in writing signed by the
Company and Dr. Melamed. The prevailing party in
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<PAGE> 5
any controversy hereunder shall be entitled to reasonable attorneys' fees and
expenses. The failure of any of the parties to require the performance of a
term or obligation or to exercise any right under this Agreement or the waiver
of any breach hereunder shall not prevent subsequent enforcement of such term
or obligation or exercise of such right or the enforcement at any time of any
other right hereunder or be deemed a waiver of any subsequent breach of the
provision so breached, or of any other breach hereunder. This Agreement shall
inure to the benefit of, and be binding upon, successors of the Company by way
of merger, consolidation or transfer of substantially all the assets of the
Company, and may not be assigned by Dr. Melamed. This Agreement supersedes all
prior understandings and agreements between the parties relating to the subject
matter hereof (without limitation of the Employment Agreement executed by Dr.
Melamed as of the date hereof).
* * * * *
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date first set forth above.
MONARCH DENTAL CORPORATION
By: /s/ GARY W. CAGE
-------------------------------------
Gary W. Cage, Chief Executive Officer
/s/ WARREN F. MELAMED
-------------------------------------
Warren F. Melamed, D.D.S.
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EXHIBIT 10.23
EMPLOYMENT AGREEMENT
(Warren F. Melamed, D.D.S.)
This EMPLOYMENT AGREEMENT ("Agreement") effective as of July 1, 1997
by and between Monarch Dental Corporation, a Delaware corporation whose
principal executive offices are in Dallas, Texas ("Company"), and Warren F.
Melamed, D.D.S. ("Executive").
R E C I T A L S
Company recognizes that Executive has made significant contributions
to the financial success of the Company, and that Executive has certain
knowledge and business contacts in Company's business.
Company desires to continue Executive's employment and to obtain the
benefit of Executive's contacts and knowledge in the business as well as his
valuable judgment, extensive experience, good counsel and advice.
In order to award Executive for his contributions to the financial
success of the Company and to induce Executive to continue his employment with
the Company, the Company has agreed to provide Executive certain compensation
and management arrangements as set forth in this Agreement.
The Board of Directors of the Company has determined that it is in the
best interests of the Company to retain the Executive's services and to
reinforce and encourage the continued attention and dedication of members of
the Company's management, including the Executive, to their assigned duties
without distraction in potentially disturbing circumstances arising from the
possibility of a change in control of the Company or the assertion of claims
and actions against employees.
The Company desires to assure itself of the services of the Executive
for the period provided in this Agreement and the Executive desires to serve in
the employ of the Company on the terms and conditions hereinafter provided.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
<PAGE> 2
ARTICLE I
EMPLOYMENT
1.1 Employment. The Company hereby employs the Executive and the
Executive hereby accepts employment by the Company for the period and upon the
terms and conditions contained in this Agreement.
1.2 Office and Duties.
(a) Position. The Executive shall serve the Company as
Chairman of the Board of Directors, President and Chief Dental
Officer, with authority, duties and responsibilities not less than the
Executive has on the date of this Agreement, with his actions at all
times subject to the direction of the Board of Directors of the
Company.
(b) Commitment. Throughout the term of this Agreement,
the Executive shall devote substantially all of his time, energy,
skill and best efforts to the performance of his duties hereunder in a
manner that will faithfully and diligently further the business and
interests of the Company. Subject to the foregoing, the Executive may
serve, or continue to serve, on the boards of directors of, and hold
any other offices or positions in, companies or organizations that are
disclosed to the Board of Directors and that will not materially
affect the performance of the Executive's duties pursuant to this
Agreement.
1.3 Term. Subject to the provisions hereof, the term of this
Agreement shall be for 4 years commencing on July 1, 1997 ("Initial Term"), and
shall be automatically renewed thereafter for successive 1 year terms (each a
"Renewal Term") unless either party gives to the other written notice of
termination no fewer than 90 days prior to the expiration of the Initial Term
or any Renewal Term that it does not desire to extend this Agreement (the
Initial Term and any Renewal Term(s) shall be collectively referred to herein
as the "Term").
1.4 Compensation.
(a) Base Salary. The Company shall pay the Executive as
compensation an aggregate salary ("Base Salary") of $300,000 per year
during the Term, or such greater amount as shall be approved by the
Compensation Committee of the Company's Board of Directors. The
Compensation Committee shall review the Executive's Base Salary at
least annually. The Base Salary for each year shall be paid by the
Company in accordance with the regular payroll practices of the
Company.
(b) Bonus Compensation. The Executive shall be eligible
to receive from the Company annual bonus compensation ("Bonus
Compensation") based on the Executive's performance as may be
determined from time to time during the term hereof (such bonus amount
shall accrue as if this Agreement was entered into as of January 1,
1997) within the reasonable discretion of the Compensation Committee
of the Board or, if a Compensation Committee is not appointed, by the
Board. The Company and the Executive intend that Executive's bonus
compensation shall be based on Executive's performance with a bonus
equal to 50% of Executive's Base Salary being paid for satisfactory
performance and with such percentage being adjusted either upward or
downward for above satisfactory or below satisfactory performance, as
the case may be.
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<PAGE> 3
Except as otherwise expressly provided herein, any Bonus Compensation,
shall be paid by the Company to Executive by January 31st of each year
or within 30 days after the termination of this Agreement, as
applicable.
(c) Stock Options. The Company shall grant the Executive
stock options to purchase 150,000 shares of the Company's common stock
in accordance with the terms and conditions of that certain Stock
Option Agreement dated as of May 28, 1997.
1.5 Employment Benefits. In addition to the Base Salary and any
Bonus Compensation payable to Executive hereunder, Executive shall be entitled
to the following benefits upon satisfaction by Executive of the eligibility
requirements therefor, if any, subject to the following limitations:
(a) Health and Dental Insurance. During the Term, the
Company, at its own expense, shall provide Executive (and all
dependents of Executive at the request of Executive) with welfare
benefits which shall include health and dental insurance in amounts
and with coverage comparable to the coverage currently provided to
officers of the Company as of the date of this Agreement.
(b) Vacations. Executive shall be entitled to a paid
vacation of not less than 20 business days each year during the Term
of this Agreement, exclusive of holidays and weekends, which vacation
shall be taken by Executive in accordance with the business
requirements of the Company at the time and its personnel policies
then in effect relative to this subject. Executive shall also be
entitled to all paid holidays given by the Company to its employees.
(c) Working Facilities. During the Term of this
Agreement, the Company shall provide, at its expense, adequate office
space, furniture, equipment, supplies and personnel (including
professional, clerical, support and other personnel) as shall be
suitable to Executive's position and adequate for Executive's use in
performing his duties and responsibilities under this Agreement.
(d) Automobile Allowance. During the Term of this
Agreement, the Company shall provide Executive with a monthly
automobile allowance of One Thousand and No/100 Dollars ($1,000.00).
In addition, during the Term of this Agreement, the Company shall
reimburse Executive for the cost of gasoline incurred by Executive in
operating such automobile and the cost of automobile insurance
selected by Executive. Any allowance due Executive pursuant to the
preceding provisions of this paragraph shall be paid by the Company to
Executive on the first workday of each month or on such other day
during the month as the Company and Executive shall mutually
determine.
(e) Fringe Benefits and Perquisites. During the Term,
the Executive shall be entitled to participate in or receive benefits
under any plan or arrangement made available by the Company to its
senior executive officers, subject to and on a basis consistent with
the terms, conditions and overall administration of such plans and
arrangements. Nothing
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<PAGE> 4
paid to the Executive under any plan or arrangement made available to
the Executive shall be deemed to be in lieu of compensation hereunder.
(f) Payment and Reimbursement of Expenses. During the
Term, the Company shall pay or reimburse the Executive for all
reasonable travel and other expenses incurred by the Executive in
performing his obligations under this Agreement in accordance with the
policies and procedures of the Company for its senior executive
officers, provided that the Executive properly accounts therefor in
accordance with the regular policies of the Company.
(g) Continuing Dental Education Time and Expenses.
During the Term of this Agreement, Executive may, at his option,
attend continuing dental education seminars (such attendance shall not
be considered vacation time for purposes of this Agreement) and the
Company will reimburse Executive for all expenses (including tuition,
travel, and meals) incurred by Executive for attending such continuing
dental education.
1.6 Termination.
(a) Disability. The Company may terminate this Agreement
for Disability. "Disability" shall exist if because of ill health,
physical or mental disability, or any other reason beyond his control,
and notwithstanding reasonable accommodations made by the Company, the
Executive shall have been unable, unwilling or shall have failed to
perform his duties under this Agreement, as determined in good faith
by the Compensation Committee of the Company's Board of Directors, or,
if a Compensation Committee is not appointed, by the Board of
Directors, for a period of 180 consecutive days, or if, in any
12-month period, the Executive shall have been unable or unwilling or
shall have failed to perform his duties for a period of 270 days,
irrespective of whether or not such days are consecutive.
(b) Cause. The Company may terminate the Executive's
employment for Cause. Termination for "Cause" shall mean termination
because of the Executive's (i) willful gross misconduct that causes
material economic harm to the Company or that brings substantial
discredit to the Company's reputation, (ii) final, nonappealable
conviction of a felony involving moral turpitude, or (iii) material
breach of any provision of this Agreement. Item (iii) of this
subsection shall not constitute Cause unless the Company notifies the
Executive thereof, in writing, specifying in reasonable detail the
basis therefor and stating that it is grounds for Cause, and unless
the Executive fails to cure such matter within 60 days after such
notice is sent or given under this Agreement. The Executive shall be
permitted to respond and to defend himself before the Board of
Directors or any appropriate committee thereof within a reasonable
time after written notification of any proposed termination for Cause
under item (i) or (iii) of this subsection.
(c) Without Cause. During the Term, the Company may
terminate the Executive's employment Without Cause, subject to the
provisions of subsection 1.7(d) (Termination Without Cause or for Good
Reason). Termination "Without Cause" shall
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<PAGE> 5
mean termination of the Executive's employment by the Company other
than termination for Cause or for Disability.
(d) Termination by Executive. The Executive may
terminate his employment hereunder for Good Reason. For purposes of
this Agreement, the termination of Executive's employment hereunder by
Executive because of the occurrence of one or more of the following
events shall be deemed to have occurred for "Good Reason":
(i) any material breach of this Agreement by the
Company; provided, however, that a material breach of this
Agreement by the Company shall not constitute Good Reason
unless the Executive notifies the Company in writing of the
breach, specifying in reasonable detail the nature of the
breach and stating that such breach is grounds for Good
Reason, and unless the Company fails to cure such breach
within 60 days after such notice is sent or given under this
Agreement;
(ii) a relocation of the Company's principal
executive offices to any county other than Dallas County or
Collin County, Texas; provided, however, that no relocation
shall constitute Good Reason unless the Executive advises the
Board of Directors, in writing and prior to the relocation, of
the Executive's objection to such relocation;
(iii) a material change in the nature or scope of
Executive's authorities, powers, functions, duties or
responsibilities that the Executive has on the date of this
Agreement and that is reasonably determined by Executive in
good faith to be adverse to Executive (specifically including
but not limited to a material increase in travel); or
(iv) any reduction in Executive's Base Salary or
Bonus Compensation or any other failure by the Company to
comply with Sections 1.4 or 1.5 hereof that is not consented
to or approved by Executive.
(e) Change in Control. If, within 12 months of a Change
in Control, either (i) the Executive's employment is terminated by the
Company Without Cause, or (ii) the Executive terminates his employment
for Good Reason, then the provisions of subsection 1.7(e) (Termination
Upon a Change in Control) shall apply. For purposes of this
Agreement, "Change in Control" shall mean any of the following:
(i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other
property, other than a merger of the Company in which the
holders of the Company's common stock immediately prior to the
merger, own more than 50% of the combined voting power of the
merged or consolidated company's then outstanding voting
securities entitled to vote generally in the election of
directors;
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<PAGE> 6
(ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of
more than 50% of the assets of the Company;
(iii) any approval by the stockholders of the
Company of any plan or proposal for the liquidation or
dissolution of the Company;
(iv) the cessation of control (by virtue of their
not constituting a majority of directors) of the Company's
Board of Directors by the individuals (the "Continuing
Directors") who (x) at the date of this Agreement were
directors or (y) become directors after the date of this
Agreement and whose election or nomination for election by the
Company's stockholders, was approved by a vote of at least
two-thirds of the directors then in office who were directors
at the date of this Agreement or whose election or nomination
for election was previously so approved); or
(v) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of an aggregate of 50% or
more of the voting power of the Company's outstanding voting
securities by any person or group (as such term is used in
Rule 13d-5 under such Act); provided, however, that
notwithstanding the foregoing, an acquisition shall not
constitute a Change in Control hereunder if the acquiror is
(w) the Executive, (x) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company and
acting in such capacity, (y) a corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of
voting securities of the Company or (z) any other person whose
acquisition of shares of voting securities is approved in
advance by a majority of the Continuing Directors;
(vi) subject to applicable law, in a Chapter 11
bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving the Company to a case under
Chapter 7.
(f) Without Good Reason. During the Term, the Executive
may terminate his employment Without Good Reason. Termination
"Without Good Reason" shall mean termination of the Executive's
employment by the Executive other than termination for Good Reason.
(g) Explanation of Termination of Employment. Any party
terminating this Agreement shall give prompt written notice ("Notice
of Termination") to the other party hereto advising such other party
of the termination of this Agreement. Within 30 days after
notification that the Agreement has been terminated, the terminating
party shall deliver to the other party hereto a written explanation
(the "Explanation of Termination of Employment"), which shall state in
reasonable detail the basis for such termination and shall indicate
whether termination is being made for Cause, Without Cause or for
Disability (if the Company has terminated the Agreement) or for Good
Reason, upon a
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<PAGE> 7
Change in Control, or Without Good Reason (if the Executive has
terminated the Agreement).
(h) Date of Termination. "Date of Termination" shall mean
the date on which Notice of Termination is sent or given under this
Agreement.
1.7 Compensation During Disability or Upon Termination.
(a) During Disability. During any period that the
Executive fails to perform his duties hereunder because of ill health,
physical or mental disability, or any other reason beyond his control,
he shall continue to receive his full compensation and benefits
pursuant to Sections 1.4 (Compensation) and 1.5 (Employment Benefits)
until the Date of Termination.
(b) Termination for Disability. If the Company shall
terminate the Executive's employment for Disability, the Company's
obligation to pay compensation and benefits pursuant to Sections 1.4
(Compensation) and 1.5 (Employment Benefits) shall terminate, except
that the Company shall pay the Executive (i) accrued but unpaid
compensation and benefits pursuant to Sections 1.4 (Compensation) and
1.5 (Employment Benefits) through the Date of Termination, and (ii)
the benefits set forth in subsection 1.7(f) (Employee Benefits).
(c) Termination for Cause or Without Good Reason. If the
Company shall terminate the Executive's employment for Cause or if the
Executive shall terminate his employment Without Good Reason, then the
Company's obligation to pay compensation and benefits pursuant to
Sections 1.4 (Compensation) and 1.5 (Employment Benefits) shall
terminate, except that the Company shall pay the Executive his accrued
but unpaid compensation and benefits pursuant to Sections 1.4
(Compensation) and 1.5 (Employment Benefits) through the Date of
Termination.
(d) Termination Without Cause or for Good Reason. If
the Company shall terminate the Executive's employment Without Cause
or if the Executive shall terminate his employment for Good Reason,
then the Company shall pay to the Executive as severance pay, either
in accordance with the provisions of Section 1.4 (Compensation) or in
a lump sum within 15 days following the Date of Termination (at the
Company's option), in cash, an amount equal to the greater of:
(i) the Executive's total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) (for this purpose, the Bonus
Compensation shall be deemed to be the average Bonus
Compensation paid to Executive by the Company over the 3 most
recently completed years beginning with 1997 (or such shorter
period as may be applicable)) for the balance of the Initial
Term; or
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<PAGE> 8
(ii) 2 years average total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4 (b) (Bonus Compensation) paid to Executive by the Company
over the 3 most recently completed years beginning with 1997
(or such shorter period as may be applicable).
(e) Termination Upon a Change in Control. If, within
twelve (12) months of a Change of Control pursuant to subsection
1.6(e) (Change in Control), either (i) the Executive's employment is
terminated by the Company Without Cause, or (ii) if the Executive
terminates his employment for Good Reason, then the Company shall pay
to the Executive as severance pay either in accordance with the
provisions of Section 1.4 (Compensation) or in a lump sum within 15
days following the Date of Termination (at the Company's option), in
cash, an amount equal to the greater of:
(i) the Executive's total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) (for this purpose, the Bonus
Compensation shall be deemed to be the average Bonus
Compensation paid to Executive by the Company over the 3 most
recently completed years beginning with 1997 (or such
shorter period as may be applicable)) for the balance of the
Initial Term up to a maximum of 3 years; or
(ii) 2 years average total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) paid to Executive by the Company
over the 3 most recently completed years beginning with 1997
(or such shorter period as may be applicable).
(f) Employee Benefits. Unless the Company terminates the
Executive's employment for Cause or the Executive terminates his
employment Without Good Reason, the Company shall maintain in full
force and effect (to the extent consistent with past practice) for the
continued benefit of the Executive and, if applicable, his wife and
children, the employee benefits set forth in subsections 1.5(a)
(Health and Dental Insurance), 1.5(d) (Automobile Allowance) and
1.5(e) (Fringe Benefits and Perquisites) above that he was entitled to
receive immediately prior to the Date of Termination (subject to the
general terms and conditions of the plans and programs under which he
receives such benefits) for the balance of the applicable period set
forth in subsections 1.7(d) (Termination Without Cause or for Good
Reason) or 1.7(e) (Termination Upon a Change in Control), as
applicable, or for the period provided for under the terms and
conditions of such plans and programs, whichever is longer, provided
that his continued participation or, if applicable, the participation
of his wife and children, is possible under the general terms and
conditions of such plans and programs.
(g) No Mitigation. The Executive shall not be required
to mitigate the amount of any payment provided for in this Section 1.7
(Compensation During Disability or Upon Termination) by seeking other
employment or otherwise.
(h) Reduction in Compensation. If the Executive
terminates his employment for Good Reason or upon a Change in Control
based upon a reduction by the Company of the Executive's Base Salary,
then for purposes of subsections 1.7(d) (Termination Without Cause or
for Good Reason) and 1.7(e) (Termination Upon a Change in Control),
the Executive's Base Salary as of the Date of Termination shall be
deemed to be the
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<PAGE> 9
Executive's Base Salary immediately prior to the reduction that the
Executive claims as grounds for Good Reason.
1.8 Death of Executive. If the Executive dies prior to the
expiration of this Agreement, the Executive's employment and other obligations
under this Agreement shall automatically terminate and all compensation to
which the Executive is or would have been entitled hereunder (including without
limitation under subsections 1.5(a) (Base Salary) and 1.5(b) (Bonus
Compensation)) (for this purpose, the Bonus Compensation shall be deemed to be
50% of Executive's Base Salary in the year of death), shall terminate as of the
end of the month in which the Executive's death occurs; provided, however, that
(i) for the balance of the Initial Term or Renewal Term then in effect, the
Executive's wife and children shall be entitled to receive their benefits under
Subsection 1.5(a) (Health and Dental Insurance); and (ii) the Executive's named
beneficiary or beneficiaries shall receive such reimbursement as may have been
due to the Executive pursuant to subsection 1.5(f) (Payment and Reimbursement
of Expenses) hereof.
ARTICLE 2
NON-COMPETITION AND CONFIDENTIALITY
2.1 Non-Competition Agreement. The Company and the Executive
acknowledge that they have entered into that certain Non-Competition Agreement
dated February 5, 1996, and they hereby reaffirm and readopt all the terms and
conditions of that Non-Competition Agreement as if it was completely restated
herein.
2.2 Confidentiality. Executive shall not, directly or indirectly,
at any time following termination of his employment with the Company, reveal,
divulge or make known to any person or entity, or use for Executive's personal
benefit (including without limitation for the purpose of soliciting business,
whether or not competitive with any business of the Company or any of its
subsidiaries), any information acquired during the course of employment
hereunder with regard to the financial, business or other affairs of the
Company or any of its subsidiaries (including without limitation any list or
record of persons or entities with which the Company or any of its subsidiaries
has any dealings), other than (1) material already in the public domain, (2)
information of a type not considered confidential by persons engaged in the
same business or a business similar to that conducted by the Company, or (3)
material that Executive is required to disclose under the following
circumstances: (A) at the express direction of any authorized governmental
entity; (B) pursuant to a subpoena or other court process; (C) as otherwise
required by law or the rules, regulations, or orders of any applicable
regulatory body; or (D) as otherwise necessary, in the opinion of counsel for
Executive, to be disclosed by Executive in connection with the prosecution of
any legal action or proceeding initiated by Executive against the Company or
any of its subsidiaries or the defense of any legal action or proceeding
initiated against Executive in his capacity as an employee or director of the
Company or any of its subsidiaries. Executive shall, at any time requested by
the Company (either during or after his employment with the Company), promptly
deliver to the Company all memoranda, notes, reports, lists and other documents
(and all copies thereof) relating to the business of the Company or any of its
subsidiaries that he may then possess or have under his control.
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ARTICLE 3
INDEMNIFICATION
3.1 Indemnification Arrangement. The Company and the Executive
acknowledge that they have entered into that certain Indemnification Agreement
dated February 5, 1996, and they hereby reaffirm and readopt all the terms and
conditions of that Indemnification Agreement as if it was completely restated
herein.
ARTICLE 4
MISCELLANEOUS
4.1 Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or on behalf of the Company or any
affiliate of the Company against the Executive, the Executive's spouse, heirs,
executors or personal or legal representatives after the expiration of two
years from the date of accrual of such cause of action, and any claim or cause
of action of the Company or any affiliate shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such
two-year period; provided, however, that if any shorter period of limitations
is otherwise applicable to any such cause of action such shorter period shall
govern.
4.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
4.3 Indulgences, Etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power, or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
4.4 Notices. All notices, requests, demands and other
communications required or permitted under this Agreement and the transactions
contemplated herein shall be in writing and shall be deemed to have been duly
given, made and received when sent by telecopy (with a copy sent by mail) or
when personally delivered or one business day after it is sent by overnight
service, addressed as set forth below:
If to the Executive:
Warren F. Melamed, D.D.S.
17723 Cedar Creek Canyon Road
Dallas, Texas 75252
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If to the Company:
Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: Chief Executive Officer
Any party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this subsection for the giving of notice, which shall be
effective only upon receipt.
4.5 Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for
any reason any other or others of them may be invalid or unenforceable in whole
or in part.
4.6 Entire Agreement. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained, which shall be deemed terminated effective
immediately. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms
hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
4.7 Headings; Index. The headings of paragraphs are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
4.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without giving
effect to principles of conflict of laws; provided, however, that questions
regarding the Company's ability to indemnify and advance expenses pursuant to
Article 3 (Indemnification) shall be governed by the Delaware General
Corporation Law.
4.9 Dispute Resolution. Any dispute, controversy or claim arising
out of or in relation to or connection to this Agreement, including without
limitation any dispute as to the construction, validity, interpretation,
enforceability or breach of this Agreement, shall be exclusively and finally
settled by arbitration, and any party may submit such dispute, controversy or
claim to arbitration (Dispute Resolution).
(a) Arbitrators. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties; provided, however, that
if the dispute involves more than $2,000,000, then the arbitration
shall be heard and determined by three (3) arbitrators. If three (3)
arbitrators are necessary as provided above, then (i) each side shall
appoint an arbitrator of its choice
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within thirty (30) days of the submission of a notice of arbitration
and (ii) the party-appointed arbitrators shall in turn appoint a
presiding arbitrator of the tribunal within thirty (30) days following
the appointment of the last party-appointed arbitrator. If (x) the
parties cannot agree on the sole arbitrator, (y) one party refuses to
appoint its party-appointed arbitrator within said thirty (30) day
period or (z) the party-appointed arbitrators cannot reach agreement
on a presiding arbitrator of the tribunal, then the appointing
authority for the implementation of such procedure shall be the Senior
United States District Judge for the Northern District of Texas, who
shall appoint an independent arbitrator who does not have any
financial interest in the dispute, controversy or claim. If the
Senior United States District Judge for the Northern District of Texas
refuses or fails to act as the appointing authority within ninety (90)
days after being requested to do so, then the appointing authority
shall be the Chief Executive Officer of the American Arbitration
Association, who shall appoint an independent arbitrator who does not
have any financial interest in the dispute, controversy or claim. All
decisions and awards by the arbitration tribunal shall be made by
majority vote.
(b) Proceedings. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
(ii) The arbitrators shall be and remain at all
times wholly independent and impartial;
(iii) The arbitration proceedings shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association, as amended from time
to time;
(iv) Any procedural issues not determined under
the arbitral rules selected pursuant to item (iii) above shall
be determined by the law of the place of arbitration, other
than those laws which would refer the matter to another
jurisdiction;
(v) The costs of the arbitration proceedings
(including attorneys' fees and costs) shall be borne in the
manner determined by the arbitrators;
(vi) The decision of the arbitrators shall be
reduced to writing; final and binding without the right of
appeal; the sole and exclusive remedy regarding any claims,
counterclaims, issues or accounting presented to the
arbitrators; made and promptly paid in United States dollars
free of any deduction or offset; and any costs or fees
incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
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<PAGE> 13
(vii) The award shall include interest from the
date of any breach or violation of this Agreement, as
determined by the arbitral award, and from the date of the
award until paid in full, at 7% per annum; and
(viii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or application may be made to such
court for a judicial acceptance of the award and an order of
enforcement, as the case may be.
4.10 Survival. The covenants and agreements of the parties set
forth in Article 4 (Miscellaneous) are of a continuing nature and shall survive
the expiration, termination or cancellation of this Agreement, regardless of
the reason therefor.
4.11 Binding Effect, Etc. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business or assets of the Company, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all, or a substantial part, of the business or assets of the
Company, by written agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place.
* * * * *
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<PAGE> 14
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized, and Executive has signed
this Agreement, all as of the day and year first above written.
MONARCH DENTAL CORPORATION
By: /s/ GARY W. CAGE
-------------------------------------
Gary W. Cage, Chief Executive Officer
/s/ WARREN F. MELAMED
-------------------------------------
Warren F. Melamed, D.D.S.
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<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
(Gary W. Cage)
This EMPLOYMENT AGREEMENT ("Agreement") effective as of July 1, 1997
by and between Monarch Dental Corporation, a Delaware corporation whose
principal executive offices are in Dallas, Texas ("Company"), and Gary W. Cage
("Executive").
R E C I T A L S
Company recognizes that Executive has made significant contributions
to the financial success of the Company, and that Executive has certain
knowledge and business contacts in Company's business.
Company desires to continue Executive's employment and to obtain the
benefit of Executive's contacts and knowledge in the business as well as his
valuable judgment, extensive experience, good counsel and advice.
In order to award Executive for his contributions to the financial
success of the Company and to induce Executive to continue his employment with
the Company, the Company has agreed to provide Executive certain compensation
and management arrangements as set forth in this Agreement.
The Board of Directors of the Company has determined that it is in the
best interests of the Company to retain the Executive's services and to
reinforce and encourage the continued attention and dedication of members of
the Company's management, including the Executive, to their assigned duties
without distraction in potentially disturbing circumstances arising from the
possibility of a change in control of the Company or the assertion of claims
and actions against employees.
The Company desires to assure itself of the services of the Executive
for the period provided in this Agreement and the Executive desires to serve in
the employ of the Company on the terms and conditions hereinafter provided.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
<PAGE> 2
ARTICLE I
EMPLOYMENT
1.1 Employment. The Company hereby employs the Executive and the
Executive hereby accepts employment by the Company for the period and upon the
terms and conditions contained in this Agreement.
1.2 Office and Duties.
(a) Position. The Executive shall serve the Company as
Chief Executive Officer, with authority, duties and responsibilities
not less than the Executive has on the date of this Agreement, with
his actions at all times subject to the direction of the Board of
Directors of the Company.
(b) Commitment. Throughout the term of this Agreement,
the Executive shall devote substantially all of his time, energy,
skill and best efforts to the performance of his duties hereunder in a
manner that will faithfully and diligently further the business and
interests of the Company. Subject to the foregoing, the Executive may
serve, or continue to serve, on the boards of directors of, and hold
any other offices or positions in, companies or organizations that are
disclosed to the Board of Directors and that will not materially
affect the performance of the Executive's duties pursuant to this
Agreement.
1.3 Term. Subject to the provisions hereof, the term of this
Agreement shall be for 4 years commencing on July 1, 1997 ("Initial Term"), and
shall be automatically renewed thereafter for successive 1 year terms (each a
"Renewal Term") unless either party gives to the other written notice of
termination no fewer than 90 days prior to the expiration of the Initial Term
or any Renewal Term that it does not desire to extend this Agreement (the
Initial Term and any Renewal Term(s) shall be collectively referred to herein
as the "Term").
1.4 Compensation.
(a) Base Salary. The Company shall pay the Executive as
compensation an aggregate salary ("Base Salary") of $200,000 per year
during the Term, or such greater amount as shall be approved by the
Compensation Committee of the Company's Board of Directors. The
Compensation Committee shall review the Executive's Base Salary at
least annually. The Base Salary for each year shall be paid by the
Company in accordance with the regular payroll practices of the
Company.
(b) Bonus Compensation. The Executive shall be eligible
to receive from the Company annual bonus compensation ("Bonus
Compensation") based on the Executive's performance as may be
determined from time to time during the term hereof (such bonus amount
shall accrue as if this Agreement was entered into as of January 1,
1997) within the reasonable discretion of the Compensation Committee
of the Board or, if a Compensation Committee is not appointed, by the
Board. The Company and the Executive intend that Executive's bonus
compensation shall be based on Executive's performance with a bonus
equal to 50% of Executive's Base Salary being paid for satisfactory
performance and with such percentage being adjusted either upward or
downward for above satisfactory or below satisfactory performance, as
the case may be.
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<PAGE> 3
Except as otherwise expressly provided herein, any Bonus Compensation,
shall be paid by the Company to Executive by January 31st of each year
or within 30 days after the termination of this Agreement, as
applicable.
(c) Stock Options. The Company shall grant the Executive
stock options to purchase 150,000 shares of the Company's common stock
in accordance with the terms and conditions of that certain Stock
Option Agreement dated as of May 28, 1997.
1.5 Employment Benefits. In addition to the Base Salary and any
Bonus Compensation payable to Executive hereunder, Executive shall be entitled
to the following benefits upon satisfaction by Executive of the eligibility
requirements therefor, if any, subject to the following limitations:
(a) Health and Dental Insurance. During the Term, the
Company, at its own expense, shall provide Executive (and all
dependents of Executive at the request of Executive) with welfare
benefits which shall include health and dental insurance in amounts
and with coverage comparable to the coverage currently provided to
officers of the Company as of the date of this Agreement.
(b) Vacations. Executive shall be entitled to a paid
vacation of not less than 20 business days each year during the Term
of this Agreement, exclusive of holidays and weekends, which vacation
shall be taken by Executive in accordance with the business
requirements of the Company at the time and its personnel policies
then in effect relative to this subject. Executive shall also be
entitled to all paid holidays given by the Company to its employees.
(c) Working Facilities. During the Term of this
Agreement, the Company shall provide, at its expense, adequate office
space, furniture, equipment, supplies and personnel (including
professional, clerical, support and other personnel) as shall be
suitable to Executive's position and adequate for Executive's use in
performing his duties and responsibilities under this Agreement.
(d) Fringe Benefits and Perquisites. During the Term,
the Executive shall be entitled to participate in or receive benefits
under any plan or arrangement made available by the Company to its
senior executive officers, subject to and on a basis consistent with
the terms, conditions and overall administration of such plans and
arrangements. Nothing paid to the Executive under any plan or
arrangement made available to the Executive shall be deemed to be in
lieu of compensation hereunder.
(e) Payment and Reimbursement of Expenses. During the
Term, the Company shall pay or reimburse the Executive for all
reasonable travel and other expenses incurred by the Executive in
performing his obligations under this Agreement in accordance with the
policies and procedures of the Company for its senior executive
officers, provided that the Executive properly accounts therefor in
accordance with the regular policies of the Company.
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<PAGE> 4
1.6 Termination.
(a) Disability. The Company may terminate this Agreement
for Disability. "Disability" shall exist if because of ill health,
physical or mental disability, or any other reason beyond his control,
and notwithstanding reasonable accommodations made by the Company, the
Executive shall have been unable, unwilling or shall have failed to
perform his duties under this Agreement, as determined in good faith
by the Compensation Committee of the Company's Board of Directors, or,
if a Compensation Committee is not appointed, by the Board of
Directors, for a period of 180 consecutive days, or if, in any
12-month period, the Executive shall have been unable or unwilling or
shall have failed to perform his duties for a period of 270 days,
irrespective of whether or not such days are consecutive.
(b) Cause. The Company may terminate the Executive's
employment for Cause. Termination for "Cause" shall mean termination
because of the Executive's (i) willful gross misconduct that causes
material economic harm to the Company or that brings substantial
discredit to the Company's reputation, (ii) final, nonappealable
conviction of a felony involving moral turpitude, or (iii) material
breach of any provision of this Agreement. Item (iii) of this
subsection shall not constitute Cause unless the Company notifies the
Executive thereof, in writing, specifying in reasonable detail the
basis therefor and stating that it is grounds for Cause, and unless
the Executive fails to cure such matter within 60 days after such
notice is sent or given under this Agreement. The Executive shall be
permitted to respond and to defend himself before the Board of
Directors or any appropriate committee thereof within a reasonable
time after written notification of any proposed termination for Cause
under item (i) or (iii) of this subsection.
(c) Without Cause. During the Term, the Company may
terminate the Executive's employment Without Cause, subject to the
provisions of subsection 1.7(d) (Termination Without Cause or for Good
Reason). Termination "Without Cause" shall mean termination of the
Executive's employment by the Company other than termination for Cause
or for Disability.
(d) Termination by Executive. The Executive may
terminate his employment hereunder for Good Reason. For purposes of
this Agreement, the termination of Executive's employment hereunder by
Executive because of the occurrence of one or more of the following
events shall be deemed to have occurred for "Good Reason":
(i) any material breach of this Agreement by the
Company; provided, however, that a material breach of this
Agreement by the Company shall not constitute Good Reason
unless the Executive notifies the Company in writing of the
breach, specifying in reasonable detail the nature of the
breach and stating that such breach is grounds for Good
Reason, and unless the Company fails to cure such breach
within 60 days after such notice is sent or given under this
Agreement;
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<PAGE> 5
(ii) a relocation of the Company's principal
executive offices to any county other than Dallas County or
Collin County, Texas; provided, however, that no relocation
shall constitute Good Reason unless the Executive advises the
Board of Directors, in writing and prior to the relocation, of
the Executive's objection to such relocation;
(iii) a material change in the nature or scope of
Executive's authorities, powers, functions, duties or
responsibilities that the Executive has on the date of this
Agreement and that is reasonably determined by Executive in
good faith to be adverse to Executive (specifically including
but not limited to a material increase in travel); or
(iv) any reduction in Executive's Base Salary or
Bonus Compensation or any other failure by the Company to
comply with Sections 1.4 or 1.5 hereof that is not consented
to or approved by Executive.
(e) Change in Control. If, within 12 months of a Change
in Control, either (i) the Executive's employment is terminated by the
Company Without Cause, or (ii) the Executive terminates his employment
for Good Reason, then the provisions of subsection 1.7(e) (Termination
Upon a Change in Control) shall apply. For purposes of this
Agreement, "Change in Control" shall mean any of the following:
(i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's
common stock would be converted into cash, securities or other
property, other than a merger of the Company in which the
holders of the Company's common stock immediately prior to the
merger, own more than 50% of the combined voting power of the
merged or consolidated company's then outstanding voting
securities entitled to vote generally in the election of
directors;
(ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of
more than 50% of the assets of the Company;
(iii) any approval by the stockholders of the
Company of any plan or proposal for the liquidation or
dissolution of the Company;
(iv) the cessation of control (by virtue of their
not constituting a majority of directors) of the Company's
Board of Directors by the individuals (the "Continuing
Directors") who (x) at the date of this Agreement were
directors or (y) become directors after the date of this
Agreement and whose election or nomination for election by the
Company's stockholders, was approved by a vote of at least
two-thirds of the directors then in office who were directors
at the date of this Agreement or whose election or nomination
for election was previously so approved); or
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<PAGE> 6
(v) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of an aggregate of 50% or
more of the voting power of the Company's outstanding voting
securities by any person or group (as such term is used in
Rule 13d-5 under such Act); provided, however, that
notwithstanding the foregoing, an acquisition shall not
constitute a Change in Control hereunder if the acquiror is
(w) the Executive, (x) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company and
acting in such capacity, (y) a corporation owned, directly or
indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of
voting securities of the Company or (z) any other person whose
acquisition of shares of voting securities is approved in
advance by a majority of the Continuing Directors;
(vi) subject to applicable law, in a Chapter 11
bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving the Company to a case under
Chapter 7.
(f) Without Good Reason. During the Term, the Executive
may terminate his employment Without Good Reason. Termination
"Without Good Reason" shall mean termination of the Executive's
employment by the Executive other than termination for Good Reason.
(g) Explanation of Termination of Employment. Any party
terminating this Agreement shall give prompt written notice ("Notice
of Termination") to the other party hereto advising such other party
of the termination of this Agreement. Within 30 days after
notification that the Agreement has been terminated, the terminating
party shall deliver to the other party hereto a written explanation
(the "Explanation of Termination of Employment"), which shall state in
reasonable detail the basis for such termination and shall indicate
whether termination is being made for Cause, Without Cause or for
Disability (if the Company has terminated the Agreement) or for Good
Reason, upon a Change in Control, or Without Good Reason (if the
Executive has terminated the Agreement).
(h) Date of Termination. "Date of Termination" shall mean
the date on which Notice of Termination is sent or given under this
Agreement.
1.7 Compensation During Disability or Upon Termination.
(a) During Disability. During any period that the
Executive fails to perform his duties hereunder because of ill health,
physical or mental disability, or any other reason beyond his control,
he shall continue to receive his full compensation and benefits
pursuant to Sections 1.4 (Compensation) and 1.5 (Employment Benefits)
until the Date of Termination.
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<PAGE> 7
(b) Termination for Disability. If the Company shall
terminate the Executive's employment for Disability, the Company's
obligation to pay compensation and benefits pursuant to Sections 1.4
(Compensation) and 1.5 (Employment Benefits) shall terminate, except
that the Company shall pay the Executive (i) accrued but unpaid
compensation and benefits pursuant to Sections 1.4 (Compensation) and
1.5 (Employment Benefits) through the Date of Termination, and (ii)
the benefits set forth in subsection 1.7(f) (Employee Benefits).
(c) Termination for Cause or Without Good Reason. If the
Company shall terminate the Executive's employment for Cause or if the
Executive shall terminate his employment Without Good Reason, then the
Company's obligation to pay compensation and benefits pursuant to
Sections 1.4 (Compensation) and 1.5 (Employment Benefits) shall
terminate, except that the Company shall pay the Executive his accrued
but unpaid compensation and benefits pursuant to Sections 1.4
(Compensation) and 1.5 (Employment Benefits) through the Date of
Termination.
(d) Termination Without Cause or for Good Reason. If
the Company shall terminate the Executive's employment Without Cause
or if the Executive shall terminate his employment for Good Reason,
then the Company shall pay to the Executive as severance pay, either
in accordance with the provisions of Section 1.4 (Compensation) or in
a lump sum within 15 days following the Date of Termination (at the
Company's option), in cash, an amount equal to the greater of:
(i) the Executive's total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) (for this purpose, the Bonus
Compensation shall be deemed to be the average Bonus
Compensation paid to Executive by the Company over the 3 most
recently completed years beginning with fiscal 1996 (or such
shorter period as may be applicable)) for the balance of the
Initial Term; or
(ii) 2 years average total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) paid to Executive by the Company
over the 3 most recently completed years beginning with fiscal
1996 (or such shorter period as may be applicable).
(e) Termination Upon a Change in Control. If, within
twelve (12) months of a Change of Control pursuant to subsection
1.6(e) (Change in Control), either (i) the Executive's employment is
terminated by the Company Without Cause, or (ii) if the Executive
terminates his employment for Good Reason, then the Company shall pay
to the Executive as severance pay either in accordance with the
provisions of Section 1.4 (Compensation) or in a lump sum within 15
days following the Date of Termination (at the Company's option), in
cash, an amount equal to the greater of:
(i) the Executive's total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) (for this purpose, the Bonus
Compensation shall be deemed to be the average Bonus
Compensation paid to Executive by the Company over the 3 most
recently
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<PAGE> 8
completed years beginning with fiscal 1996 (or such shorter
period as may be applicable)) for the balance of the Initial
Term up to a maximum of 3 years; or
(ii) 2 years average total compensation including
without limitation under subsections 1.4(a) (Base Salary) and
1.4(b) (Bonus Compensation) paid to Executive by the Company
over the 3 most recently completed years beginning with fiscal
1996 (or such shorter period as may be applicable).
(f) Employee Benefits. Unless the Company terminates the
Executive's employment for Cause or the Executive terminates his
employment Without Good Reason, the Company shall maintain in full
force and effect (to the extent consistent with past practice), for
the continued benefit of the Executive and, if applicable, his wife
and children, the employee benefits set forth in subsections 1.5(a)
(Health and Dental Insurance), and 1.5(d) (Fringe Benefits and
Perquisites) above that he was entitled to receive immediately prior
to the Date of Termination (subject to the general terms and
conditions of the plans and programs under which he receives such
benefits) for the balance of the applicable period set forth in
subsections 1.7(d) (Termination Without Cause or for Good Reason) or
1.7(e) (Termination Upon a Change in Control), as applicable, or for
the period provided for under the terms and conditions of such plans
and programs, whichever is longer, provided that his continued
participation or, if applicable, the participation of his wife and
children, is possible under the general terms and conditions of such
plans and programs.
(g) No Mitigation. The Executive shall not be required
to mitigate the amount of any payment provided for in this Section 1.7
(Compensation During Disability or Upon Termination) by seeking other
employment or otherwise.
(h) Reduction in Compensation. If the Executive
terminates his employment for Good Reason or upon a Change in Control
based upon a reduction by the Company of the Executive's Base Salary,
then for purposes of subsections 1.7(d) (Termination Without Cause or
for Good Reason) and 1.7(e) (Termination Upon a Change in Control),
the Executive's Base Salary as of the Date of Termination shall be
deemed to be the Executive's Base Salary immediately prior to the
reduction that the Executive claims as grounds for Good Reason.
1.8 Death of Executive. If the Executive dies prior to the
expiration of this Agreement, the Executive's employment and other obligations
under this Agreement shall automatically terminate and all compensation to
which the Executive is or would have been entitled hereunder (including without
limitation under subsections 1.5(a) (Base Salary) and 1.5(b) (Bonus
Compensation)) (for this purpose, the Bonus Compensation shall be deemed to be
50% of Executive's Base Salary in the year of death), shall terminate as of the
end of the month in which the Executive's death occurs; provided, however, that
(i) for the balance of the Initial Term or Renewal Term then in effect, the
Executive's wife and children shall be entitled to receive their benefits under
Subsection 1.5(a) (Health and Dental Insurance); and (ii) the Executive's named
beneficiary or beneficiaries shall receive such reimbursement as may have been
due to the Executive pursuant to subsection 1.5(e) (Payment and Reimbursement
of Expenses) hereof.
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ARTICLE 2
NON-COMPETITION AND CONFIDENTIALITY
2.1 Non-Competition Agreement. The Company and the Executive
acknowledge that they have entered into that certain Non-Competition Agreement
dated July 1, 1997, and they hereby reaffirm and readopt all the terms and
conditions of that Non-Competition Agreement as if it was completely restated
herein.
2.2 Confidentiality. Executive shall not, directly or indirectly,
at any time following termination of his employment with the Company, reveal,
divulge or make known to any person or entity, or use for Executive's personal
benefit (including without limitation for the purpose of soliciting business,
whether or not competitive with any business of the Company or any of its
subsidiaries), any information acquired during the course of employment
hereunder with regard to the financial, business or other affairs of the
Company or any of its subsidiaries (including without limitation any list or
record of persons or entities with which the Company or any of its subsidiaries
has any dealings), other than (1) material already in the public domain, (2)
information of a type not considered confidential by persons engaged in the
same business or a business similar to that conducted by the Company, or (3)
material that Executive is required to disclose under the following
circumstances: (A) at the express direction of any authorized governmental
entity; (B) pursuant to a subpoena or other court process; (C) as otherwise
required by law or the rules, regulations, or orders of any applicable
regulatory body; or (D) as otherwise necessary, in the opinion of counsel for
Executive, to be disclosed by Executive in connection with the prosecution of
any legal action or proceeding initiated by Executive against the Company or
any of its subsidiaries or the defense of any legal action or proceeding
initiated against Executive in his capacity as an employee or director of the
Company or any of its subsidiaries. Executive shall, at any time requested by
the Company (either during or after his employment with the Company), promptly
deliver to the Company all memoranda, notes, reports, lists and other documents
(and all copies thereof) relating to the business of the Company or any of its
subsidiaries that he may then possess or have under his control.
ARTICLE 3
INDEMNIFICATION
3.1 Indemnification Arrangement. The Company and the Executive
acknowledge that they have entered into that certain Indemnification Agreement
dated as of March 11, 1996, and they hereby reaffirm and readopt all the terms
and conditions of that Indemnification Agreement as if it was completely
restated herein.
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<PAGE> 10
ARTICLE 4
MISCELLANEOUS
4.1 Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or on behalf of the Company or any
affiliate of the Company against the Executive, the Executive's spouse, heirs,
executors or personal or legal representatives after the expiration of two
years from the date of accrual of such cause of action, and any claim or cause
of action of the Company or any affiliate shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such
two-year period; provided, however, that if any shorter period of limitations
is otherwise applicable to any such cause of action such shorter period shall
govern.
4.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
4.3 Indulgences, Etc. Neither the failure nor any delay on the
part of either party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power, or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
4.4 Notices. All notices, requests, demands and other
communications required or permitted under this Agreement and the transactions
contemplated herein shall be in writing and shall be deemed to have been duly
given, made and received when sent by telecopy (with a copy sent by mail) or
when personally delivered or one business day after it is sent by overnight
service, addressed as set forth below:
If to the Executive:
Gary W. Cage
17671 Addison Road, #2902
Dallas, TX 75287
If to the Company:
Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: President
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<PAGE> 11
Any party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this subsection for the giving of notice, which shall be
effective only upon receipt.
4.5 Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for
any reason any other or others of them may be invalid or unenforceable in whole
or in part.
4.6 Entire Agreement. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained, which shall be deemed terminated effective
immediately. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms
hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
4.7 Headings; Index. The headings of paragraphs are included
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
4.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without giving
effect to principles of conflict of laws; provided, however, that questions
regarding the Company's ability to indemnify and advance expenses pursuant to
Article 3 (Indemnification) shall be governed by the Delaware General
Corporation Law.
4.9 Dispute Resolution. Any dispute, controversy or claim arising
out of or in relation to or connection to this Agreement, including without
limitation any dispute as to the construction, validity, interpretation,
enforceability or breach of this Agreement, shall be exclusively and finally
settled by arbitration, and any party may submit such dispute, controversy or
claim to arbitration (Dispute Resolution).
(a) Arbitrators. The arbitration shall be heard and
determined by one arbitrator, who shall be impartial and who shall be
selected by mutual agreement of the parties; provided, however, that
if the dispute involves more than $2,000,000, then the arbitration
shall be heard and determined by three (3) arbitrators. If three (3)
arbitrators are necessary as provided above, then (i) each side shall
appoint an arbitrator of its choice within thirty (30) days of the
submission of a notice of arbitration and (ii) the party-appointed
arbitrators shall in turn appoint a presiding arbitrator of the
tribunal within thirty (30) days following the appointment of the last
party-appointed arbitrator. If (x) the parties cannot agree on the
sole arbitrator, (y) one party refuses to appoint its party-appointed
arbitrator within said thirty (30) day period or (z) the
party-appointed arbitrators cannot reach agreement on a presiding
arbitrator of the tribunal, then the appointing authority for the
implementation of such procedure shall be the Senior United States
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<PAGE> 12
District Judge for the Northern District of Texas, who shall appoint
an independent arbitrator who does not have any financial interest in
the dispute, controversy or claim. If the Senior United States
District Judge for the Northern District of Texas refuses or fails to
act as the appointing authority within ninety (90) days after being
requested to do so, then the appointing authority shall be the Chief
Executive Officer of the American Arbitration Association, who shall
appoint an independent arbitrator who does not have any financial
interest in the dispute, controversy or claim. All decisions and
awards by the arbitration tribunal shall be made by majority vote.
(b) Proceedings. Unless otherwise expressly agreed in
writing by the parties to the arbitration proceedings:
(i) The arbitration proceedings shall be held in
Dallas, Texas, at a site chosen by mutual agreement of the
parties, or if the parties cannot reach agreement on a
location within thirty (30) days of the appointment of the
last arbitrator, then at a site chosen by the arbitrators;
(ii) The arbitrators shall be and remain at all
times wholly independent and impartial;
(iii) The arbitration proceedings shall be
conducted in accordance with the Commercial Arbitration Rules
of the American Arbitration Association, as amended from time
to time;
(iv) Any procedural issues not determined under
the arbitral rules selected pursuant to item (iii) above shall
be determined by the law of the place of arbitration, other
than those laws which would refer the matter to another
jurisdiction;
(v) The costs of the arbitration proceedings
(including attorneys' fees and costs) shall be borne in the
manner determined by the arbitrators;
(vi) The decision of the arbitrators shall be
reduced to writing; final and binding without the right of
appeal; the sole and exclusive remedy regarding any claims,
counterclaims, issues or accounting presented to the
arbitrators; made and promptly paid in United States dollars
free of any deduction or offset; and any costs or fees
incident to enforcing the award shall, to the maximum extent
permitted by law, be charged against the party resisting such
enforcement;
(vii) The award shall include interest from the
date of any breach or violation of this Agreement, as
determined by the arbitral award, and from the date of the
award until paid in full, at 7% per annum; and
(viii) Judgment upon the award may be entered in any
court having jurisdiction over the person or the assets of the
party owing the judgment or
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<PAGE> 13
application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the
case may be.
4.10 Survival. The covenants and agreements of the parties set
forth in Article 4 (Miscellaneous) are of a continuing nature and shall survive
the expiration, termination or cancellation of this Agreement, regardless of
the reason therefor.
4.11 Binding Effect, Etc. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business or assets of the Company, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all, or a substantial part, of the business or assets of the
Company, by written agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized, and Executive has signed
this Agreement, all as of the day and year first above written.
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
-------------------------------------
Warren F. Melamed, D.D.S., President
/s/ GARY W. CAGE
-------------------------------------
Gary W. Cage
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<PAGE> 1
EXHIBIT 10.25
NON-COMPETITION AGREEMENT
(Gary W. Cage)
NON-COMPETITION AGREEMENT dated this 1st day of July, 1997 by and
between Monarch Dental Corporation, a Delaware corporation (the "Company"), and
Gary W. Cage ("Mr. Cage").
WITNESSETH
WHEREAS, the Company and Mr. Cage have entered into that certain
Employment Agreement dated as of July 1, 1997 (the "Employment Agreement"); and
WHEREAS, the execution and delivery by Mr. Cage of this Agreement is a
condition to the Company's willingness to execute and deliver the Employment
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
Section 1. Non-Competition. In view of the fact that any activity of
Mr. Cage in violation of the terms hereof would deprive the Company and its
subsidiaries (as defined below) of the benefit of the Company's bargain under
the Employment Agreement, as a material inducement to and a condition precedent
of the Company's execution and delivery of the Employment Agreement, and in
consideration of the other covenants set forth herein, Mr. Cage hereby agrees
to the following restrictions on his activities:
(a) Non-Competition Agreement. Mr. Cage hereby agrees
that during the period commencing on the date hereof and ending on the date
that is the later of: (i) five (5) years after the date hereof or (ii) the
date on which Mr. Cage receives his final severance payment pursuant to the
Employment Agreement (provided that if the Company elects to pay Mr. Cage's
severance payment in a lump sum, then Mr. Cage shall be deemed to receive his
final severance payment on the same date that he would have received his final
payment on a non-lump sum payout), he will not, without the express written
consent of the Company, directly or indirectly, anywhere in the geographic area
set forth in Section 1(c) below, engage, participate or invest in any activity
which is, or provide or facilitate the provision of financing to, or assist
(whether as owner, part-owner, shareholder, partner, director, officer,
trustee, employee, agent or consultant, or in any other capacity), any
business, organization or person other than the Company (or any affiliate of
the Company), and including particularly any such business, organization or
person involving, or which is, a family member of Mr. Cage, whose business,
activities, products or services are competitive with any of the business,
activities, products or services conducted or offered by the Company and its
subsidiaries (including for purposes of this Agreement any associated
professional corporation and the employees and independent contractors thereof
which or who provide dental services in connection with the business of the
Company and its subsidiaries (herein, "Dental Providers")), which business,
activities, products and services shall include in
<PAGE> 2
any event the provision of dental health care services (including, without
limitation, the acquisition, ownership and/or operation of one or more dental
health care practices including group practices). Without implied limitation,
the forgoing covenant shall include hiring or engaging or attempting to hire or
engage for or on behalf of himself or any such competitor any officer or
employee of, or any Dental Provider who provides services in connection with
the business of the Company or any of its direct and/or indirect subsidiaries,
encouraging for or on behalf of himself or any such competitor, any such
officer, employee or Dental Provider to terminate his, her or its relationship
or employment with the Company or any of its direct or indirect subsidiaries
(including Dental Providers), soliciting for or on behalf of himself or any
such competitor any client of the Company or any of its direct or indirect
subsidiaries (including Dental Providers) and diverting to any person (as
hereinafter defined) any client or business opportunity of the Company or of
any of its direct or indirect subsidiaries (including Dental Providers).
Notwithstanding anything herein to the contrary, Mr. Cage may make
passive investments in any enterprise competitive with the Company, the shares
of which are publicly traded, if such investment constitutes less than five
percent (5%) of the equity of such enterprise.
Neither Mr. Cage nor any business entity controlled by him is a party
to any contract, commitment, arrangement or agreement which could, following
the date hereof, restrain or restrict the Company or any subsidiary or
affiliate of the Company from carrying on its business or restrain or restrict
Mr. Cage from performing his obligations under his Employment Agreement with
the Company, and as of the date of this Agreement Mr. Cage has no business
interests in the health care industry whatsoever other than his interest in the
Company, other than interests in public companies of less than five percent
(5%).
For purposes of this Agreement, any reference to the subsidiaries of
the Company shall be deemed to include all entities directly or indirectly
controlled by it through an ownership of more than fifty percent (50%) of the
voting interests, as well as any Dental Provider, and the term "person" shall
mean an individual, a corporation, an association, a partnership, an estate, a
trust, and any other entity or organization.
(b) Non-Competition Consideration. In consideration of
the execution and delivery by Mr. Cage of this Agreement, on the date hereof
the Company shall enter into, execute and deliver to Mr. Cage the Employment
Agreement.
(c) Geographic Area. The provisions of Section 1 of this
Agreement shall apply in the following geographic areas:
(i) The state of Texas; and
(ii) All other states in which the Company or any
of its subsidiaries (including acquired businesses) commence
conducting business activities during the period during which Mr. Cage
serves as an officer or employee of the Company or any of its
subsidiaries, or in which any company or business acquired or to be
acquired by the
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<PAGE> 3
Company or any of its subsidiaries pursuant to an agreement entered
into during the period during which Mr. Cage serves as an officer or
employee of the Company or any of its subsidiaries conducts business,
provided that the Company shall notify Mr. Cage promptly upon
commencement of business activities in any new market, whether on a de
novo basis or through acquisition.
(d) Consulting. As additional consideration for the
covenants hereunder, the Company shall engage Mr. Cage as a consultant upon any
termination of his employment for any reason other than death or disability
prior to the fourth anniversary of the date hereof. Such engagement shall
continue until the fourth anniversary of the date hereof and Mr. Cage shall be
paid $500 per month during such period, subject to withholding (if applicable),
by the Company or a subsidiary of the Company for his consulting services. Mr.
Cage shall not be required to devote more than one (1) hour per week to the
performance of consulting services nor to travel from his principal location in
his performance of such services, and any consulting services performed shall
otherwise be mutually agreeable.
Section 2. Scope of Agreement. The parties acknowledge that the
time, scope, geographic area and other provisions of this Agreement have been
specifically negotiated by sophisticated commercial parties and agree that (a)
all such provisions are reasonable under the circumstances of the transactions
contemplated by the Employment Agreement, (b) are given as an integral and
essential part of the transactions contemplated by the Employment Agreement and
(c) but for the covenants of Mr. Cage contained in this Agreement, the Company
would not have entered into the Employment Agreement or consummated the
transactions contemplated thereby. Mr. Cage has independently consulted with
his counsel and has been advised in all respects concerning the reasonableness
and proprietary of the covenants contained herein, with specific regard to the
business to be conducted by Company and its subsidiaries.
Section 3. Certain Remedies; Severability. It is specifically
understood and agreed that any breach of the provisions of this Agreement by
Mr. Cage or any of his affiliates will result in irreparable injury to the
Company and its subsidiaries, that the remedy at law alone will be an
inadequate remedy for such breach and that, in addition to any other remedy it
may have, the Company and its subsidiaries shall be entitled to enforce the
specific performance of this Agreement by Mr. Cage through both temporary and
permanent injunctive relief without the necessity of proving actual damages,
but without limitation of their right to damages and any and all other remedies
available to them, it being understood that injunctive relief is in addition
to, and not in lieu of, such other remedies. In the event that any covenant
contained in this Agreement shall be determined by any court of competent
jurisdiction to be unenforceable by reason of its extending for too great a
period of time or over too great a geographical area or by reason of its being
too extensive in any other respect, it shall be interpreted to extend only over
the maximum period of time for which it may be enforceable and/or over the
maximum geographical area as to which it may be enforceable and/or to the
maximum extent in all other respects as to which it may be enforceable, all as
determined by such court in such action. The existence of any claim or cause
of action which Mr. Cage may have against the Company or any of its
subsidiaries or affiliates shall not constitute a defense or bar to the
enforcement of any of the provisions of this Agreement.
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<PAGE> 4
Section 4. Jurisdiction. The parties hereby irrevocably submit
to the non-exclusive jurisdiction of the courts of the State of Texas to
construe and enforce the covenants contained in this Agreement. In the event
that the courts of any state shall hold such covenants unenforceable (in whole
or in part) by reason of the breadth of such scope or otherwise, it is the
intention of the parties hereto that such determination shall not bar or in any
way affect the right of the Company or any its subsidiaries to the relief
provided for herein in the courts of any other state within the geographic
scope of such covenants, as to breaches of such covenants in such other
respective states, the above covenants as they relate to each state being, for
this purpose, severable into diverse and independent covenants.
Section 5. 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:
To the Company: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, TX 75244
Attn: President
With a copy to: Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: Kenneth K. Bezozo, Esq.
To Mr. Cage: Gary W. Cage
17671 Addison Road, #2902
Dallas, TX 75287
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.
Section 6. Miscellaneous. This Agreement shall be governed by
and construed under the laws of the State of Texas, and shall not be modified
or discharged in whole or in part except by an agreement in writing signed by
the Company and Mr. Cage. The prevailing party in any controversy hereunder
shall be entitled to reasonable attorneys' fees and expenses. The failure of
any of the parties to require the performance of a term or obligation or to
exercise any right under this Agreement or the waiver of any breach hereunder
shall not prevent subsequent enforcement of such term or obligation or exercise
of such right or the enforcement at any time of any other right hereunder or be
deemed a waiver of any subsequent breach of the provision so breached, or of
any other breach hereunder. This Agreement shall inure to the benefit of, and
be binding upon, successors of the Company by way of merger, consolidation or
transfer of substantially all the assets of the Company, and may not be
assigned by Mr. Cage. This Agreement supersedes all prior understandings and
agreements between the parties relating to the subject matter hereof (without
limitation of the Employment Agreement executed by Mr. Cage as of the date
hereof).
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<PAGE> 5
* * * * *
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date first set forth above.
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
-------------------------------------
Warren F. Melamed, D.D.S., President
/s/ GARY W. CAGE
-------------------------------------
Gary W. Cage
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<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
July 17, 1997
