<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1997
REGISTRATION STATEMENT NO. 333-24409
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MONARCH DENTAL CORPORATION
(Exact name of Registrant as specified in its charter)
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<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)
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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)
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Copies to:
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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, SUITE 1200
BOSTON, MASSACHUSETTS (214) 651-5000 AUSTIN, TEXAS 78701
02109-2881 (512) 477-5495
(617) 570-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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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. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
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Common Stock, $.01 par value.......... 3,162,500 Shares $12.00 $37,950,000 $11,500
=====================================================================================================================
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(1) Includes 412,500 shares of Common Stock which the underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(3) Includes $10,455 previously paid in connection with the filing of this
Registration Statement on April 2, 1997.
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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.
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<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 JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED MAY 20, 1997
PROSPECTUS
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2,750,000 SHARES
MONARCH DENTAL CORPORATION
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 Company has applied to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol MDDS.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share......................... $ $ $
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Total(3).......................... $ $ $
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(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.
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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. 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. 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.
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 April 30,
1997, the Company managed 66 Dental Offices, of which 15 were internally
developed and 51 were acquired by the Company. The Dental Offices provide
general dentistry services and increasingly offer specialty dental services such
as orthodontics, oral surgery, endodontics, periodontics and pediatric
dentistry. At April 30, 1997, the Dental Offices employed 125 full-time general
dentists and employed or contracted with 13 full-time specialists.
The dental services industry is undergoing rapid change throughout the
United States. The industry historically has been highly fragmented, with
approximately 153,300 active dental professionals 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 dental professionals 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 its revenue mix by focusing on fee-for-service
general and specialty dentistry and supplementing this 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. Revenue from
the Company's Dallas-Fort Worth operations increased $3.6 million, or 38.3%, to
$13.2 million
3
<PAGE> 5
in 1995, and increased $5.1 million, or 38.1%, to $18.3 million in 1996.
Operating income for the Company's Dallas-Fort Worth operations increased
$694,000, or 52.7%, to $2.0 million in 1995 and increased $805,000, or 40.0%, to
$2.8 million in 1996. However, there can be no assurance that the Company's
revenue and operating income in this market will continue to grow at these
historical rates or that the Company's operations in other markets will grow at
rates comparable to those experienced in Dallas-Fort Worth.
Since January 1, 1996, the Company has entered three new markets through
the acquisitions of MacGregor Dental Centers in Houston in February 1996,
Midwest Dental Care in Wisconsin in August 1996 and Convenient Dental Care,
Arkansas Dental Health Associates and United Dental Care Tom Harris D.D.S. &
Associates in Arkansas in November 1996, January 1997 and April 1997,
respectively. The collective pro forma revenue of these acquired companies was
$38.3 million for the year ended December 31, 1996.
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) 1,376,250 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 32,500 shares are issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $3.12 per
share, (ii) 500,000 shares of Common Stock reserved for issuance under the
Company's Equity Acquisition Option Plan (the "Acquisition Plan"), of which
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, and (iii) 250,000 shares of Common Stock
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan
(the "Purchase Plan"). See "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 to be effected in May 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.
4
<PAGE> 6
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
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THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, 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)
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CONSOLIDATED STATEMENT OF INCOME
DATA:
Dental group practices revenue,
net.......................... $9,559 $13,223 $35,980 $56,426 $6,316 $14,476 $15,579
Less: amounts retained by
dental group practices....... 3,070 4,301 11,802 18,081 2,060 5,029 5,298
Net revenue.................... 6,489 8,922 24,178 38,345 4,256 9,447 10,281
Operating expenses............. 5,401 7,253 21,391 33,995 3,544 8,485 9,198
Operating income............... 1,088 1,669 2,787 4,350 712 962 1,083
Interest expense, net.......... 81 87 1,687 1,006 259 579 251
Income before provision for
income taxes................. 1,007 1,582 1,100 3,344 453 383 832
Income taxes(4)................ -- -- 425 1,294 174 150 325
Net income..................... $1,007 $ 1,582 $ 675 $ 2,050 $ 279 $ 233 $ 507
Pro forma net income(4)........ 617 970 675 2,050 279 233 507
Net income per common
share(5)..................... $ 0.10 $ 0.22 $ 0.04 $ 0.03 $ 0.05
Weighted average common shares
outstanding.................. 6,732 9,482 6,732 6,732 9,482
OTHER FINANCIAL AND OPERATING
DATA:
EBITDA(6)...................... $1,340 $ 1,962 $ 4,217 $ 6,588 $ 960 $ 1,527 $ 1,700
Number of Dental Offices (end
of period)................... 10 12 53 66 28 57 66
Number of dentists (end of
period)(7)................... 25 33 133 138 75 125 138
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MARCH 31, 1997
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PRO FORMA
ACTUAL AS ADJUSTED(8)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 446 $ 1,529
Working capital (deficit)................................. (3,878) (3,086)
Total assets.............................................. 36,353 41,168
Long-term debt, less current maturities................... 19,424 4,220
Redeemable equity securities.............................. 9,751 --
Total stockholders' equity (deficit)...................... (3,310) 26,043
</TABLE>
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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 and
United Dental Care Tom Harris D.D.S. & Associates 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 acquisition of United Dental Care Tom Harris D.D.S. &
Associates as if it 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) EBITDA represents earnings before net interest expense, income taxes and
depreciation and amortization and is not intended to represent an
alternative to net income or any other measure of performance under
generally accepted accounting principles. EBITDA is not intended to suggest
that cash flows are sufficient to meet cash needs. The Company believes that
investors may find this measure useful as an indicator of financial
performance.
(7) Includes full-time general dentists employed by the Company or the P.C.s, as
applicable, and full-time specialists, most of whom are independent
contractors.
(8) Gives effect to the acquisition of United Dental Care Tom Harris D.D.S. &
Associates 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."
5
<PAGE> 7
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. 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.
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 of existing Dental Offices and
successfully establishing de novo Dental Offices. The Company is subject to
risks associated with this growth strategy, including the risk that the Company
will be unable to successfully expand existing Dental Offices or establish de
novo Dental Offices, or increase efficiency through its management of the
existing Dental Offices. Revenue from the Company's Dallas-Fort Worth operations
increased $3.6 million, or 38.3%, from $9.6 million in 1994 to $13.2 million in
1995, and increased $5.1 million, or 38.1%, to $18.3 million in 1996 as a result
of the addition of new offices and the increase in
6
<PAGE> 8
patient volume in existing offices. However, there can be no assurance that the
Company's revenue in this market will continue to grow at these historical 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."
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 managed by the Company increased from 12 at January 1, 1996 to 66 at
April 30, 1997. This growth has placed, and will continue to place, strains on
the Company's management, operations and systems. The Company's ability to
compete effectively will depend upon its ability to hire, train and assimilate
additional management and other employees and its ability to expand, improve and
effectively utilize its operating, management, marketing and financial systems
to accommodate its expanded operations. Any failure by the Company's management
to effectively anticipate, implement and manage the changes required to sustain
the Company's growth may have a material adverse effect on the Company's
business, financial condition and operating results.
Limited Capital; Need for Additional Financing. Implementation of the
Company's growth strategy has required and is expected to continue to require
significant capital resources. Such resources will be needed to acquire or
establish additional Dental Offices and for the effective integration, operation
and expansion of the Dental Offices. The Company historically has used a
combination of cash, promissory notes, stock and the assumption of certain
liabilities (including indebtedness) as consideration in acquisitions of dental
practices and intends to continue to do so. The Company expects that its capital
requirements over the next several years will substantially exceed cash flow
generated from operations and borrowings available under the Company's existing
credit facility or any successor credit facility. Therefore, to finance capital
requirements, the Company anticipates that it will from time to time issue
additional equity securities and incur additional debt. Additional debt or
non-Common Stock equity financings could be required to the extent that the
Company's Common Stock fails to maintain a 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 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 significantly 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
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"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.
Under a capitated managed dental care contract, the participating dentist
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 dentist, thereby shifting the risk of utilization of such
services to the dentist. In contrast, under traditional indemnity insurance
arrangements, the insurance company pays whatever reasonable charges are billed
for the dental services provided.
Risks associated with capitated managed dental care contracts include
principally (i) the risk that the Company may be terminated as a provider by one
or more managed dental care plans with which it contracts 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 the
Company's 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 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-
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related companies is increasing. In connection with its operations in existing
markets and expansion into new markets, the Company may become subject to
additional laws, regulations and interpretations or enforcement actions. The
ability of the Company to operate profitably will depend in part upon the
ability of the Company and the P.C.s to operate in compliance with applicable
health care regulations.
The laws of many states, including Arkansas 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.
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.
Some states 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. Many states 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. The laws of some states prohibit the
advertising of dental services under a trade or corporate name and 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. 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 assumes financial
risk, the Company or the P.C.s may become subject to state insurance laws.
Specifically, in some states, regulators may determine that the Company or the
P.C.s are engaged in the business of insurance, particularly if they contract on
a financial-risk basis directly with self-insured employers or other entities
that are not licensed to engage in the business of insurance. To the extent that
the Company or the P.C.s are determined to be engaged in the business of
insurance, the Company may be required to change the method of payment from
third-party payors and the Company's revenue may be materially and adversely
affected.
Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs and prohibit fraud or abuse in connection with
such practices. Because very little dental care is currently provided under
Medicare and Medicaid, the Company receives very little revenue from these
programs and the impact of these laws on the Company to date has been
negligible. There 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,
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<PAGE> 11
insurance, facility licensure or certificate-of-need laws or that the
enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
Risks Arising From Health Care Reform. There can be no assurance that the
laws and regulations of the states in which the Company operates will not change
or be interpreted in the future either to restrict or adversely affect the
Company's relationships with dentists or the operation of Dental Offices.
Federal and state governments are currently considering various types of health
care initiatives and comprehensive revisions to the health care and health
insurance systems. Some of the proposals under consideration, or others that may
be introduced, could, if adopted, have a material adverse effect on the
Company's business, financial condition and operating results. It is uncertain
what legislative programs, if any, will be adopted in the future, or what
actions Congress or state legislatures may take regarding health care reform
proposals or legislation. In addition, changes in the health care industry, such
as the growth of managed care organizations and provider networks, may result in
lower payments for the services of the Company's affiliated dental practices.
Possible Exposure to Professional Liability. In recent years, dentists have
become subject to an increasing number of lawsuits alleging malpractice and
related legal theories. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Dental Offices, if successful, could result in substantial damage awards that
may exceed the limits of the Company's insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the P.C.s or the dentists or their
compliance with regulatory requirements directly applicable to providers (except
in Wisconsin where the ownership of dental practices by the Company is
permitted). Nevertheless, dentists at the Dental Offices have been in the past
involved in malpractice suits and there can be no assurance that the Company
will not become subject to litigation in the future as a result of the dental
services provided at the Dental Offices. The Company maintains professional
malpractice and general liability insurance for itself and maintains
professional liability insurance covering dentists, hygienists and dental
assistants at the Dental Offices. The Company generally is a named insured under
such policies and is named as an additional insured on each individual dentist's
policy, wherever possible. Certain types of risks and liabilities are not
covered by insurance, however, and there can be no assurance that coverage will
continue to be available upon terms satisfactory to the Company or that the
coverage will be adequate to cover losses. Malpractice insurance, moreover, can
be expensive and varies from state to state. Successful malpractice claims
asserted against the dentists, the P.C.s or the Company may have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business -- Insurance."
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
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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 $3.3 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 expects the amount allocable to
intangible assets on its balance sheet to increase in the future in connection
with additional acquisitions, which will increase the Company's amortization
expense. In the event of any sale or liquidation of the Company or a portion of
its assets, there can be no assurance that the value of the Company's intangible
assets will be realized. In addition, the Company continually evaluates whether
events and circumstances have occurred indicating that any portion of the
remaining balance of the amount allocable to the Company's intangible assets may
not be recoverable. When factors indicate that the amount allocable to the
Company's intangible assets should be evaluated for possible impairment, the
Company may be required to reduce the carrying value of such assets. Any future
determination requiring the write off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and operating results.
Dependence on Management Agreements, the P.C.s and Affiliated
Dentists. Except with respect to its Wisconsin operations, the Company receives
fees for services provided to the P.C.s under a Management Agreement, but 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. 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
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certain matters, including but not limited to matters relating to the Management
Agreement between the Company and the Texas P.C. Although Dr. Melamed has a
fiduciary duty to the Company and its stockholders, there can be no assurance
that the Company will not be adversely affected by matters in which Dr. Melamed
has a potential conflict of interest. In addition, the Company and Dr. Melamed
have entered into a succession agreement whereby upon any termination of Dr.
Melamed's affiliation with the Company, Dr. Melamed is required to sell his
ownership interest in the Texas P.C. for a nominal amount. The Audit Committee
of the Company's Board of Directors will review and approve all transactions
between the Company and Dr. Melamed, including any amendments or modifications
to the Management Agreement with the Texas P.C. or the related succession
agreement. See "Business -- Affiliation Structure" and "Management."
Material Benefit to Insiders. In February 1996, the Company completed a
series of transactions principally including the repurchase of shares of Common
Stock from Dr. Melamed and the concurrent acquisition of MacGregor Dental
Centers from an entity controlled by Dr. Charles G. Shears, an executive officer
and director of the Company. In connection with these transactions, the Company
incurred $17.4 million of indebtedness under a senior secured credit facility
from a bank; investors principally including investment funds associated with TA
Associates, Inc. purchased from the Company an aggregate of $10.0 million of
Convertible Participating Preferred Stock; the Company redeemed Common Stock
from Dr. Melamed for $6.7 million; Dr. Melamed contributed interests in two
corporations holding ownership interests in the Company's Dallas-Fort Worth
Dental Offices in exchange for an aggregate of 356,240 shares of Common Stock
and a cash payment of $425,000 and the Company repaid outstanding indebtedness
to Dr. Melamed of $446,000; and the Company acquired MacGregor Dental Centers
for consideration consisting of cash in the amount of $14.9 million, the
assumption of indebtedness of approximately $662,000 and other ordinary course
obligations and 700,000 shares of Common Stock. Upon the completion of this
offering, the Convertible Participating Preferred Stock will convert into
2,400,000 shares of Common Stock and 3,840,000 shares of Redeemable Preferred
Stock. As required by the terms of the Redeemable Preferred Stock, the Company
will immediately redeem all of the Redeemable Preferred Stock upon its issuance
for $8.0 million in cash with a portion of the net proceeds from this offering.
See "Certain Transactions."
Effective Control by Principal Stockholders. After giving effect to the
sale of the shares of Common Stock offered hereby, investors principally
including investment funds associated with TA Associates, Inc., Dr. Melamed,
members of his family and trusts for the benefit of members of his family, Dr.
Shears and trusts for the benefit of members of his family and Dr. David L.
Hehli, President of 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 5,444,505 shares of Common Stock owned by current
stockholders of the Company will be eligible for sale in accordance with Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"),
beginning 90 days after the date of this Prospectus and an additional 1,013,515
shares will become eligible for sale in the public market under Rule 144 at
various dates thereafter through April 1, 1998, at which date all of such shares
will be eligible for sale. The remaining 250,703 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 substantially all of such shares have agreed not to offer, sell or otherwise
dispose of any shares of Common Stock owned by them (other than transfers for
estate planning purposes) 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
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in connection with prior or future acquisitions, which may be issued with
registration rights), or the availability of such shares for sale, may adversely
affect the prevailing market price for the Common Stock and could impair the
Company's ability to obtain additional capital through an offering of its equity
securities. See "Shares Eligible for Future Sale."
Absence of a Public Trading Market; Offering Price; Possible Volatility of
Stock Price. Prior to this offering, there has been no public market for the
Common Stock and there can be no assurance that an active market will develop or
be sustained following the consummation of this offering. Consequently, the
offering price of the Common Stock will be determined by negotiation between the
Company and the representatives of the several Underwriters. See "Underwriting"
for a description of the factors to be considered in determining the initial
public offering price. Following the completion of this offering, the trading
price of the Company's Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in the Company's operating results,
material announcements by the Company or its competitors, governmental
regulatory action, conditions in the health care industry generally or in the
dental services industry specifically, or other events or factors, many of which
are beyond the Company's control. In addition, the stock market has experienced
extreme price and volume fluctuations which have particularly affected the
market prices of many health care services companies and which often have been
unrelated to the operating performance of such companies. The Company's
operating results in future quarters may be below the expectations of securities
analysts and investors. In such event, the price of the Common Stock would
likely decline, perhaps substantially.
Dividend Policy. The Company has not declared or paid cash dividends on its
Common Stock since it became a C corporation in February 1996 and the Company
does not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The payment of dividends is prohibited under the terms of the Company's
existing senior credit facility and may be prohibited under any future credit
facility which the Company may obtain. See "Dividend Policy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
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."
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THE COMPANY
The Company was founded by Dr. Warren F. Melamed in 1983, commencing
operations as a single location dental practice in Dallas. From its founding in
1983 through the end of 1995, the Company expanded its operations in the
Dallas-Fort Worth area to include a total of 12 Dental Offices staffed by 33
dentists.
In February 1996, the Company completed a series of transactions
principally including the repurchase of shares of Common Stock from Dr. Melamed,
the Company's founder and Chairman, and the concurrent acquisition of the
MacGregor Dental Centers business ("MacGregor") in Houston from an entity
controlled by Dr. Charles G. Shears, an executive officer and director of the
Company (the "1996 Transactions"). In connection with the 1996 Transactions, the
Company incurred $17.4 million of indebtedness under a senior secured credit
facility from a bank (the "Credit Facility"), and investors principally
including investment funds associated with TA Associates, Inc., a private equity
firm based in Boston, Massachusetts (the "TA Investors"), invested $10.0 million
to acquire shares of Convertible Participating Preferred Stock. Upon completion
of this offering, the Convertible Participating Preferred Stock will convert
into 2,400,000 shares of Common Stock and 3,840,000 shares of Redeemable
Preferred Stock which the Company will immediately redeem from the TA Investors
for $8.0 million using a portion of the net proceeds from the sale of the Common
Stock offered hereby. See "Use of Proceeds" and "Certain Transactions."
The Company's entry into the Houston market through the acquisition of
MacGregor represented the Company's initial expansion beyond the Dallas-Fort
Worth market. This acquisition resulted in the addition of 15 Dental Offices and
42 dentists and approximately doubled the size of the Company's operations.
Since completing the 1996 Transactions, the Company has expanded into two
additional markets, Wisconsin and Arkansas, through acquisitions. In August
1996, the Company acquired Midwest Dental Care ("Midwest") resulting in the
addition of 22 Dental Offices and 35 dentists located throughout Wisconsin. The
Company acquired Convenient Dental Care, Inc. ("Convenient") of Fort Smith,
Arkansas, in November 1996, Arkansas Dental Health Associates, Inc. ("Arkansas
Dental Health") of Little Rock, Arkansas, in January 1997 and United Dental Care
Tom Harris D.D.S. & Associates ("United") of Little Rock, Arkansas, in April
1997, resulting in the addition of an aggregate of 13 Dental Offices and 20
dentists. The collective pro forma revenue of MacGregor, Midwest, Convenient,
Arkansas Dental Health and United was $38.3 million for the year ended December
31, 1996.
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.
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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 $27.2 million ($31.4 million 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. All outstanding indebtedness under the Credit
Facility was used to finance the Company's acquisitions of MacGregor, Midwest,
Convenient, Arkansas Dental Health and United. 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.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 (i) on an actual basis and (ii) as adjusted to give effect to the
sale by the Company of the 2,750,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share and the application of
the estimated net proceeds therefrom as described in "Use of Proceeds." This
table should be read in conjunction with the Consolidated Financial Statements
and Notes thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1)..................... $ 3,592 $ 3,857
======= =======
Long-term debt, net of current maturities(1)................ $19,424 $ 4,220
Convertible Participating Preferred Stock, $.01 par value,
4,800,000 shares authorized, 4,800,000 shares issued and
outstanding; no shares authorized, issued or outstanding
as adjusted............................................... 9,313 --
Redeemable Preferred Stock, $.01 par value, 3,840,000 shares
authorized; no shares issued or outstanding; no shares
authorized, issued or outstanding as adjusted(2).......... -- --
Redeemable Common Stock, $.01 par value, 175,000 shares
issued and outstanding; no shares issued or outstanding as
adjusted(3)............................................... 438 --
Stockholders' equity (deficit):
Series A Convertible Junior Preferred Stock, $.01 par
value, 1,704,550 shares authorized, 1,704,550 shares
issued and outstanding; no shares authorized, issued or
outstanding as adjusted................................ 17 --
Preferred Stock, $.01 par value, no shares authorized,
issued or outstanding; 2,000,000 shares authorized, no
shares issued or outstanding as adjusted............... -- --
Common Stock, $.01 par value, 9,900,000 shares authorized;
3,387,708 shares issued and outstanding; 50,000,000
shares authorized, 9,389,973 shares issued and
outstanding as adjusted(4)............................. 32 104
Additional paid-in capital................................ 3,964 33,262
Retained deficit.......................................... (7,323) (7,323)
------- -------
Total stockholders' equity (deficit).............. (3,310) 26,043(5)
------- -------
Total capitalization.............................. $25,865 $30,263
======= =======
</TABLE>
- ------------------------------
(1) See Notes 6 and 8 of Notes to Consolidated Financial Statements of the
Company for information concerning long-term debt and capital lease
obligations.
(2) Upon completion of this offering, the Convertible Participating Preferred
Stock will convert into 2,400,000 shares of Common Stock and 3,840,000
shares of Redeemable Preferred Stock and all shares of Redeemable Preferred
Stock will be redeemed for $8.0 million in cash.
(3) Reflects 175,000 shares of Common Stock subject to put rights which
terminate upon completion of this offering.
(4) Excludes (i) 1,376,250 shares of Common Stock reserved for issuance under
the 1996 Stock Plan, of which 32,500 shares were issuable at March 31, 1997
upon the exercise of outstanding stock options at a weighted average
exercise price of $3.12 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 and (iii) 250,000 shares of Common Stock
reserved for issuance under the Purchase Plan. See "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.
16
<PAGE> 18
DILUTION
As of March 31, 1997, the Company had a net tangible book value of
approximately $(28,841,000) or $(8.98) per share of Common Stock. Net tangible
book value represents the amount of total tangible assets less total liabilities
and redeemable equity securities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in the net tangible
book value after March 31, 1997, other than to give effect to the receipt by the
Company of the net proceeds from the sale of the 2,750,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00 per
share, the pro forma net tangible book value of the Company as of March 31, 1997
would have been approximately $(2,757,000), or $(0.30) per share. This
represents an immediate increase in net tangible book value of $8.68 per share
to existing stockholders and an immediate dilution of $11.30 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share before the
offering.............................................. $(8.98)
Increase per share attributable to new investors....... 8.68
------
Pro forma net tangible book value per share after the
offering.................................................. (0.30)
------
Dilution per share to new investors......................... $11.30
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences between existing stockholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<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 April 30, 1997 or of the Underwriters'
over-allotment option. As of April 30, 1997, stock options to purchase 32,500
shares of Common Stock were outstanding with a weighted average exercise price
of $3.12 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."
17
<PAGE> 19
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 and
United (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 acquisition of United 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 1997 acquisition of United, (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.
The pro forma consolidated financial information has been prepared by
management based on the historical financial statements of the Company, Arkansas
Dental Health and United for the year ended December 31, 1996 and 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.
18
<PAGE> 20
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 UNITED
---------- --------- ------- ---------- ---------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $5,261 $3,485 $4,201 $711 $818 $14,476 $1,103
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 1,103
Operating expenses:
Clinical salaries and benefits... 960 463 752 119 153 2,447 410
Other salaries and benefits...... 644 316 427 -- -- 1,387 217
Dental supplies.................. 338 161 328 36 49 912 75
Laboratory fees.................. 224 224 28 51 64 591 30
Occupancy........................ 271 220 242 39 28 800 63
Advertising...................... 239 56 11 5 14 325 49
Depreciation and amortization.... 171 213 139 13 29 565 27
General and administrative....... 540 305 449 67 97 1,458 80
------ ------ ------ ---- ----- ------- ------
3,387 1,958 2,376 330 434 8,485 951
------ ------ ------ ---- ----- ------- ------
Operating income................... 164 357 307 37 97 962 152
Interest expense, net.............. 576 3 (3) 3 -- 579 13
------ ------ ------ ---- ----- ------- ------
Income (loss) before income
taxes............................ (412) 354 310 34 97 383 139
Income taxes (benefit)............. (160) 137 121 14 38 150 54
------ ------ ------ ---- ----- ------- ------
Net income (loss).................. $ (252) $ 217 $ 189 $ 20 $ 59 $ 233 $ 85
====== ====== ====== ==== ===== ======= ======
Net income per common share........ $ 0.03
=======
Weighted average common shares
outstanding...................... 6,732
=======
<CAPTION>
ACQUISITION PRO FORMA
ADJUSTMENTS OFFERING AS ADJUSTED
----------- -------- -----------
<S> <C> <C> <C>
Dental group practices revenue,
net.............................. $ -- $ -- $15,579
Less: amounts retained by dental
group practices.................. 269(c) -- 5,298
----- ----- -------
Net revenue........................ (269) -- 10,281
Operating expenses:
Clinical salaries and benefits... (257)(c) -- 2,600
Other salaries and benefits...... 6(c) -- 1,610
Dental supplies.................. -- -- 987
Laboratory fees.................. -- -- 621
Occupancy........................ -- -- 863
Advertising...................... -- -- 374
Depreciation and amortization.... 25(d) -- 617
General and administrative....... (12)(c) -- 1,526
----- ----- -------
(238) -- 9,198
----- ----- -------
Operating income................... (31)(e) -- 1,083
Interest expense, net.............. 62(f) (403)(g) 251
----- ----- -------
Income (loss) before income
taxes............................ (93) 403 832
Income taxes (benefit)............. (35) 156 325(h)
----- ----- -------
Net income (loss).................. $ (58) $ 247 $ 507
===== ===== =======
Net income per common share........ $ 0.05
=======
Weighted average common shares
outstanding...................... 9,482
=======
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
19
<PAGE> 21
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) 1996 PRE-ACQUISITIONS (B)
-------------------------------- --------------------------------
CONVENIENT 1996 CONVENIENT
MONARCH(A) MACGREGOR MIDWEST & DAVIS HISTORICAL MACGREGOR MIDWEST & DAVIS
---------- --------- ------- ---------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $18,084 $12,129 $5,250 $517 $35,980 $1,095 $10,406 $2,065
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 1,095 10,406 2,065
Operating expenses:
Clinical salaries and benefits... 3,103 2,034 1,032 90 6,259 288 5,630 1,139
Other salaries and benefits...... 1,681 930 516 -- 3,127 219 1,462 128
Dental supplies.................. 1,062 688 442 24 2,216 52 881 112
Laboratory fees.................. 833 753 25 37 1,648 65 55 136
Occupancy........................ 801 766 346 24 1,937 64 723 100
Advertising...................... 872 326 8 4 1,210 36 61 17
Depreciation and amortization.... 517 730 178 5 1,430 38 339 3
General and administrative....... 1,876 1,107 548 33 3,564 206 1,078 176
------- ------- ------ ---- ------- ------ ------- ------
10,745 7,334 3,095 217 21,391 968 10,229 1,811
------- ------- ------ ---- ------- ------ ------- ------
Operating income (loss)............ 1,530 966 213 78 2,787 127 177 254
Interest expense, net.............. 1,707 (32) 10 2 1,687 5 39 20
------- ------- ------ ---- ------- ------ ------- ------
Income (loss) before income
taxes............................ (177) 998 203 76 1,100 122 138 234
Income taxes (benefit)............. (9) 339 69 26 425 47 53 91
------- ------- ------ ---- ------- ------ ------- ------
Net income (loss).................. $ (168) $ 659 $ 134 $ 50 $ 675 $ 75 $ 85 $ 143
======= ======= ====== ==== ======= ====== ======= ======
Net income per common share........ $ 0.10
=======
Weighted average common shares
outstanding...................... 6,732
=======
<CAPTION>
1997 ACQUISITIONS(B)
----------------------
ARKANSAS ACQUISITION PRO FORMA
DENTAL HEALTH UNITED ADJUSTMENTS OFFERING AS ADJUSTED
------------- ------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Dental group practices revenue,
net.............................. $2,718 $4,162 $ -- $ -- $56,426
Less: amounts retained by dental
group practices.................. -- -- 6,279(c) -- 18,081
------ ------ ------- ------ -------
Net revenue........................ 2,718 4,162 (6,279) -- 38,345
Operating expenses:
Clinical salaries and benefits... 998 1,366 (6,728)(c) -- 8,952
Other salaries and benefits...... 803 815 -- -- 6,554
Dental supplies.................. 240 223 -- -- 3,724
Laboratory fees.................. 198 113 -- -- 2,215
Occupancy........................ 112 234 -- -- 3,170
Advertising...................... 47 187 (10)(c) -- 1,548
Depreciation and amortization.... 57 110 261(d) -- 2,238
General and administrative....... 434 349 (213)(c) -- 5,594
------ ------ ------- ------ -------
2,889 3,397 (6,690) -- 33,995
------ ------ ------- ------ -------
Operating income (loss)............ (171) 765 411 -- 4,350
Interest expense, net.............. 36 32 (73)(e) (1,617)(g) 1,006
877(f) -- --
------ ------ ------- ------ -------
Income (loss) before income
taxes............................ (207) 733 (393) 1,617 3,344
Income taxes (benefit)............. (80) 284 (152) 626 1,294(h)
------ ------ ------- ------ -------
Net income (loss).................. $ (127) $ 449 $ (241) $ 991 $ 2,050
====== ====== ======= ====== =======
Net income per common share........ $ 0.22
=======
Weighted average common shares
outstanding...................... 9,482(j)
=======
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
20
<PAGE> 22
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 and United 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 $28.8 million at March 31, 1997 and are being amortized over
a composite average period of 31 years.
(e) To eliminate interest expense related to liabilities not assumed
in connection with the 1996 Acquisitions and 1997 Acquisitions.
(f) To record interest expense on debt issued in connection with the
1996 Acquisitions and 1997 Acquisitions, assuming such acquisitions were
completed on January 1, 1996.
(g) To eliminate interest expense assuming repayment of $18.2 million
of indebtedness under the Company's Credit Facility with a portion of the
proceeds of the offering received by the Company as of January 1, 1996, net
of estimated federal and state income taxes at a combined rate of
approximately 38.7%.
(h) To reflect the estimated income tax effects at an estimated
effective rate of approximately 38.7%.
21
<PAGE> 23
MONARCH DENTAL CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ACQUISITION EQUITY AS
HISTORICAL UNITED(A) ADJUSTMENTS CONVERSION(B) OFFERING(C) ADJUSTED
---------- --------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............... $ 446 $277 $ (194)(d) $ -- $ 1,000 $ 1,529
Other current assets.................... 4,560 126 -- -- -- 4,686
------- ---- ------- ------- -------- --------
Total current assets............ 5,006 403 (194) -- 1,000 6,215
Property and equipment, net............... 5,237 337 -- -- -- 5,574
Intangible assets, net.................... 25,531 114 3,155(e) -- -- 28,800
Other assets.............................. 579 -- -- -- -- 579
------- ---- ------- ------- -------- --------
Total assets.................... $36,353 $854 $ 2,961 $ -- $ 1,000 $ 41,168
======= ==== ======= ======= ======== ========
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 -- -- -- 3,857
Other current liabilities............... 3,991 152 -- -- -- 4,143
------- ---- ------- ------- -------- --------
Total current liabilities....... 8,884 417 -- -- -- 9,301
Notes payable and capital lease
obligations............................. 19,424 181 2,840(d) (18,225) 4,220
Other liabilities......................... 1,604 -- -- -- -- 1,604
------- ---- ------- ------- -------- --------
Total liabilities............... 29,912 598 2,840 -- (18,225) 15,125
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 -- 1(d) 17 28 104
2
24
--
Additional paid-in capital.............. 3,907 -- 376(d) 436 27,197 33,262
1,289
Retained earnings (deficit)............. (7,266) 256 (256)(f) -- -- (7,323)
------- ---- ------- ------- -------- --------
Total stockholders' equity
(deficit)..................... (3,310) 256 121 1,751 27,225 26,043
------- ---- ------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit)..................... $36,353 $854 $ 2,961 $ -- $ 1,000 $ 41,168
======= ==== ======= ======= ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
22
<PAGE> 24
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
acquisition. This acquisition has 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 approximately $2.8 million in cash. The pro
forma purchase accounting adjustments are recorded under the Acquisition
Adjustments column.
The following methods and assumptions were used to estimate fair
value:
Cash and cash equivalents -- The historical carrying amount
approximated fair value.
Other current assets -- Other current assets consisted primarily of
accounts receivable.
Property and equipment, net -- The Company performed an
asset-by-asset review and determined that the historical carrying amount
approximated fair value.
Intangible assets -- In connection with the allocation of the
purchase price to intangible assets, the Company analyzed the nature of
each dental group practice with which a Management Agreement was entered
into, including the number of dentists in each dental group practice,
number of dental offices and ability to recruit additional dentists, the
dental group practice's relative market position, the length of time
each dental group practice had been in existence, and the term and
enforceability of the Management Agreement. The Management Agreements
are for a term of 40 years and cannot be terminated by the relevant P.C.
without cause, consisting primarily of bankruptcy or material default.
The Company believes that there is no material value allocable to
the employment and noncompete agreements entered into between the P.C.s
and the individual dentists, since the primary economic beneficiaries of
these agreements are the P.C.s, which are entities that the Company does
not legally control. The Company believes that the dental group
practices operated by the P.C.s with which it has Management Agreements
are long-lived entities with an indeterminable life and that the
dentists, customer demographics and various contracts will be
continuously replaced. The amounts allocated to the Management
Agreements are being amortized on a straight-line method over 30 years.
The Emerging Issues Task Force of the Financial Accounting
Standards Board is currently evaluating certain matters relating to the
physician practice management industry, which the Company expects to
include a review of the consolidation of professional corporation
revenues and the accounting for business combinations. The Company is
unable to predict the impact, if any, that this review may have on the
Company's acquisition strategy, allocation of purchase price related to
acquisitions and amortization life assigned to intangible assets.
Liabilities assumed -- Given the short-term nature of the
liabilities assumed, the historical carrying amount approximated their
fair value.
(b) To reflect the conversion of the Convertible Participating
Preferred Stock into 2,400,000 shares of Common Stock and 3,840,000 shares
of Redeemable Preferred Stock. The Redeemable Preferred Stock will be
redeemed for $8.0 million in cash at the closing of the offering. To also
reflect the conversion of all other outstanding equity securities into
Common Stock upon the closing of the offering.
(c) To reflect the estimated net proceeds from the sale of 2,750,000
shares of Common Stock in the offering at an assumed initial public
offering price of $11.00 per share, estimated to be approximately $27.2
million (after deducting estimated underwriting discounts and commissions
and offering expenses), and the repayment of $18.2 million of indebtedness
under the Credit Facility.
(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 acquisition.
23
<PAGE> 25
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 audited
Consolidated Financial Statements of the Company 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>
QUARTER ENDED
YEAR ENDED DECEMBER 31, 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.......................... 6,732 6,732 6,732
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------- ---------
1992 1993 1994 1995 1996 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.
24
<PAGE> 26
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 April 30, 1997, the
Company opened 14 additional Dental Offices on a de novo basis in the
Dallas-Fort Worth 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 three 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. These de novo Dental Offices began contributing operating
income to the Company within three months of opening. 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.
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
25
<PAGE> 27
Dallas-Fort Worth market as potential acquisition candidates with a view to
expanding the Company's operations into new markets. Since December 31, 1995,
the Company has completed the following acquisitions in new markets:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS FOUNDED OF ACQUISITION
--------------------- -------------- --------- ------- ------------------
<S> <C> <C> <C> <C>
MacGregor, Houston......................... 15 37 1962 February 1, 1996
Midwest, Wisconsin......................... 22 32 1975 September 1, 1996
Convenient, Arkansas....................... 1 3 1982 November 1, 1996
Arkansas Health, Arkansas.................. 3 6 1984 January 1, 1997
United, Arkansas........................... 9 13 1990 April 1, 1997
</TABLE>
- ------------------------------
The data presented in this table is as of April 30, 1997.
The purchase prices paid by the Company in connection with the acquisitions
described in the table above were as follows: (i) MacGregor, $16.8 million,
consisting of 700,000 shares of Common Stock valued at $148,000 at the date of
issuance, the assumption of $662,000 of debt and cash of $15.9 million funded
out of the proceeds of equity investments made in connection with the 1996
Transactions and borrowings under the Credit Facility; (ii) Midwest, $6.2
million, consisting of 350,000 shares of Common Stock valued at $700,000 at the
date of issuance, the assumption of $246,000 of debt and cash of $5.3 million
primarily borrowed under the Credit Facility; (iii) Convenient, $575,000,
consisting of 30,000 shares of Common Stock valued at $75,000 at the date of
issuance and cash of $500,000 primarily borrowed under the Credit Facility; (iv)
Arkansas Dental Health, $2.4 million, consisting of 57,500 shares of Common
Stock valued at $173,000 at the date of issuance, the assumption of $659,000 of
debt and cash of $1.6 million primarily borrowed under the Credit Facility; and
(v) United, $3.7 million, consisting of 68,750 shares of Common Stock valued at
$378,000 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 92,500 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 date of the acquisition.
COMPONENTS OF REVENUE AND EXPENSES
Dental group practices revenue, net ("Revenue") represents the revenue from
the Dental Offices, reported at estimated realizable amounts, from third-party
payors and patients for dental services rendered. Net revenue represents Revenue
less amounts retained by the dental group practices. The amounts retained by
dental group practices represent amounts paid by (i) the P.C.s as salary,
benefits and other payments to employed dentists and hygienists and contracted
specialists and (ii) the Company as salary, benefits and other payments to
employed dentists and hygienists and contracted specialists in states in which
it operates and in which ownership of dental practices by the Company is
permitted (currently Wisconsin). The Company's net revenue is dependent on the
Revenue of the dental group practices. Operating expenses consist of the
expenses incurred by the Company in connection with managing the Dental Offices,
including salaries and benefits for personnel other than dentists and
hygienists, dental supplies, dental laboratory fees, occupancy costs, equipment
leases, management information systems and other expenses related to 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
26
<PAGE> 28
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. 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 consists principally of fee-for-service Revenue and
Revenue from capitated managed dental care plans. Fee-for-service Revenue
includes Revenue derived from indemnity dental plans, preferred provider plans
and direct payments by patients not covered by any third-party payment
arrangement. Managed dental care Revenue constitutes Revenue from capitated
managed dental care plans, including capitation payments and patient
co-payments. Under a capitated managed dental care contract, the participating
dentist 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 dentist, thereby shifting the risk of utilization
of these services to the dentist. In addition, participating dentists 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 for the dental services provided. See "Business -- Payor Mix."
The Company seeks to increase its fee-for-service business by increasing
the size of existing offices, opening new offices and advertising. The Company
seeks to supplement its 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 made to the Company 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.
27
<PAGE> 29
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 $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
28
<PAGE> 30
quarter of 1997, an increase of $3.0 million, or 122.5%. This increase resulted
in part from the acquisitions of Midwest, Convenient and Arkansas Dental Health,
which contributed combined managed dental care Revenue of $1.8 million for the
first quarter of 1997. The acquisition of MacGregor accounted for $526,000 of
the increase as a result of being included for three months in 1997 versus two
months in 1996. In the Dallas-Fort Worth market, managed dental care Revenue
increased $687,000, or 40.8%, in the first quarter of 1997 over the first
quarter of 1996. As a percentage of Revenue, fee-for-service Revenue increased
from 61.5% to 62.6% for the first quarters of 1996 and 1997, respectively. See
"-- Components of Revenue and Expenses" above.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $2.1 million for the first quarter of 1996 to
$5.0 million for the first quarter of 1997, an increase of $2.9 million, or
144.1%. The increase was due primarily to the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which together added amounts retained by
dental group practices of $2.1 million for the first quarter of 1997. The
acquisition of MacGregor accounted for $488,000 of the increase as a result of
being included for three months in 1997 versus two months in 1996. In the
Dallas-Fort Worth market, amounts retained by dental group practices increased
$409,000 in the first quarter of 1997, as dentist and hygienist compensation
increased as a result of higher productivity at the Dental Offices. As a percent
of Revenue, amounts retained by dental group practices increased from 32.6% to
34.7% for the first quarters of 1996 and 1997, respectively, resulting from the
acquisition of dental group practices with relatively higher dentist and
hygienist compensation levels than in Dallas-Fort Worth.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $1.1 million for the first quarter of 1996 to $2.4 million for the first
quarter of 1997, an increase of $1.3 million, or 129.8%. The increased clinical
salaries and benefits were due primarily to the increased number of Dental
Offices resulting from the acquisitions of Midwest, Convenient and Arkansas
Dental Health, which added combined clinical salaries of $992,000 for the first
quarter of 1997. The acquisition of MacGregor accounted for $108,000 of the
increase as a result of being included for three months in 1997 versus two
months in 1996. In the Dallas-Fort Worth market, clinical salaries and benefits
increased $284,000 as a result of the opening of three de novo Dental Offices
and the expansion of six Dental Offices. As a percent of Revenue, clinical
salaries and benefits remained constant at 16.9% for the first quarters of 1996
and 1997.
Other salaries and benefits. Other salaries and benefits increased from
$466,000 for the first quarter of 1996 to $1.4 million for the first quarter of
1997, an increase of $921,000, or 197.6%. This increase resulted primarily from
additional managerial infrastructure associated with MacGregor and Midwest as
well as the building of additional corporate infrastructure to manage the
Company's growth. As a percent of Revenue, other salaries and benefits increased
from 7.4% to 9.6% for the first quarters of 1996 and 1997, respectively, as the
first quarter of 1997 reflected a more fully staffed corporate infrastructure.
Dental supplies. Dental supplies expense increased from $327,000 for the
first quarter of 1996 to $912,000 for the first quarter of 1997, an increase of
$585,000, or 178.9%. This increase resulted from the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which added $397,000 of combined dental
supplies expense for the first quarter of 1997. The acquisition of MacGregor
accounted for $45,000 of the increase as a result of MacGregor being included
for three months in 1997 versus two months in 1996. In the Dallas-Fort Worth
market, dental supplies increased $144,000 in the first quarter of 1997 as a
result of greater productivity. As a percent of Revenue, dental supplies expense
increased from 5.2% to 6.3% for the first quarters of 1996 and 1997,
respectively. This increase is due to the incurrence of higher dental supply
expenses at acquired businesses.
Laboratory fees. Laboratory fees increased from $322,000 for the first
quarter of 1996 to $591,000 for the first quarter of 1997, an increase of
$269,000, or 83.5%. This increase resulted from the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which added $133,000 in combined
laboratory fees for the first quarter of 1997. The acquisition of MacGregor
accounted for $105,000 of the increase as a result of MacGregor being included
for three months in 1997 versus two months in 1996. In the Dallas-Fort Worth
market, laboratory fees increased $42,000 in the first quarter of 1997 as a
result of greater productivity. As a
29
<PAGE> 31
percent of Revenue, laboratory fees decreased from 5.1% to 4.1% for the first
quarters of 1996 and 1997, respectively, as a result of the inclusion of an
internal lab in the acquisition of Midwest.
Occupancy. Occupancy expense increased from $318,000 for the first quarter
of 1996 to $800,000 for the first quarter of 1997, an increase of $482,000 or
151.6%. This increase resulted from the acquisitions of Midwest, Convenient and
Arkansas Dental Health, which added a combined $295,000 to occupancy expense for
the first quarter of 1997. The acquisition of MacGregor accounted for $84,000 of
the increase as a result of MacGregor being included for three months in 1997
versus two months in 1996. In the Dallas-Fort Worth market, occupancy expense
increased $94,000 in the first quarter of 1997 as three de novo Dental Offices
were opened and six Dental Offices were expanded. As a percent of Revenue,
occupancy expense increased from 5.0% to 5.5% for the first quarters of 1996 and
1997, respectively, resulting from the assumption of higher-cost leases in
Houston.
Advertising. Advertising expense increased from $225,000 for the first
quarter of 1996 to $325,000 for the first quarter of 1997, an increase of
$100,000, or 44.4%. Increased advertising in the Houston market combined with
MacGregor being included in three months in 1997 versus two months in 1996
accounted for $44,000 of the increase and increased television and print
advertising in the Dallas-Fort Worth market accounted for $26,000 of the
increase. The acquisitions of Midwest, Convenient and Arkansas Dental Health,
which added a combined $30,000 to advertising expense for the first quarter of
1997, accounted for the remainder of the increase. As a percent of Revenue,
advertising expense decreased from 3.6% to 2.2% for the first quarters of 1996
and 1997, respectively. This decrease resulted from leveraging advertising
expense with greater market penetration and the acquisition of Midwest, which
historically has done no television or radio advertising.
Depreciation and amortization. Depreciation and amortization expense
increased from $248,000 for the first quarter of 1996 to $565,000 for the first
quarter of 1997, an increase of $317,000, or 127.8%. This increase was the
result of the acquisitions of Midwest, Convenient and Arkansas Dental Health,
which added combined depreciation and amortization expense of $176,000 for the
first quarter of 1997. The acquisition of MacGregor accounted for $83,000 of the
increase as a result of MacGregor being included for three months in 1997 versus
two months in 1996. Depreciation and amortization expenses for the Dallas-Fort
Worth market increased $66,000 in the first quarter of 1997 as three de novo
Dental Offices were opened and six Dental Offices were expanded. As a percent of
Revenue, depreciation and amortization expense remained constant at 3.9% for the
first quarters of 1996 and 1997.
General and administrative. General and administrative expense increased
from $573,000 for the first quarter of 1996 to $1.5 million for the first
quarter 1997, an increase of $885,000, or 154.5%. This increase resulted from
the acquisitions of Midwest, Convenient and Arkansas Dental Health and the
expansion of the Company's corporate infrastructure to manage growth. As a
percent of Revenue, general and administrative expense increased from 9.1% to
10.1% for the first quarters of 1996 and 1997, respectively. This increase was
due principally to Midwest having higher general and administrative costs as a
percent of Revenue than the Company's operations in Dallas-Fort Worth and the
additional corporate infrastructure in place in the first quarter of 1997.
Operating income. Operating income increased from $712,000 for the first
quarter of 1996 to $962,000 for the first quarter of 1997, an increase of
$250,000, or 35.1%. This increase resulted from the acquisitions of Midwest,
Convenient and Arkansas Dental Health, which added combined operating income of
$450,000 for the first quarter of 1997. Operating income from the Company's
Dallas-Fort Worth operations increased $82,000 in the first quarter of 1997,
which was largely offset by increased corporate expenses due to the development
of corporate infrastructure. As a percent of Revenue, operating income decreased
from 11.3% to 6.6% for the first quarters of 1996 and 1997, respectively. 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
30
<PAGE> 32
average of $10.5 million of indebtedness for two months in 1996 incurred under
the Credit Facility for the 1996 Transactions.
Income taxes. Income taxes decreased from $174,000 for the first quarter of
1996 to $150,000 for the first quarter of 1997, a decrease of $24,000, or 13.8%.
This decrease is the result of lower net income before taxes, which decreased
from $453,000 for the first quarter of 1996 to $383,000 for the first quarter of
1997, a decrease of $71,000, or 15.5%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Dental group practices revenue, net. Revenue increased from $13.2 million
for 1995 to $36.0 million for 1996, an increase of $22.8 million, or 172.1%.
This increase resulted primarily from the acquisitions of MacGregor in February
1996 and Midwest in September 1996, which contributed Revenue of $12.1 million
and $5.3 million for the 11 months and four months ended December 31, 1996,
respectively. Dental Offices in the Dallas-Fort Worth market contributed an
additional $5.1 million of the increase in Revenue in 1996 resulting from the
opening of two de novo Dental Offices, the physical expansion of six existing
Dental Offices and the acquisition of a solo practice.
Fee-for-service Revenue increased from $9.1 million for 1995 to $21.9
million for 1996, an increase of $12.8 million, or 141.6%, due to acquisitions
in new markets and growth in existing markets. This increase resulted from the
acquisitions of MacGregor and Midwest, which contributed fee-for-service Revenue
of $7.6 million and $3.2 million for the respective periods following the dates
of acquisition. In the Dallas-Fort Worth market, fee-for-service Revenue
increased from $9.1 million for 1995 to $10.7 million for 1996, representing an
increase of $1.6 million, or 18.4%. Managed dental care Revenue increased from
$4.2 million for 1995 to $14.1 million for 1996, an increase of $9.9 million, or
238.4%, due to acquisitions in new markets and growth in existing markets. This
increase resulted in part from the acquisitions of MacGregor and Midwest, which
contributed managed dental care Revenue of $4.5 million and $2.1 million for the
respective periods following the dates of acquisition. In the Dallas-Fort Worth
market, managed dental care Revenue increased $3.3 million, or 80.8%, over 1995.
As a percentage of Revenue, fee-for-service Revenue decreased from 68.4% to
60.8% for 1995 and 1996, respectively, as managed dental care Revenue grew at a
higher rate than fee-for-service Revenue. See "-- Components of Revenue and
Expenses" above.
Amounts retained by dental group practices. Amounts retained by dental
group practices increased from $4.3 million for 1995 to $11.8 million for 1996,
an increase of $7.5 million, or 174.4%. The increase was primarily due to the
acquisitions of MacGregor and Midwest which added amounts retained by dental
group practices of $3.8 million and $1.9 million for the respective periods
following the dates of acquisition. In the Dallas-Fort Worth market, amounts
retained by dental group practices increased $1.6 million as dentist and
hygienist compensation generally increased in relation to increased productivity
at the Dental Offices. As a percent of Revenue, amounts retained by dental group
practices increased from 32.5% to 32.8% for 1995 and 1996, respectively.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $2.2 million for 1995 to $6.3 million for 1996, an increase of $4.1
million, or 179.0%. The increased clinical salaries and benefits were due
primarily to the increased number of Dental Offices resulting from the
acquisitions of MacGregor and Midwest which added clinical salaries of $2.0
million and $1.0 million for the respective periods following the dates of
acquisition. As a percent of Revenue, clinical salaries and benefits increased
from 17.0% to 17.4% for 1995 and 1996, respectively, as a result of higher
salary costs in the acquired Dental Offices.
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
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<PAGE> 33
Midwest, which added $688,000 and $442,000 of dental supplies expense for the
respective periods following the dates of acquisition. As a percent of Revenue,
dental supplies expense remained relatively constant at 6.3% and 6.2% for 1995
and 1996, respectively.
Laboratory fees. Laboratory fees increased from $633,000 for 1995 to $1.6
million for 1996, an increase of $1.0 million, or 160.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $753,000 and
$25,000 to laboratory fees for the respective periods following the dates of
acquisition. As a percent of Revenue, laboratory fees decreased slightly from
4.8% to 4.6% for 1995 and 1996, respectively.
Occupancy. Occupancy expense increased from $471,000 for 1995 to $1.9
million for 1996, an increase of $1.4 million, or 311.3%. This increase resulted
primarily from the acquisitions of MacGregor and Midwest, adding $766,000 and
$346,000 to occupancy expense for the respective periods following the dates of
acquisition. As a percent of Revenue, occupancy expense increased from 3.6% to
5.4% for 1995 and 1996, respectively, reflecting the assumption of higher-cost
leases in Houston.
Advertising. Advertising expense increased from $710,000 for 1995 to $1.2
million for 1996, an increase of $490,000, or 70.4%. This increase was the
result of advertising in the Houston market at a cost of $326,000 for the 11
months ended December 31, 1996 and an increase of $162,000 in television and
print advertising in the Dallas-Fort Worth market in 1996. As a percent of
Revenue, advertising expense decreased from 5.4% to 3.4% for 1995 and 1996,
respectively. This decrease resulted from leveraging advertising expense with
greater market penetration and the acquisition of Midwest which has not
conducted television or radio advertising.
Depreciation and amortization. Depreciation and amortization expense
increased from $293,000 for 1995 to $1.4 million for 1996, an increase of $1.1
million, or 388.1%. This increase was primarily the result of the acquisitions
of MacGregor and Midwest, which added depreciation and amortization expense of
$730,000 and $178,000 for the respective periods following the dates of
acquisition. Depreciation and amortization expense for the Dallas-Fort Worth
operations increased $226,000 as two de novo Dental Offices were opened and six
Dental Offices were expanded. As a percent of Revenue, depreciation and
amortization expense increased from 2.2% to 4.0% for 1995 and 1996,
respectively.
General and administrative. General and administrative expense increased
from $1.1 million for 1995 to $3.6 million for 1996, an increase of $2.5
million, or 224.3%. This increase resulted primarily from the acquisitions of
MacGregor and Midwest during 1996 and the expansion of the Company's corporate
infrastructure in 1996 to manage growth. As a percent of Revenue, general and
administrative expense increased from 8.3% to 9.9% for 1995 and 1996,
respectively. This increase was due principally to MacGregor and Midwest having
higher general and administrative costs as a percent of Revenue than the
Company's operations in Dallas-Fort Worth.
Operating income. Operating income increased from $1.7 million for 1995 to
$2.8 million for 1996, an increase of $1.1 million, or 67.0%. This increase
resulted from the addition of MacGregor and Midwest which added operating income
of $966,000 and $213,000 for the respective periods following the dates of
acquisition. Income from the Company's Dallas-Fort Worth operations increased
$781,000 in 1996, which was largely offset by increased expenses due to the
development of corporate infrastructure. As a percent of Revenue, operating
income decreased from 12.6% in 1995 to 7.6% in 1996. This decrease was primarily
the result of adding the MacGregor and Midwest acquisitions, which experienced
lower operating margins than the Company's Dallas-Fort Worth operations.
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.
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<PAGE> 34
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Dental group practices revenue, net. Revenue increased from $9.6 million
for 1994 to $13.2 million for 1995, an increase of $3.6 million, or 38.3%. This
increase was due to expansion in the Dallas-Fort Worth market, including the
opening of two de novo Dental Offices.
Fee-for-service Revenue increased from $7.5 million for 1994 to $9.1
million for 1995, an increase of $1.6 million, or 21.0%, due to growth in the
Dallas-Fort Worth market. Managed dental care Revenue increased from $2.1
million for 1994 to $4.2 million for 1995, an increase of $2.1 million, or
100.5%, due to growth in the Dallas-Fort Worth market. As a percentage of
Revenue, fee-for-service Revenue decreased from 78.2% to 68.4% for 1994 and
1995, respectively. See "-- Components of Revenue and Expenses" above.
Amounts retained by dental group practices. Amounts retained by dental
groups increased from $3.1 million for 1994 to $4.3 million for 1995, an
increase of $1.2 million, or 40.1%. The increase was due primarily to higher
dentist compensation in 1995 compared to 1994, resulting from increased
productivity at the Dental Offices. As a percent of Revenue, amounts retained by
dental group practices increased from 32.1% to 32.5% for 1994 and 1995,
respectively.
Clinical salaries and benefits. Clinical salaries and benefits increased
from $1.6 million for 1994 to $2.2 million for 1995, an increase of $600,000, or
44.4%. The increased clinical salaries and benefits resulted primarily from
higher patient volume which required increased staffing. As a percent of
Revenue, clinical salaries and benefits increased from 16.2% to 17.0% for 1994
and 1995, respectively, principally as a result of two de novo Dental Offices
opened in 1995 being fully staffed although in a start-up phase.
Other salaries and benefits. Other salaries and benefits increased from
$688,000 for 1994 to $971,000 for 1995, an increase of $283,000, or 41.1%. This
increase was principally due to increased executive compensation and staffing
levels. As a percent of Revenue, other salaries and benefits remained relatively
constant at 7.2% and 7.3% for 1994 and 1995, respectively.
Dental supplies. Dental supplies expense increased from $509,000 for 1994
to $833,000 for 1995, an increase of $324,000, or 63.7%. As a percent of
Revenue, dental supplies expense increased from 5.3% to 6.3% for 1994 and 1995,
respectively. These increases were due primarily to increased patient volume in
1995 relative to 1994 and to the initial stocking of dental supplies for the two
de novo Dental Offices opened in 1995.
Laboratory fees. Laboratory fees increased from $430,000 for 1994 to
$633,000 for 1995, an increase of $203,000, or 47.2%. As a percent of Revenue,
laboratory fees increased from 4.5% to 4.8% for 1994 and 1995, respectively.
Occupancy. Occupancy expense increased from $392,000 for 1994 to $471,000
for 1995, an increase of $79,000, or 20.2%, due primarily to the opening of two
de novo Dental Offices and the full year effect of occupancy expense in one de
novo Dental Office opened in the fourth quarter of 1994. As a percent of
Revenue, occupancy expense decreased from 4.1% to 3.6% for 1994 and 1995,
respectively.
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.
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<PAGE> 35
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%.
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<PAGE> 36
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
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 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 TOTAL 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>
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<PAGE> 37
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 significantly reduce or eliminate
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.
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
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<PAGE> 38
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 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."
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<PAGE> 39
BUSINESS
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 seeks to build geographically dense networks of dental providers by
expanding within its existing markets and entering new markets through
acquisition. At April 30, 1997, the Company managed 66 Dental Offices, of which
15 were internally developed and 51 were acquired by the Company. At April 30,
1997, the Dental Offices employed 125 full-time general dentists and contracted
with 13 full-time specialists.
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 practice 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 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
38
<PAGE> 40
larger dental practice management companies. Group practices with comprehensive
networks of dental providers in particular markets can offer these plans the
ability to enter these markets more quickly and to service their plan members
more efficiently than contracting through solo or smaller group practices. As a
result, having an extensive provider network can provide a group practice with
advantages in establishing and maintaining relationships with such plans,
including greater leverage than that of solo or smaller group practices when
negotiating provider agreements.
In recent years, general dental, orthodontic and other specialty practices
increasingly have formed larger group practices, following the consolidation
trend seen elsewhere in the health care industry. In these practices a separate
professional management team handles practice management functions such as
staffing, billing, information systems, managed care contracting, leasing,
purchasing and marketing, thereby enabling the dental professionals to focus on
providing high quality dental services. Several factors have contributed to the
increased formation of larger group practices in the dental services industry.
These include the increasing complexity of managing a dental practice due, in
part, to the shift to third-party reimbursement, the economies of scale
achievable in such areas as administration, purchasing and advertising, the need
for cost-effective management of patient care, the desire to capture revenues
from higher-margin specialty procedures, which would otherwise be referred to
independent specialists, and the growing importance of capital resources to
acquire and maintain state-of-the-art dental equipment, clinical facilities and
management information systems.
BUSINESS STRATEGY
The Company's objective is to be a leading dental practice management
company in each of its markets. The Company's strategy includes the following
key elements:
Expand in Existing Markets. The Company generates growth within its
existing markets by increasing patient volume and fees in existing Dental
Offices, either on a per-patient or per-procedure basis, by increasing the
physical space of existing Dental Offices to accommodate more single-chair
operatories and multi-chair specialty bays, and by opening Dental Offices on a
de novo basis. The Company intends to focus increasingly on acquisitions of solo
and smaller dental group practices within its existing markets as an additional
means of generating growth. Revenue from the Company's Dallas-Fort Worth
operations increased $3.6 million, or 38.3%, to $13.2 million in 1995, and
increased $5.1 million, or 38.1%, to $18.3 million in 1996. Operating income for
the Company's Dallas-Fort Worth operations increased $694,000, or 52.7%, to $2.0
million in 1995 and increased $805,000, or 40.0%, to $2.8 million in 1996.
However, there can be no assurance that the Company's revenue and operating
income in this market will continue to grow at these historical rates or that
the Company's operations in other markets will grow at rates comparable to those
experienced in Dallas-Fort Worth.
Enter New Markets. The Company enters selected new markets by acquiring
dental group practices which have a significant market presence or which the
Company believes can achieve such a presence in the near term. The Company then
seeks to use the acquired dental group practice as a "pedestal" from which to
expand by executing its existing market growth strategies. In 1996, the Company
acquired practices in three new markets, Houston, Wisconsin and Arkansas.
Advertise and Market Dental Services. The Company seeks to increase patient
volume through television, radio and print advertising and other marketing
techniques. The Company emphasizes regional brand name recognition of its
affiliated Dental Offices, quality of care, comprehensive specialty services,
affordable payment plans for more complex procedures and patient satisfaction.
The Company complements its marketing program with patient call centers to
provide scheduling, informational and patient follow-up services. The Company
also supports its marketing program by 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 its revenue mix between
revenue from its fee-for-service business and revenue from capitated managed
dental care plans. The Company focuses on fee-for-
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<PAGE> 41
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
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 1
Acquired Offices............................... - - - 39 12
-- -- -- -- --
Offices at end of the period................... 9 10 12 53 66
== == == == ==
</TABLE>
- ------------------------------
(1) Through April 30, 1997
Expansion Within Existing Markets. The Company's strategies for growth
within its existing markets include expanding existing Dental Offices, opening
de novo Dental Offices and acquiring solo practices and smaller group practices.
Historically, the Company has expanded its operations in its existing markets
principally through expansion of existing Dental Offices and establishment of de
novo Dental Offices rather than through acquisitions. The Company recently
completed its first acquisition of a solo practice in an existing market
(Dallas-Fort Worth) and intends to focus increasingly on the acquisition of solo
and smaller group practices within existing markets.
Expansion of an existing Dental Office typically involves increasing the
physical space of the Dental Office to accommodate more single-chair operatories
and multi-chair specialty bays. This 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.
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<PAGE> 42
The average investment by the Company in the three 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. These de novo Dental Offices began contributing
operating income to the Company within three months of opening. 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.
DENTAL SERVICES
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 typically offers specialty dental services
through teams which rotate through several Dental Offices in a particular
market. This enables the Company to capture revenue from services that would
otherwise be referred to independent specialists. 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 manages
Dental Offices, the number of Dental Offices and dentists in each area at April
30, 1997, the year that each practice was established and the effective date of
each practice's affiliation with the Company:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
GROUP PRACTICE/MARKET DENTAL OFFICES DENTISTS(1) FOUNDED OF ACQUISITION
--------------------- -------------- ------------ ------- -----------------
<S> <C> <C> <C> <C>
Monarch, Dallas-Fort Worth........ 16 47 1983 N/A
MacGregor, Houston................ 15 37 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 6 1984 January 1, 1997
United, Arkansas.................. 9 13 1990 April 1, 1997
-- ---
Total........................... 66 138
</TABLE>
- ------------------------------
(1) Includes full-time general dentists employed by the Company or the P.C.s, as
applicable, and full-time specialists, most of whom are independent
contractors.
The attributes of the Dental Offices vary from market to market. In urban
and suburban areas a Dental Office may have, for example, 15 or more
single-chair operatories, a multi-chair specialty bay, several full-time general
dentists, several dental hygienists and dental assistants, a business manager
and a receptionist. In
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<PAGE> 43
more rural markets, a Dental Office may have, for example, only three or four
single chair operatories, 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 through television, radio and
print advertising and other marketing techniques. The Company has developed
these techniques over the past 14 years in its Dallas-Fort Worth operations and
adapts them for use in its other markets as appropriate. The Company's
advertising emphasizes regional brand name recognition of its affiliated Dental
Offices, quality of care, comprehensive specialty services, affordable payment
plans for more complex procedures and patient satisfaction. The Company operates
as "Monarch(TM) Dental" or under 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
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
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. In addition, members of capitated managed dental care plans pay the
Company 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 its revenue mix between revenue from its
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 its fee-for-service business by
expanding its operations within existing markets, entering new markets and
advertising.
The Company seeks to supplement its 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. The Company's capitated managed dental care relationships enable it to
increase dentist productivity and facility utilization. These relationships also
provide increased co-payment revenue, referrals of additional fee-for-service
patients and opportunities for its dentists 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> 44
The following tables set forth information regarding the sources of the
Company's Revenue for the years ended December 31, 1994, 1995 and 1996 and the
sources of the Company's Revenue in each of its markets for the year ended
December 31, 1996, beginning with the respective dates of acquisition for
Houston, Wisconsin and Arkansas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
-------------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fee-for-Service (1)..................................... $7,478 78.2% $9,051 68.5% $21,863 60.8%
Managed Dental Care:
Capitation............................................ 773 8.1% 1,642 12.4% 8,142 22.6%
Co-payment............................................ 1,308 13.7% 2,530 19.1% 5,975 16.6%
------ ----- ------- ----- ------- -----
Total........................................... $9,559 100.0% $13,223 100.0% $35,980 100.0%
====== ===== ======= ===== ======= =====
</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
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,
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<PAGE> 45
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 its revenue mix by
balancing fee-for-service and capitated managed dental care patients. This also
enables each Dental Office's staff 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 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 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 Company's 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 Company's
dentists and hygienists can obtain
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<PAGE> 46
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, managed care contracting, 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 Company's Dental Offices are owned
directly by, and the dentists are employed by, the Company.
Employment Agreements
All dentists practicing at the Dental Offices have entered into employment
agreements or independent contractor agreements through their professional
corporations. 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 such 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. At April 30, 1997, 87.7% of the dentists practicing at the Dental
Offices received collections-based compensation while 12.3% received a fixed
salary.
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
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<PAGE> 47
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 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.
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.
Some states 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. Many states 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. The laws of some states prohibit the
advertising of dental services under a trade or corporate name and 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. These laws and
their interpretations vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion.
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<PAGE> 48
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 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 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.
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<PAGE> 49
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 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.
The Company's revenues 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
48
<PAGE> 50
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 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 April 30, 1997, the Company had approximately 689 employees,
including 32 dentists and 39 hygienists located at Midwest but excluding the 106
dentists and 33 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.
49
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of April
30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Warren F. Melamed, D.D.S. ................... 50 Chairman of the Board, 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........................... 31 Chief Financial Officer
Glenn E. Hemmerle(1)(2)...................... 51 Director
Roger B. Kafker(2)........................... 34 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 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.
50
<PAGE> 52
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.
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.
51
<PAGE> 53
(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 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.
52
<PAGE> 54
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 (including dentists who are employed by or
independent contractors of the P.C.s). The 1996 Stock Plan provides for the
issuance of 1,376,250 shares of Common Stock of which (i) 32,500 shares were
subject to outstanding options with a weighted average exercise price of $3.12
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 April 30, 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
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
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<PAGE> 55
or deemed to be reinvested in additional shares of Common Stock, which may
thereafter accrue further dividends.
The Compensation Committee may, in its sole discretion, accelerate or
extend the date or dates on which all or any particular award or awards granted
under the 1996 Stock Plan may be exercised or vest. To the extent not exercised,
all options granted under the 1996 Stock Plan terminate upon the dissolution,
liquidation or sale of the Company unless assumed by a successor entity, except
as the Compensation Committee otherwise determines.
Restricted Stock Grants. Since adopting the 1996 Stock Plan in connection
with the 1996 Transactions in February 1996, the Company has sold an aggregate
of 345,208 shares of restricted Common Stock for an aggregate cash purchase
price of $73,184 to employees and directors of the Company under the 1996 Stock
Plan or separate restricted stock agreements. These shares generally vest in
equal monthly installments (or annually in the case of the shares sold to Dr.
Melamed) over four years beginning with the date of sale, with unvested shares
subject to repurchase at cost upon the termination of the purchaser's employment
or other relationship with the Company. Shares of restricted Common Stock
generally would be treated as fully vested in the event of a sale of the
Company.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan was adopted by the Board of Directors and approved by the
Company's stockholders. Up to 250,000 shares of Common Stock may be issued under
the Purchase Plan. The Purchase Plan is administered by the Compensation
Committee.
The first offering under the Purchase Plan will begin on August 1, 1997 and
end on December 31, 1997, 1998. Subsequent offerings will commence on each
January 1 and July 1 thereafter and will have a duration of six months.
Generally, all employees who are customarily employed for more than 20 hours per
week as of the first day of the applicable offering period are eligible to
participate in the Purchase Plan. Any employee who owns or is deemed to own
shares of stock representing in excess of 5% of the 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 entered into an Employment Agreement with Dr. Melamed in
connection with the 1996 Transactions pursuant to which Dr. Melamed currently
serves as its Chairman of the Board and Chief Dental Officer. The agreement
provides for (i) an annual base salary of $300,000, (ii) an initial employment
term ending on February 5, 2000 with an indefinite term commencing thereafter
terminable by either party and (iii) the continuation of base salary payments
until the later of February 5, 2000 or one year following termination of Dr.
Melamed's employment in the event such employment is terminated by the Company
without cause (as defined) or by Dr. Melamed following a material default of the
agreement by the Company.
In connection with the 1996 Transactions, the Company also entered into
Non-Competition Agreements with Drs. Melamed and Shears. These agreements
provide that Drs. Melamed and Shears will not engage in certain competitive
activities without the Company's consent prior to February 5, 2001 and February
5, 1999, respectively. In the event that either Dr. Melamed's or Dr. Shears'
employment with the Company terminates other than as a result of death or
disability prior to the February 5, 2001 or February 5, 1999, respectively,
54
<PAGE> 56
these agreements provide that the terminated employee 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.
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 profession 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
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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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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 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
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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.
The Company has entered into a Management Agreement with Modern Dental
Professionals, P.C., a dental profession 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.
In addition to the Management Agreement with the Texas P.C., the Company
has a contractual right to designate or approve the licensed dentist or dentists
who own the Texas P.C.'s capital stock in the event Dr. Melamed ceases to be
affiliated with the Company for any reason.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy will require that any loans
by the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of April 30, 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 April 1, 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 April 30,
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., 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;
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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 trusts for the benefit of members of
Dr. Melamed's family, as to which shares Dr. Melamed disclaims beneficial
ownership.
(5) All shares are held jointly with Dr. Shears' wife. Does not include 695,580
shares held by trusts for the benefit of members of Dr. Shears' family, as
to which shares Dr. Shears disclaims beneficial ownership.
(6) Constitutes 100,000 shares of restricted stock held by Mr. Cage,
approximately 29,167 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 25,000 shares.
(7) Constitutes 10,000 shares of restricted stock held by Mr. Hemmerle,
approximately 2,292 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.
(8) Includes 5,115 shares of Common Stock beneficially owned by Mr. Kafker
through TA Venture Investors Limited Partnership, all of which shares are
included in the 2,673,200 shares described in footnote (3) above. Does not
include any shares beneficially owned by Advent VII L.P., Advent Atlantic
and Pacific II L.P. or Advent New York L.P., of which Mr. Kafker disclaims
beneficial ownership.
(9) Includes 270,000 shares of restricted stock held by executive officers and
directors which are subject to repurchase in certain circumstances.
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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.
Accordingly, 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 with 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.
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,
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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 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.
Amendment of 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 it at such meeting, in which
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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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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, 5,444,505 Restricted Shares will be eligible for
sale in the public market pursuant to Rule 144, certain of which may be sold
under Rule 144 in accordance with Rule 701 under the Securities Act as described
below, beginning 90 days after the date of this Prospectus and an additional
1,013,515 shares will become eligible for sale in the public market under Rule
144 at various dates thereafter through April 1, 1998 at which date all of such
shares will be eligible for sale. Substantially all such shares are subject to
the lock-up agreements described below. The remaining 250,703 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 92,087 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 outstanding options or the
grant of Common Stock pursuant to written compensation plans or contracts prior
to this offering 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. 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
64
<PAGE> 66
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 April 30, 1997, 1,376,250 shares of Common Stock were reserved for
issuance under the 1996 Stock Plan, of which 32,500 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 92,500 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.
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."
65
<PAGE> 67
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 6,708,723 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. In addition, the Company has agreed that,
without the prior written consent of Hambrecht &
66
<PAGE> 68
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.
67
<PAGE> 69
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
and United Dental Care, 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.
68
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996 and March 31, 1997 (Unaudited).................... F-3
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-4
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-5
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-6
Notes to Consolidated Financial Statements................ F-7
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-19
Combined Balance Sheets as of September 30, 1994 and
1995................................................... F-20
Combined Statements of Operations for the Years Ended
September 30, 1994 and 1995............................ F-21
Combined Statements of Stockholder's Equity for the Years
Ended September 30, 1994 and 1995...................... F-22
Combined Statements of Cash Flows for the Years Ended
September 30, 1994 and 1995............................ F-23
Notes to Combined Financial Statements.................... F-24
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-29
Combined Balance Sheets as of December 31, 1994 and
1995................................................... F-30
Combined Statements of Operations for the Years Ended
December 31, 1994 and 1995............................. F-31
Combined Statements of Stockholder's Equity for the Years
Ended December 31, 1994 and 1995....................... F-32
Combined Statements of Cash Flows for the Years Ended
December 31, 1994 and 1995............................. F-33
Notes to Combined Financial Statements.................... F-34
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-40
Combined Balance Sheets as of December 31, 1995 and 1996
and March 31, 1997 (Unaudited)......................... F-41
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-42
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-43
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-44
Notes to Combined Financial Statements.................... F-45
</TABLE>
F-1
<PAGE> 71
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 and 3 of Note 13,
for which the date is May 1, 1997
F-2
<PAGE> 72
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
---------- ----------- ----------- -----------
Total current liabilities....... 1,418,696 8,677,014 8,884,311 8,884,311
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 29,911,758
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 Preferred Stock, $.01 par
value, 3,840,000 shares authorized; no
shares issued and outstanding......... -- -- -- 8,000,000
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-3
<PAGE> 73
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............................... 6,732,015 6,732,015 6,732,015
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
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-5
<PAGE> 75
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-6
<PAGE> 76
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 and accounts of the dental
group practices under Management Agreements.
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.
The Company's consolidated financial statements have been prepared in
anticipation of an initial public offering (the "offering").
F-7
<PAGE> 77
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
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 upon the
revenue of the dental group practices.
The amounts retained by dental group practices consist of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Payments to professional corporations under Management
Agreements............................................ $3,070 $4,300 $ 9,860
Payments to dentists, hygienists and contracted
specialists employed by the Company................... -- -- 1,942
------ ------ -------
$3,070 $4,300 $11,802
====== ====== =======
</TABLE>
F-8
<PAGE> 78
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Melamed is the sole owner of Modern Dental.
The Company and Melamed have a succession agreement whereby upon any termination
of Melamed's affiliation with the Company, Melamed is required to sell his
ownership interest in Modern Dental for a nominal amount.
Advertising
The costs of advertising, promotion and marketing are expensed in the year
incurred.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include money market accounts and all highly liquid investments with
original maturities of three months or less.
Accounts Receivable
Accounts receivable represent receivables from patients and other
third-party payors for dental services provided. Such amounts are recorded net
of contractual allowances and estimated bad debts. Unearned revenue represents
amounts relating to longer term services, such as orthodontics.
The Dental Offices grant credit without collateral to their patients, most
of whom are local residents and are insured under third-party payor agreements.
Periodically, the Dental Offices transfer the patient receivables to the
Company. Amounts collected on behalf of and payable to the Dental Offices is
reflected as payable to affiliated dental group practices in the accompanying
consolidated balance sheets. The Company does not believe these receivables
represent any concentrated credit 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
F-9
<PAGE> 79
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market values. Costs of acquisition in excess of the net estimated fair value of
tangible assets acquired and liabilities assumed is allocated first to
identifiable intangibles and then either to the Management Agreement (in those
transactions where the Company has effectively acquired the right to manage the
Dental Office) or goodwill (for acquired Dental Offices). The Management
Agreement represents the Company's right to manage the Dental Offices during the
40-year term of the agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over its estimated useful life of 30
years. The Management Agreements cannot be terminated by the related
professional corporation without cause, consisting primarily of bankruptcy or
material default. The value assigned to goodwill is amortized over 40 years. At
December 31, 1996, the weighted average life assigned to all intangible assets
was approximately 32 years.
The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization periods, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each Dental Office's relative market share and local market
competitive environment, current period and forecasted operating results, cash
flow levels of the Dental Offices and the impact on the net revenue earned by
the Company, and legal factors governing the practice of dentistry.
The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of the
consolidation of professional corporation revenues and the accounting for
business combinations. The Company is unable to predict the impact, if any, that
this 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.
F-10
<PAGE> 80
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental pro forma net income per share for the year ended December 31,
1996 and the three months ended March 31, 1997, was $0.18 and $0.05 (unaudited),
respectively, assuming certain proceeds from the offering are used to retire
$18,225,000 of the Company's outstanding indebtedness under its credit agreement
discussed in Note 6 and to redeem the Company's Redeemable Preferred Stock.
Unaudited Pro Forma Consolidated Balance Sheet at March 31, 1997
Upon completion of the offering, the Company will convert its Convertible
Participating Preferred Stock into 2,400,000 shares of Common Stock and
3,840,000 shares of Redeemable Preferred Stock. In addition, the Company's
Redeemable Common Stock and Series A Convertible Junior Preferred Stock will be
converted into 175,000 and 852,265 shares, respectively, of Monarch Common
Stock. The unaudited pro forma balance sheet information is presented as if such
conversions had occurred as of March 31, 1997.
3. ACQUISITIONS:
Concurrent with the Reorganization discussed in Note 1, Monarch acquired
certain assets and assumed certain liabilities of MacGregor Dental Centers, Inc.
and Shears Management, Inc. (collectively referred to as "MacGregor"), for cash
and Common Stock in an asset contribution transaction. MacGregor operates and
manages 15 dental offices in the Houston, Texas area. The dentists and
hygienists practicing in MacGregor dental offices are employed by Modern Dental.
This acquisition was accounted for using the purchase method of accounting.
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.
F-11
<PAGE> 81
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-12
<PAGE> 82
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS:
Intangible assets consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZATION PERIOD
-------------------
<S> <C> <C>
Management Agreements 30 years $17,276,138
Goodwill 40 years 6,268,885
Less -- Accumulated amortization (573,156)
-----------
Intangible assets, net $22,971,867
===========
</TABLE>
6. NOTES PAYABLE:
Notes payable consists of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Borrowings under credit facility............................ $ -- $21,551,686
Other notes payable, with an interest rate of prime plus
0.5%, secured by certain receivables and property......... 74,067 --
-------- -----------
74,067 21,551,686
Less -- Current maturities.................................. (58,315) (3,192,857)
-------- -----------
Notes payable, net.......................................... $ 15,752 $18,358,829
======== ===========
</TABLE>
The maturities of notes payable at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997............................................ $ 3,192,857
1998............................................ 3,192,857
1999............................................ 15,165,972
-----------
Total........................................... $21,551,686
===========
</TABLE>
Effective February 5, 1996, and modified August 29, 1996, the Company
entered into a credit agreement (the "Credit Facility") with a commercial bank.
The Credit Facility provides for a three-year commitment to fund revolving
credit borrowings of up to $30 million. Of this amount, $2.0 million is
available for general working capital purposes. Under the terms of the Credit
Facility, the Company paid a commitment fee of approximately $577,000 which has
been capitalized in other assets in the accompanying, consolidated balance sheet
and amortized as an adjustment to interest expense using the effective interest
method. The interest rate under the Credit Facility is set at the Company's
option as follows: (i) reserve adjusted LIBOR plus 2.0% to 3.25%; or (ii) the
bank's base rate plus 1.25% to 1.5%. The Credit Facility includes certain
restrictive covenants including limitations on the payment of dividends and
making acquisitions as well as the maintenance of certain financial ratios. The
Credit Facility is secured by substantially all the assets of the Company. At
December 31, 1996, subject to certain conditions as defined by the credit
agreement, the Company had approximately $8.4 million of borrowings available.
Of this amount, $2.0 million is available for working capital purposes.
F-13
<PAGE> 83
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, 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-14
<PAGE> 84
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-15
<PAGE> 85
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-16
<PAGE> 86
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-17
<PAGE> 87
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.
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 declared a 1-for-2 reverse stock split. The accompanying financial
statements give retroactive effect to the stock split.
F-18
<PAGE> 88
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-19
<PAGE> 89
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-20
<PAGE> 90
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-21
<PAGE> 91
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-22
<PAGE> 92
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-23
<PAGE> 93
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.
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
F-24
<PAGE> 94
MACGREGOR DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-25
<PAGE> 95
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-26
<PAGE> 96
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-27
<PAGE> 97
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-28
<PAGE> 98
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-29
<PAGE> 99
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-30
<PAGE> 100
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-31
<PAGE> 101
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-32
<PAGE> 102
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) (111,170)
--------- --------- --------- ---------
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-33
<PAGE> 103
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-34
<PAGE> 104
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-35
<PAGE> 105
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-36
<PAGE> 106
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-37
<PAGE> 107
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 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.
F-38
<PAGE> 108
MIDWEST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 AND 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-39
<PAGE> 109
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-40
<PAGE> 110
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-41
<PAGE> 111
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) 764,726 757,752 151,998
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-42
<PAGE> 112
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-43
<PAGE> 113
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-44
<PAGE> 114
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-45
<PAGE> 115
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-46
<PAGE> 116
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-47
<PAGE> 117
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-48
<PAGE> 118
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
The Company................................ 14
Use of Proceeds............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Pro Forma Consolidated Financial
Information........................... 18
Selected Consolidated Financial
Information........................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................... 38
Management................................. 50
Certain Transactions....................... 57
Principal Stockholders..................... 59
Description of Capital Stock............... 61
Shares Eligible for Future Sale............ 64
Underwriting............................... 66
Legal Matters.............................. 67
Experts.................................... 68
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
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
SALOMON BROTHERS INC
, 1997
============================================================
<PAGE> 119
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..................................... 300,000
Printing Expenses........................................... 125,000
Blue Sky Qualification Fees and Expenses.................... 3,000
Transfer Agent's Fee........................................ 10,000
Miscellaneous............................................... 155,958
--------
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.
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.
II-1
<PAGE> 120
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.
(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
II-2
<PAGE> 121
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 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 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 April 1997, pursuant to an Asset Purchase Agreement, the Company
issued an aggregate of 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.
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
II-3
<PAGE> 122
partner was Oral Health Concepts, Inc. and whose sole limited partner was the
Company, and (v) the Company transferred its limited partnership interest in
Monarch Dental Associates, L.P. to Partners Dental Corporation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <S>
1.1 -- Form of Underwriting Agreement
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 Equity Acquisition Option Plan
10.4 -- 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)
10.5 -- 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)
*10.6 -- 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)
10.7 -- 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)
10.8 -- 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)
10.9 -- 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.
10.10 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Warren F. Melamed, D.D.S.
</TABLE>
II-4
<PAGE> 123
<TABLE>
<C> <S>
*10.11 -- Management Agreement by and among Modern Dental
Professionals, P.C., Monarch Dental Associates, L.P. and
MacGregor Dental Associates, L.P.
*10.12 -- Management Agreement by and between Modern Dental
Professionals -- Girlinghouse, P.A. and Convenient Dental
Care, Inc.
*10.13 -- Management Agreement by and between Modern Dental
Professionals -- Beavers, P.A. and Arkansas Dental Health
Associates, Inc.
*10.14 -- Management Agreement by and between Modern Dental
Professionals -- Girlinghouse, P.A. and United Dental
Care, Inc.
*10.15 -- Management Agreement by and between William T. Harris and
Associates, a Professional Dental Corporation and United
Dental Care, Inc.
*10.16 -- Management Agreement by and between United Dental Care
Tom Harris, D.D.S. & Associates and United Dental Care,
Inc.
10.17 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Charles G. Shears, D.D.S.
10.18 -- Restricted Stock Agreement dated as of February 6, 1996
by and between the Registrant and Warren F. Melamed,
D.D.S.
10.19 -- 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)
10.20 -- Employment Agreement dated as of August 29, 1996 by and
among the Registrant, David L. Hehli, D.D.S. and Midwest
Dental Management, Inc.
10.21 -- 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.
+10.22 -- 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.
+10.23 -- Dental Service Agreement dated January 1, 1995 by and
between Compcare Health Services Insurance Corporation
and Advance Dental Management, Inc.
10.24 -- Form of Director Indemnification Agreement
10.25 -- Sublease Agreement dated as of March 7, 1996 by and
between Old American Country Mutual Fire Insurance
Company and Oral Health Concepts Inc.
10.26 -- Office Lease Agreement dated as of September 6, 1996 by
and between Government Employees Insurance Company and
Monarch Dental Associates, L.P.
11.1 -- Unaudited net income per common equivalent share
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Goodwin, Procter & Hoar LLP (included in
Exhibit 5.1 hereto)
23.2 -- Consent of Arthur Andersen LLP
24.1 -- Powers of Attorney (included on page II-6 or previously
filed)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment to this Registration Statement.
+ Previously filed.
II-5
<PAGE> 124
(b) The following is a list of financial statement schedules furnished:
Schedule II Valuation and qualifying accounts for the years ended
December 31, 1996, 1995 and 1994.
Schedules not listed above have been omitted because they are not
applicable or because required information is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a 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-6
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Dallas, Texas, on
May 20, 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. 1 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 and Director May 20, 1997
- -----------------------------------------------------
Warren F. Melamed
/s/ GARY W. CAGE Chief Executive Officer and Director May 20, 1997
- -----------------------------------------------------
Gary W. Cage
* Executive Vice President and Director May 20, 1997
- -----------------------------------------------------
Charles G. Shears
* Director May 20, 1997
- -----------------------------------------------------
Glenn E. Hemmerle
* Director May 20, 1997
- -----------------------------------------------------
Roger B. Kafker
*By /s/ GARY W. CAGE
-------------------------------------------------
Gary W. Cage
Attorney-in-fact
</TABLE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints each of Warren F. Melamed and Gary W.
Cage such person's true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ STEVEN G. PETERSON Chief Financial Officer (principal May 20, 1997
- ----------------------------------------------------- accounting officer)
Steven G. Peterson
</TABLE>
II-7
<PAGE> 126
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> 127
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> 128
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1 -- Form of Underwriting Agreement
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 Equity Acquisition Option Plan
10.4 -- 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)
10.5 -- 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)
*10.6 -- 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)
10.7 -- 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)
10.8 -- 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)
10.9 -- 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.
10.10 -- Non-Competition Agreement dated as of February 5, 1996 by
and between the Registrant and Warren F. Melamed, D.D.S.
*10.11 -- Management Agreement by and among Modern Dental
Professionals, P.C., Monarch Dental Associates, L.P. and
MacGregor Dental Associates, L.P.
</TABLE>
<PAGE> 129
<TABLE>
<C> <S>
*10.12 -- Management Agreement by and between Modern Dental Professionals -- Girlinghouse, P.A.
and Convenient Dental Care, Inc.
*10.13 -- Management Agreement by and between Modern Dental Professionals -- Beavers, P.A. and
Arkansas Dental Health Associates, Inc.
*10.14 -- Management Agreement by and between Modern Dental Professionals -- Girlinghouse, P.A.
and United Dental Care, Inc.
*10.15 -- Management Agreement by and between William T. Harris and Associates, a Professional
Dental Corporation and United Dental Care, Inc.
*10.16 -- Management Agreement by and between United Dental Care Tom Harris, D.D.S. &
Associates and United Dental Care, Inc.
10.17 -- Non-Competition Agreement dated as of February 5, 1996 by and between the Registrant
and Charles G. Shears, D.D.S.
10.18 -- Restricted Stock Agreement dated as of February 6, 1996 by and between the Registrant
and Warren F. Melamed, D.D.S.
10.19 -- 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)
10.20 -- Employment Agreement dated as of August 29, 1996 by and among the Registrant, David
L. Hehli, D.D.S. and Midwest Dental Management, Inc.
10.21 -- 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.
+10.22 -- 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.
+10.23 -- Dental Service Agreement dated January 1, 1995 by and between Compcare Health
Services Insurance Corporation and Advance Dental Management, Inc.
10.24 -- Form of Director Indemnification Agreement
10.25 -- Sublease Agreement dated as of March 7, 1996 by and between Old American Country
Mutual Fire Insurance Company and Oral Health Concepts Inc.
10.26 -- Office Lease Agreement dated as of September 6, 1996 by and between Government
Employees Insurance Company and Monarch Dental Associates, L.P.
11.1 -- Unaudited net income per common equivalent share
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto)
23.2 -- Consent of Arthur Andersen LLP
24.1 -- Powers of Attorney (included on page II-6 or previously filed)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment to this Registration Statement.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
MONARCH DENTAL CORPORATION
2,750,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
____, 1997
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
SALOMON BROTHERS INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Monarch Dental Corporation, a Delaware corporation (herein called the
Company), proposes to issue and sell 2,750,000 shares of its authorized but
unissued Common Stock, $.01 par value (herein called the Common Stock), (said
2,750,000 shares of Common Stock being herein called the Underwritten Stock).
The Company also proposes to grant to the Underwriters (as hereinafter defined)
an option to purchase up to 412,500 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission (herein called the Commission) a
registration statement on Form S-1 (No. 333-24409), including the related
preliminary prospectus, for the registration under the Securities Act of 1933,
as amended (herein called the Securities Act), of the Stock. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission, herein, the Rules and Regulations)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock
- ---------------
(1) Plus an option to purchase from the Company up to 412,500 additional
shares to cover over-allotments.
<PAGE> 2
(herein called a Rule 462(b) registration statement), and, in the event of any
amendment thereto after the effective date of such registration statement
(herein called the Effective Date), shall also mean (from and after the
effectiveness of such amendment) such registration statement as so amended
(including any Rule 462(b) registration statement). The term Prospectus as
used in this Agreement shall mean the prospectus relating to the Stock first
filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such
filing is required, as included in the Registration Statement) and, in the
event of any supplement or amendment to such prospectus after the Effective
Date, shall also mean (from and after the filing with the Commission of such
supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such registration
statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) of the Rules and Regulations pursuant to
subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to the registration statement (including a final
form of prospectus). The Company has caused to be delivered to you copies of
each Preliminary Prospectus and has consented to the use of such copies for the
purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated or has been duly formed as a limited partnership, and is
validly existing as a corporation or limited partnership in good
standing under the laws of the jurisdiction of its incorporation or
formation, as the case may be, has full corporate or partnership power
and corporate or partnership authority to own or lease its properties
and conduct its business as described in the Registration Statement and
the Prospectus and as being conducted, and is duly qualified as a
foreign corporation or partnership and in good standing in all
jurisdictions in which the character of the property owned or leased or
the nature of the business transacted by it makes qualification
necessary (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole).
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the
ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any material transaction not referred to
in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the
rules and regulations of the Commission thereunder; on the Effective
Date, the Registration Statement did not contain any untrue statement of
a material fact and did not omit to state any material fact required to
be stated therein or necessary in order to make the statements therein
not misleading; and on the Effective Date the Prospectus did not and, on
the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the
2
<PAGE> 3
Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf
of the Underwriters for use in the Registration Statement or the
Prospectus.
(iv) The Company has all requisite corporate power and corporate
authority to enter into this Agreement and perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed
and delivered by the Company and is a valid and binding agreement on the
part of the Company, enforceable in accordance with its terms, except as
such enforceability may be limited by (A) applicable bankruptcy,
insolvency, moratorium, reorganization, fraudulent conveyance or similar
laws in effect which affect the enforcement of creditors' rights
generally and (B) general principles of equity, whether considered in a
proceeding at law or in equity; the performance of this Agreement and
the consummation of the transactions herein contemplated will not result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any material bond, debenture, note or
other evidence of indebtedness, or under any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other material agreement or instrument to which the Company is a party
or by which it or any of its properties may be bound, (ii) the charter
or bylaws of the Company, or (iii) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction
over the Company or its properties. No consent, approval, authorization
or order of or qualification with any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the
Company or its properties is required for the execution and delivery of
this Agreement and the consummation by the Company of the transactions
herein contemplated, except as may be required under the Securities Act
or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
(v) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the
Company or any of its officers or any of the Company's properties,
assets or rights before any court, government or governmental agency or
body, domestic or foreign, having jurisdiction over the Company or over
its officers or properties or otherwise which (i) if adversely decided,
would (x) result in a material adverse change in the operations,
business, financial condition, results of operations or business
prospects of the Company and its subsidiaries, taken as a whole, or (y)
would materially and adversely affect its properties, assets or rights,
(ii) if adversely decided, would prevent consummation of the
transactions contemplated hereby, or (iii) is required to be disclosed
in the Registration Statement or Prospectus and is not so disclosed; and
there are no agreements, contracts, leases or documents of the Company
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by
the Securities Act or the Rules and Regulations which have not been
accurately described in all material respects or referred to in the
Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(vi) The Stock is duly and validly authorized, and when issued
and sold to the Underwriters as provided herein, will be validly issued,
fully paid and nonassessable and conforms, in all material respects, to
the description thereof in the Prospectus. No further approval or
authority of the stockholders or the Board of Directors of the Company
will be required for the issuance and sale of the Stock as contemplated
herein.
(vii) Arthur Andersen LLP, which has examined the financial
statements of the Company, together with the related schedules and
notes, as of December 31, 1996, December 31, 1995 and December 31, 1994
filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent accountants within the
meaning of the Securities Act and the Rules and Regulations; the audited
financial statements of the Company, together with the related schedules
and notes, and the unaudited financial information, forming part of the
Registration Statement and Prospectus, fairly present in all material
respects the financial position and the results of operations
3
<PAGE> 4
of the Company at the dates and for the periods to which they apply; and
all audited financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration
Statement present fairly in all material respects the information shown
therein and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements
or schedules are required to be included in the Registration Statement.
(viii) Except as set forth in the Registration Statement and
Prospectus, (A) the Company has valid title to all properties and assets
described in the Prospectus as owned by it, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as
one enterprise, (B) the agreements to which the Company is a party
described in the Prospectus are valid agreements, enforceable against
the Company (as applicable) and, to the Company's knowledge, by the
Company against the other parties thereto, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles
and, to their knowledge, the other contracting party or parties thereto
are not in material breach or material default under any of such
agreements, and (C) the Company has valid and enforceable leases for all
properties described in the Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and
Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be
conducted, except where the failure to own or lease such properties
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(ix) The Company has timely filed all necessary federal, state
and foreign income and franchise tax returns and have paid all taxes
shown thereon as due, and there is no tax deficiency that has been or,
to the best of the Company's knowledge, is reasonably likely to be
asserted against the Company that would have a material adverse effect
on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries
considered as one enterprise; and all tax liabilities are adequately
provided for on the books of the Company.
(x) The Company and its subsidiaries maintain insurance with
recognized insurers of the types and in the amounts generally adequate
for their respective businesses and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but
not limited to, insurance covering real and personal property owned or
leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; the Company has not been refused
any insurance coverage sought or applied for; and the Company has any no
reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect
the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as
one enterprise.
(xi) Neither the Company nor any of its subsidiaries is
currently involved in any material labor dispute, nor, to the knowledge
of the Company, is any material labor dispute threatened which, if such
dispute were to occur, would be reasonably likely to result in a
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company
4
<PAGE> 5
and its subsidiaries considered as one enterprise. No collective
bargaining agreement exists with any of the Company's employees and, to
the best of the Company's knowledge, no such agreement is imminent.
(xii) The Company owns or possesses adequate rights to use all
patents, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names and copyrights which are necessary to conduct
its businesses as described in the Prospectus except where to failure to
own or possess such rights would not have a material adverse affect on
the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as
one enterprise; the expiration of any patents, patent rights, trade
secrets, trademarks, service marks, trade names or copyrights would not
have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; and the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect
to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.
(xiii) Neither the Company nor any of its subsidiaries is an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.
(xiv) The Company has not distributed and will not distribute
prior to the later of (A) the Closing Date and (B) completion of the
distribution of the Stock any offering material in connection with the
offering and sale of the Stock other than any Preliminary Prospectuses,
the Prospectus, the Registration Statement and other materials, if any,
permitted by the Securities Act.
(xv) The Company has not, at any time during the last five (5)
years, (A) made any unlawful contribution to any candidate for foreign
office or failed to disclose fully any contribution in violation of law,
or (B) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the
United States or any jurisdiction thereof.
(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected
to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Stock.
(xvii) Each officer, director and beneficial owner of shares of
Common Stock has agreed in writing that such person will not, for a
period of one hundred eighty (180) days after the effective date of the
Registration Statement, offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any
shares of Common Stock, any options or warrants to purchase any shares
of Common Stock or any securities convertible into or exchangeable for
shares of Common Stock now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires
the power of disposition, otherwise than (A) as a bona fide gift or
gifts, including without limitation transfers to beneficiaries or trusts
for estate planning purposes, provided the donee or donees thereof agree
in writing to be bound by this restriction, (B) as a distribution to
limited partners or stockholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (C) with the prior written consent of Hambrecht & Quist
LLC on behalf of the Underwriters. Furthermore, such person will also
agree and consent to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the securities held by
such person except in compliance with this restriction. The Company has
provided to counsel for the Underwriters a complete and accurate list of
all security holders of the Company and the number
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and type of securities held by each security holder. The Company has
delivered to counsel for the Underwriters true, accurate and complete
copies of all of the agreements pursuant to which its officers,
directors and stockholders have agreed not to offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock (herein called the Lock-Up
Agreements) presently in effect.
(xviii) Except as set forth in the Registration Statement and
Prospectus, (A) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment (herein
called Environmental Laws) which are applicable to its business, except
to the extent that any failure to so comply would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (B) the Company has received
no notice from any governmental authority or third party of an asserted
claim under Environmental Laws, which claim is required to be disclosed
in the Registration Statement, and (C) no property which is owned,
leased or occupied by the Company has been designated as a Superfund
site pursuant to the Comprehensive Response, Compensation, and Liability
Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or local law.
(xix) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorizations, (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets, (C) access to assets is permitted only in accordance with
management's general or specific authorization, and (D) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
(xx) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any
of the officers or directors of the Company or any of the members of the
families of any of them, which are required to be disclosed in the
Registration Statement or Prospectus and are not so disclosed.
(xxi) Prior to the Closing Date, the Stock to be issued and sold
by the Company will be authorized for listing on The Nasdaq Stock
Market, Inc. (herein called Nasdaq) National Market upon official notice
of issuance.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue
and sell 2,750,000 shares of the Underwritten Stock to the several
Underwriters, and each of the Underwriters agrees to purchase from the
Company the respective aggregate number of shares of Underwritten Stock
set forth opposite its name in Schedule I. The price at which such
shares of Underwritten Stock shall be sold by the Company and purchased
by the several Underwriters shall be $____ per share. In making this
Agreement, each Underwriter is contracting severally and not jointly;
except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number
of shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 8 or 9
hereof) to purchase and pay for the number of shares of the Stock agreed
to be purchased by such
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Underwriter or Underwriters, the Company shall immediately give notice
thereof to you, and the non-defaulting Underwriters shall have the right
within 24 hours after the receipt by you of such notice to purchase, or
procure one or more other Underwriters to purchase, in such proportions
as may be agreed upon between you and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters
agreed to purchase. If the non-defaulting Underwriters fail so to make
such arrangements with respect to all such shares and portion, the
number of shares of the Stock which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining
shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion
which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the
total number of shares of the Stock which all Underwriters agreed to
purchase hereunder. If the total number of shares of the Stock which
the defaulting Underwriter or Underwriters agreed to purchase shall not
be purchased or absorbed in accordance with the two preceding sentences,
the Company shall have the right, within 24 hours next succeeding the
24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such
shares and portion on the terms herein set forth. In any such case,
either you or the Company shall have the right to postpone the Closing
Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date
pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters
nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this
Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set
forth, the Company grants an option to the several Underwriters to
purchase, severally and not jointly, up to 412,500 shares in the
aggregate of the Option Stock from the Company at the same price per
share as the Underwriters shall pay for the Underwritten Stock. Said
option may be exercised only to cover over-allotments in the sale of the
Underwritten Stock by the Underwriters and may be exercised in whole or
in part at any time (but not more than once) on or before the thirtieth
day after the date of this Agreement upon written or telegraphic notice
by you to the Company setting forth the aggregate number of shares of
the Option Stock as to which the several Underwriters are exercising the
option. Delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made as provided in Section 5 hereof. The
number of shares of the Option Stock to be purchased by each Underwriter
shall be the same percentage of the total number of shares of the Option
Stock to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Stock, as adjusted by you in such manner
as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public
offering price after the closing of the initial public offering and
increase or decrease the concessions and discounts to dealers as they
may determine.
(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating
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<PAGE> 8
to the Stock filed by the Company (insofar as such information relates
to the Underwriters) constitutes the only information furnished by the
Underwriters to the Company for inclusion in the Registration Statement,
any Preliminary Prospectus, and the Prospectus, and you on behalf of the
respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later than 7:00 A.M., San Francisco time, on the
date two business days preceding the Closing Date), and payment
therefor, shall be made at the office of [Brobeck, Phleger & Harrison
LLP, 301 Congress Avenue, Suite 1200, Austin, Texas 78701], at 7:00
a.m., San Francisco time, on the fourth business day after the date of
this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed
upon in writing by the Company and you. The date and hour of such
delivery and payment (which may be postponed as provided in Section 3(b)
hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of
Option Stock, and payment therefor, shall be made at the office of
[Brobeck, Phleger & Harrison LLP, 301 Congress Avenue, Suite 1200,
Austin, Texas 78701], at 7:00 a.m., San Francisco time, on the third
business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by certified or official bank check, or by wire
transfer, in same day funds. Such payment shall be made upon delivery
of certificates for the Stock to you for the respective accounts of the
several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in
such name or names and shall be in such denominations as you may request
at least one business day before the Closing Date, in the case of
Underwritten Stock, and at least one business day prior to the purchase
thereof, in the case of the Option Stock. Such certificates will be
made available to the Underwriters for inspection, checking and
packaging at the offices of __________________, New York, New York _____
on the business day prior to the Closing Date or, in the case of the
Option Stock, by 3:00 p.m., New York time, on the business day preceding
the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the
Company for shares to be purchased by any Underwriter whose check shall
not have been received by you on the Closing Date or any later date on
which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of
its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted
at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not
previously have been advised and furnished with a copy or to which you
shall have reasonably objected in writing or which is not in compliance
with the Securities Act or the Rules and Regulations.
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<PAGE> 9
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission to the Company of any
stop order suspending the effectiveness of the Registration Statement,
(iii) the receipt by the Company of notice or other information
concerning the institution or intended institution of any action or
proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by the Company of
notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible
moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and
of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a
signed copy of each post-effective amendment, if any, to the
Registration Statement (together with, in each case, all exhibits
thereto unless previously furnished to you) and will also deliver to
you, for distribution to the Underwriters, a sufficient number of
additional conformed copies of each of the foregoing (but without
exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the
several Underwriters, at such office or offices as you may designate, as
many copies of the Prospectus as you may reasonably request, and (iii)
thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, likewise
send to the Underwriters as many additional copies of the Prospectus and
as many copies of any supplement to the Prospectus and of any amended
prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is
necessary to supplement or amend the Prospectus in order to make the
Prospectus not misleading in the light of the circumstances existing at
the time it is delivered to a purchaser of the Stock, the Company will
forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus so that the Prospectus as so
supplemented or amended will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances existing
at the time such Prospectus is delivered to such purchaser, not
misleading. If, after the initial public offering of the Stock by the
Underwriters and during such period, the Underwriters shall propose to
vary the terms of offering thereof by reason of changes in general
market conditions or otherwise, you will advise the Company in writing
of the proposed variation, and if such proposed variation requires that
the Prospectus be supplemented or amended, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the Stock may
be sold by the several Underwriters to use the Prospectus, as from time
to time amended or supplemented, in connection with the sale of the
Stock in accordance with the applicable provisions of the Securities Act
and the applicable rules and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the
Prospectus or any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or
blue sky laws of such jurisdictions as you may designate and, during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing
under said securities or blue sky laws; provided, however, that the
Company shall not be obligated to file any general consent to service of
process or
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to qualify as a foreign corporation in any jurisdiction in which it is
not so qualified. The Company will, from time to time, prepare and file
such statements, reports, and other documents as are or may be required
to continue such qualifications in effect for so long a period as you
may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so
request in writing, copies of all periodic and special reports furnished
to stockholders of the Company and of all information, documents and
reports filed with the Commission (including the Report on Form SR
required by Rule 463 of the Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security holders
an earnings statement in accordance with Section 11(a) of the Securities
Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs
and expenses incident to (i) the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus,
(ii) the filing fee of the National Association of Securities Dealers,
Inc. (herein called the NASD) in connection with the NASD's review of
the underwriting arrangements of the offering, (iii) the furnishing to
the Underwriters of copies of any Preliminary Prospectus and of the
several documents required by paragraph (c) of this Section 6 to be so
furnished, (iv) the printing of this Agreement and related documents
delivered to the Underwriters, (v) the preparation, printing and filing
of all supplements and amendments to the Prospectus referred to in
paragraph (d) of this Section 6, (vi) the furnishing to you and the
Underwriters of the reports and information referred to in paragraph (g)
of this Section 6 and (vii) the printing and issuance of stock
certificates, including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements
(including counsel fees and disbursements and cost of printing memoranda
for the Underwriters) paid by or for the account of the Underwriters or
their counsel in qualifying the Stock under state securities or blue sky
laws.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses
and costs which the Company hereby agrees to pay and shall not affect
any agreement which the Company may make, or may have made, for the
sharing of any such expenses and costs. Except as provided in
paragraphs (i) and (j) of this Section, the Underwriters shall pay all
of their own expenses, including the fees and disbursements of their
counsel, in connection with the offering of the Stock.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will
not, for a period of 180 days following the commencement of the public
offering of the Stock by the Underwriters, directly or indirectly, (i)
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 (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or
such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant
to this Agreement, (B) shares of Common Stock issued by the Company upon
the exercise of options granted under the stock option plans of the
Company (herein called the Option Plans), all as described in footnote 4
to the table under
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the caption "Capitalization" in the Preliminary Prospectus, and (C)
options to purchase Common Stock granted under the Option Plans.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to
or affecting the Company shall occur as a result of which in your
opinion the market price for the Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Prospectus), the
Company will, after written notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning
the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting
on such rumor, publication or event.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof)
who controls any Underwriter within the meaning of Section 15 of the
Securities Act from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any
of them may become subject under the Securities Act, the Securities
Exchange Act of 1934, as amended (herein called the Exchange Act), or
the common law or otherwise, and the Company agrees to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims,
damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the
respective indemnified parties, in each case arising out of or based
upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any post-
effective amendment thereto (including any Rule 462(b) registration
statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreement of the
Company contained in this paragraph (a) shall not apply to any such
losses, claims, damages, liabilities or expenses if such statement or
omission was made in reliance upon and in conformity with information
furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary
Prospectus or the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto, and (2) the indemnity agreement
contained in this paragraph (a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the
benefit of any person controlling such Underwriter) if at or prior to
the written confirmation of the sale of such Stock a copy of the
Prospectus (or the Prospectus as amended or supplemented) was not sent
or delivered to such person and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in
the Prospectus (or the Prospectus as amended or supplemented) unless the
failure is the result of noncompliance by the Company with paragraph (c)
of Section 6 hereof. The indemnity agreement of the Company contained
in this paragraph (a) and the representations and warranties of the
Company contained in Section 2 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for
the Stock.
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(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its
directors, each other Underwriter and each person (including each
partner or officer thereof) who controls the Company or any such other
Underwriter within the meaning of Section 15 of the Securities Act, from
and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become
subject under the Securities Act, the Exchange Act, or the common law or
otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims,
damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the
respective indemnified parties, in each case arising out of or based
upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any post-
effective amendment thereto (including any Rule 462(b) registration
statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) any untrue statement or
alleged untrue statement of a material fact contained in the Prospectus
(as amended or as supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) or the omission
or alleged omission to state therein a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was
made in reliance upon and in conformity with information furnished as
herein stated or otherwise furnished in writing to the Company by or on
behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto. The indemnity agreement of each Underwriter contained in this
paragraph (b) shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provisions of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the
commencement of any investigation or inquiry of, or proceeding against,
it in respect of which indemnity may be sought on account of any
indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or
notification to the party or parties from whom indemnification may be
sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if
the party to whom such Notice was not given was unaware of the action,
suit, investigation, inquiry or proceeding to which the Notice would
have related and was prejudiced by the failure to give the Notice, but
the omission so to notify such indemnifying party or parties of any such
service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of such indemnity
agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after
receipt of the Notice by giving written notice (herein called the Notice
of Defense) to the indemnified party, to assume (alone or in conjunction
with any other indemnifying party or parties) the entire defense of such
action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided,
however, that (i) if the indemnified party or parties reasonably
determine that there may be a conflict between the positions of the
indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses available to such
indemnified party or parties different from or in addition to those
available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to
the extent reasonably determined by such counsel to be necessary
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to protect the interests of the indemnified party or parties and (ii) in
any event, the indemnified party or parties shall be entitled to have
counsel chosen by such indemnified party or parties participate in, but
not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the
counsel chosen by the indemnifying party or parties is reasonably
satisfactory to the indemnified party or parties, the indemnifying party
or parties will not be liable under paragraphs (a) through (c) of this
Section 7 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding, except that (A) the
indemnifying party or parties shall bear the reasonable legal and other
expenses incurred in connection with the conduct of the defense as
referred to in clause (i) of the proviso to the preceding sentence
(provided that the expenses of not more than one such counsel shall be
so borne) and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt
of the Notice, no Notice of Defense has been given, the indemnifying
party or parties shall be responsible for any reasonable legal or other
expenses incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in paragraph (a) or
(b) of this Section 7 (i) in such proportion as is appropriate to
reflect the relative benefits received by each indemnifying party from
the offering of the Stock or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of each indemnifying party
in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof,
as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Stock received by the
Company and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Stock.
Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to in the first
sentence of this paragraph (d). The amount paid by an indemnified party
as a result of the losses, claims, damages or liabilities, or actions in
respect thereof, referred to in the first sentence of this paragraph (d)
shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is
the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any
amount in excess of the underwriting discount applicable to the Stock
purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
13
<PAGE> 14
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties
from whom contribution may be sought, but the omission so to notify such
party or parties of any such service shall not relieve the party from
whom contribution may be sought from any obligation it may have
hereunder or otherwise (except as specifically provided in paragraph (c)
of this Section 7).
(e) The Company agrees that it will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls
such Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or
proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended by
the Commission or Nasdaq, or if there shall have occurred (i) the engagement in
hostilities or an escalation of major hostilities by the United States or the
declaration of war or a national emergency by the United States on or after the
date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in
the Underwriters' reasonable judgment, make the offering or delivery of the
Stock impracticable, (iii) suspension of trading in securities generally or a
material adverse decline in value of securities generally on the New York Stock
Exchange, the American Stock Exchange or Nasdaq, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the
securities markets in the United States. If this Agreement shall be terminated
pursuant to this Section 8, there shall be no liability of the Company to the
Underwriters and no liability of the Underwriters to the Company; provided,
however, that, in the event of any such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued
and no proceedings therefor shall be pending or threatened by the
Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the
foregoing, and the form of the Registration Statement and of the
Prospectus (except as to the financial
14
<PAGE> 15
statements contained therein), shall have been approved at or prior to
the Closing Date by Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters.
(c) (i) You shall have received from Goodwin, Procter & Hoar LLP,
counsel for the Company, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex A and if Option
Stock is purchased at any date after the Closing Date, additional
opinions from such counsel, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing
Date in such opinions remain valid as of such later date; (ii) you shall
have received from Haynes & Boone LLP, regulatory counsel for the
Company, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth on Annex B.
(d) (i) As of the Effective Date, the statements made in the
Registration Statement and the Prospectus shall have been true and
correct and neither the Registration Statement nor the Prospectus shall
have omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not
misleading, (ii) since the Effective Date, no event shall have occurred
which should have been set forth in a supplement or amendment to the
Prospectus which has not been set forth in such a supplement or
amendment, (iii) since the respective dates as of which information is
given in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, there shall not
have been any material adverse change or any development involving a
prospective material adverse change in or affecting the business,
properties, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, and, since such dates,
except in the ordinary course of business, neither the Company nor any
of its subsidiaries shall have entered into any material transaction not
referred to in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries shall have any material
contingent obligations which are not disclosed in the Registration
Statement and the Prospectus, (v) there are not any pending or known
threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of
its subsidiaries is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus, (vi) there
are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which
have not been filed as required, (vii) the representations and
warranties of the Company herein shall be true and correct in all
material respects as of the Closing Date or any later date on which
Option Stock is to be purchased, as the case may be, and (viii) there
shall not have been any material change in the market for securities in
general or in political, financial or economic conditions from those
reasonably foreseeable as to render it impracticable in your reasonable
judgment to make a public offering of the Stock, or a material adverse
change in market levels for securities in general (or those of companies
in particular) or financial or economic conditions which render it
inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date
or such later date, as the case may be, and signed by the President and
the Chief Financial Officer of the Company, stating that the respective
signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein and any supplements or amendments thereto,
and that the statements included in clauses (i) through (vii) of
paragraph (d) of this Section 9 are true and correct.
(f) You shall have received from Arthur Andersen LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and
any later date on which Option Stock is purchased, confirming that they
are independent public accountants with respect to the Company within
the meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this
Agreement (herein called the Original Letter), but carried out to a date
not more than three business
15
<PAGE> 16
days prior to the Closing Date or such later date on which Option Stock
is purchased (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the
Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes
in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or
affecting the business or properties of the Company or any of its
subsidiaries which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Stock or the
purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the
qualification referred to in paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq
National Market, subject to official notice of issuance.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement, to the extent forms of such documents are not
attached hereto, shall be deemed to be in compliance with the provisions hereof
only if Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, shall be
satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that (i) in the event of such termination, the Company
agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein, to fulfill any of the conditions herein, or to
comply with any provision hereof other than by reason of a default by any of
the Underwriters, the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of
the Company to deliver the Stock shall be subject to the conditions that (a)
the Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 7 of this Agreement, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 11 and
16
<PAGE> 17
the possibility that such payments might later be held to be improper;
provided, however, that (i) to the extent any such payment is ultimately held
to be improper, the persons receiving such payments shall promptly refund them,
together with interest at the Prime Rate as published in The Wall Street
Journal on the business day (or if not so published, then on the next business
day when published) when such reimbursement payment was made and (ii) such
persons shall provide to the Company, upon request, reasonable assurances and
evidence of their ability to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions
of said Section 7, and their respective personal representatives, successors
and assigns. Nothing in this Agreement is intended or shall be construed to
give to any other person, firm or corporation any legal or equitable remedy or
claim under or in respect of this Agreement or any provision herein contained.
The term "successors and assigns" as herein used shall not include any
purchaser, as such purchaser, of any of the Stock from any of the several
Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed, telecopied or delivered to Hambrecht & Quist LLC,
One Bush Street, San Francisco, California 94104, with a copy to S. Michael
Dunn, P.C., Brobeck, Phleger & Harrison LLP, 301 Congress Avenue, Suite 1200,
Austin, Texas 78701; and if to the Company, shall be mailed, telegraphed,
telecopied or delivered to it at its office, Monarch Dental Corporation, 4201
Spring Valley Road, Suite 320, Dallas, Texas 75244, Attention: Gary W. Cage,
with a copy to John R. LeClaire, P.C., Goodwin, Procter & Hoar LLP, Exchange
Place, Boston, Massachusetts 02109-2881. All notices given by telegraph or
telecopy shall be promptly confirmed by letter delivered via U.S. Mail.
14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company, or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraph (l) of Section 6 hereof shall be of no
further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
17
<PAGE> 18
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
MONARCH DENTAL CORPORATION
By:
---------------------------
Gary W. Cage
Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
MONTGOMERY SECURITIES
SALOMON BROTHERS INC.
By Hambrecht & Quist LLC
By
------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
18
<PAGE> 19
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
TO BE
UNDERWRITERS PURCHASED
- ------------ ---------
<S> <C>
Hambrecht & Quist LLC . . . . . . . . . . . . . . . . . . . . . .
Montgomery Securities . . . . . . . . . . . . . . . . . . . . . .
Salomon Brothers, Inc . . . . . . . . . . . . . . . . . . . . . .
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
==========
</TABLE>
<PAGE> 20
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
GOODWIN, PROCTER & HOAR LLP
COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries that are
corporations has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good
standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification (except
where the failure to be so qualified would not have a material adverse
effect on the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole), and
has full corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement;
each of the Company's subsidiaries that is a limited partnership has
been duly formed and is validly existing and in good standing as a
limited partnership under the laws of the jurisdiction of its formation,
is duly qualified to do business in and is in good standing in each
state of the United States of America in which its ownership or leasing
of property requires such qualification (except where the failure to be
so qualified would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole), and has full partnership power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding
capital stock of each of the corporate subsidiaries of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable, and is owned of record by the Company free and clear of
all liens, encumbrances and security interests known to such counsel;
all the outstanding partnership interests in each of the subsidiaries of
the Company that is a limited partnership is owned of record by the
Company or one or more subsidiaries of the Company, free and clear of
all liens, encumbrances and security interests known to such counsel;
and to the best of such counsel's knowledge, there are no options,
warrants or other rights to purchase, agreements or other obligations to
issue or other rights to convert any obligations into shares of capital
stock, partnership interests or other ownership interests in any of such
subsidiaries that are outstanding;
(ii) the authorized capital stock of the Company consists of
____ _______ shares of Preferred Stock, $0.01 par value, of which no
shares are outstanding, and ____________ shares of Common Stock, $.01
par value, of which there are outstanding _____________ shares
(including the Underwritten Stock plus the number of shares of Option
Stock issued on the date hereof); all required corporate proceedings
have been taken validly to authorize such authorized capital stock; all
of the outstanding shares of such capital stock (including the
Underwritten Stock and the shares of Option Stock issued, if any) have
been duly and validly issued and when paid for by the Underwriters
pursuant to the Underwriting Agreement will be fully paid and
nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in
the Underwriting Agreement, will have been duly and validly issued and
be fully paid and nonassessable; and no preemptive rights of, or rights
of refusal in favor of, stockholders exist with respect to the Stock, or
the issue and sale thereof, pursuant to the Certificate of Incorporation
or Bylaws of the Company and, to the knowledge of such counsel, there
are no contractual preemptive rights that have not been waived, rights
of first refusal or rights of co-sale which exist with respect to the
issue and sale of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or suspending
or preventing the use of the Prospectus is in effect and, to the
knowledge of such counsel, no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
A-1
<PAGE> 21
(iv) the Registration Statement and the Prospectus (except as to
the financial statements and schedules and other financial data
contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Securities Act and with the rules and regulations of the Commission
thereunder;
(v) the statements under the captions "Management-Employee Stock
and Other Benefit Plans," Description of Capital Stock," "Business-Legal
Proceedings" and "Legal Matters" (as such section relates to such
counsel) in the Registration Statement and the Prospectus fairly present
in all material respects the information required to be included in the
Registration Statement or the Prospectus under Items 9, 10 and 11(c) of
Form S-1 the Securities Act and the rules and regulations of the
Commission thereunder;
(vi) such counsel do not know of any franchises, contracts,
leases, documents or legal proceedings, pending or threatened, which in
the opinion of such counsel are of a character required to be described
in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not described and
filed as required;
(vii) the Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the issue and sale by the Company of the shares of Stock
sold by the Company as contemplated by the Underwriting Agreement will
not conflict with, or result in a breach of, the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries or any
agreement or instrument known to such counsel to which the Company or
any of its subsidiaries is a party or any applicable federal,
Massachusetts or Texas law or regulation, or any order, writ, injunction
or decree known to such counsel of any federal, Massachusetts or Texas
court or governmental instrumentality;
(ix) all holders of securities of the Company who, to such
counsel's knowledge, have rights to cause the Company to register shares
of Common Stock or other securities because of the filing of the
Registration Statement by the Company have waived such rights or such
rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement; and
(x) no consent, approval, authorization or order of any federal,
Massachusetts or Texas court or governmental agency or body is required
for the consummation of the transactions contemplated in the
Underwriting Agreement, except such as have been obtained under the
Securities Act and such as may be required under state securities or
blue sky laws or the NASD in connection with the purchase and
distribution of the Stock by the Underwriters.
In addition, such counsel shall state that they have participated
in conferences with directors, officers and other representatives of the
Company, representatives of the independent public accountants for the
Company, representatives of the Underwriters and representatives of
counsel for the Underwriters, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were
discussed and, although such counsel has not independently verified and
are not passing upon and assume no responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement and the Prospectuses (other than with respect to the opinions
set forth in paragraphs (iv) and (v) above), no facts have come to such
counsel's attention which lead such counsel to believe that the
Registration Statement, on the Effective Date thereof, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
contained therein not misleading, or that the Prospectus, on the date
thereof or as of the date of such opinion, contained or contains an
untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the
statements contained therein, in the light of the circumstances under
which they were made, not
A-2
<PAGE> 22
misleading (it being understood that such counsel need express no view
with respect to the financial statements and related notes, the
financial statement schedules and other financial, statistical and
accounting data included in the Registration Statement or the
Prospectus).
------------------------------
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the General Corporation Law
of The State of Delaware, upon opinions of local counsel satisfactory in form
and scope to counsel for the Underwriters. Copies of any opinions so relied
upon shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel knows of
no reason the Underwriters are not entitled to rely upon the opinions of such
local counsel.
A-3
<PAGE> 23
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF
HAYNES & BOONE LLP
REGULATORY COUNSEL FOR THE COMPANY
[Requested form to be prepared by Brobeck, Phleger & Harrison LLP]
B-1
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MONARCH DENTAL CORPORATION
An original Certificate of Incorporation of the Corporation was filed
with the Secretary of State on December 28, 1994. This Amended and Restated
Certificate of Incorporation has been duly adopted by the Corporation in
accordance with Sections 242 and 245 of the General Corporation Law of the
State of Delaware.
ARTICLE I
The name of the Corporation is Monarch Dental Corporation.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV
The total number of shares of capital stock which the Corporation shall
have authority to issue is 75,540,000, of which (a) 8,640,000 shares shall be
preferred stock, par value $.01 per share ("Preferred Stock"), and (b)
66,900,000 shares shall be common stock, par value $.01 per share.
As of the date and time this Amended and Restated Certificate of
Incorporation shall become effective under the laws of the State of Delaware
(the "Effective Time"), each share of Common Stock, par value $.01 per share
(the "Old Common Stock"), issued and outstanding immediately prior to the
Effective Time shall be automatically converted (without any further act) into
24,382.803 fully paid and nonassessable shares of Common Stock (as defined in
<PAGE> 2
Section C.1). Until presented and surrendered for cancellation, each
certificate for shares of the Old Common Stock outstanding as of the Effective
Time shall be deemed to represent the number of shares of Common Stock
determined in accordance with this paragraph, and upon presentation and
surrender each holder of a certificate or certificates for such Old Common
Stock shall be entitled to receive a certificate for such number of shares of
Common Stock.
Except as otherwise restricted by this Amended and Restated Certificate
of Incorporation, the Corporation is authorized to issue, from time to time,
all or any portion of the capital stock of the Corporation which may have been
authorized but not issued, to such person or persons and for such lawful
consideration as it may deem appropriate, and generally in its absolute
discretion to determine the terms and manner of any disposition of such
authorized but unissued capital stock.
Any and all such shares issued for which the full consideration has been
paid or delivered shall be deemed fully paid shares of capital stock, and the
holder of such shares shall not be liable for any further call or assessment or
any other payment thereon.
The voting powers, designations, preferences, privileges and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions of each class of capital stock of the Corporation,
shall be as provided in this Article IV.
A. CONVERTIBLE PARTICIPATING PREFERRED STOCK
1. Designation. A total of 4,800,000 shares of the Corporation's
Preferred Stock shall be designated as Convertible Participating Preferred
Stock, $.01 par value per share (the "Convertible Preferred Stock").
2. Election of Directors; Voting.
(a) Election of Directors. The holders of outstanding shares
of Convertible Preferred Stock shall, voting together as a separate
class, be entitled to elect two (2) Directors. Such Directors shall be
the candidates receiving the highest number of affirmative votes (with
each holder of Convertible Preferred Stock entitled to cast one vote for
or against each candidate with respect to each share of Convertible
Preferred Stock held by such holder) of the outstanding shares of
Convertible Preferred Stock (the "Convertible Preferred Stock Director
Designees"), with votes cast against such candidates and votes withheld
having no legal effect. The election of the Convertible Preferred Stock
Director Designees by the holders of the Convertible Preferred Stock
shall occur (i) at the annual meeting of holders of capital stock, (ii)
at any special meeting of holders of capital stock, (iii) at any special
meeting of holders of Convertible Preferred Stock called by holders of a
majority of the outstanding shares of Convertible Preferred Stock or
(iv) by the unanimous written consent of holders of the outstanding
shares of Convertible Preferred Stock. If at any time when any share of
Convertible Preferred Stock is outstanding a Convertible Preferred Stock
Director Designee should cease to be a Director for any reason, the
vacancy shall only be filled
2
<PAGE> 3
by the vote or written consent of the holders of the outstanding shares
of Convertible Preferred Stock, voting together as a separate class, in
the manner and on the basis specified above. The holders of outstanding
shares of Convertible Preferred Stock shall also be entitled to vote for
all other Directors of the Corporation together with holders of all
other shares of the Corporation's outstanding capital stock entitled to
vote thereon, voting as a single class, with each outstanding share
entitled to the same number of votes specified in Section A.2(b). The
holders of outstanding shares of Convertible Preferred Stock may, in
their sole discretion, determine to elect only one Convertible Preferred
Stock Director Designee from time to time, and during any such period
the Board of Directors nonetheless shall be deemed duly constituted.
(b) Voting Generally. The holder of each share of Convertible
Preferred Stock shall be entitled to the number of votes equal to the
largest number of full shares of Common Stock (as defined in Section C
of this Article IV) into which each share of Convertible Preferred Stock
could be converted pursuant to Section A.6 hereof on the record date for
the vote or for written consent of stockholders, if applicable. The
holder of each share of Convertible Preferred Stock shall be entitled to
notice of any stockholders' meeting in accordance with the by-laws of
the Corporation and shall vote with holders of the Common Stock, voting
together as single class, upon all matters submitted to a vote of
stockholders excluding those matters required to be submitted to a class
or series vote pursuant to the terms hereof (including without
limitation Section A.8) or by law. Fractional votes shall not, however,
be permitted and any fractional voting rights resulting from the above
formula (after aggregating all shares of Common Stock into which shares
of Convertible Preferred Stock held by each holder could be converted)
shall be rounded to the nearest whole number (with one-half rounded
upward to one).
3. Dividends. The holders of Convertible Preferred Stock
shall be entitled to receive dividends out of funds legally available
therefor at such times and in such amounts as the Board of Directors may
determine in its sole discretion, provided, however, that no such
dividend may be declared or paid on any shares of Convertible Preferred
Stock unless at the same time a dividend is declared or paid on all
outstanding shares of Common Stock and Class A Common Stock and vice
versa, with holders of Convertible Preferred Stock, Common Stock and
Class A Common Stock sharing in any such dividends as if they
constituted a single class of stock and with each holder of a share of
Convertible Preferred Stock entitled to receive such dividends based on
the number of shares of Common Stock into which such share of
Convertible Preferred Stock is then convertible hereunder. The right to
dividends on shares of Convertible Preferred Stock shall not be
cumulative, and no right shall accrue to holders of Convertible
Preferred Stock by reason of the fact that dividends on said shares are
not declared in any prior period.
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4. Liquidation.
(a) Liquidation Preference. Upon any liquidation, dissolution
or winding up of the Corporation and its subsidiaries, whether voluntary
or involuntary (a "Liquidation Event"), each holder of outstanding
shares of Convertible Preferred Stock shall be entitled to be paid out
of the assets of the Corporation available for distribution to
stockholders, whether such assets are capital, surplus or earnings, and
before any amount shall be paid or distributed to the holders of Common
Stock, Class A Common Stock or of any other stock ranking on liquidation
junior to the Convertible Preferred Stock, an amount in cash equal to
$2.0834 per share (adjusted appropriately for stock splits, stock
dividends, recapitalizations and the like with respect to the
Convertible Preferred Stock) (the "Convertible Preferred Liquidation
Preference Amount"); provided, however, that if, upon any Liquidation
Event, the amounts payable with respect to the Convertible Preferred
Stock are not paid in full, the holders of the Convertible Preferred
Stock shall share ratably in any distribution of assets in proportion to
the full respective preferential amounts to which they are entitled;
provided further, however, that if upon any Liquidation Event the
holders of the Convertible Preferred Stock would receive the Convertible
Preferred Liquidation Preference Amount, together with any declared but
unpaid dividends or more per share if no distribution were made under
the foregoing provisions of this Section A.4(a) and all of the assets of
the Corporation were distributed as if each share of such Convertible
Preferred Stock had been converted solely into the number of shares of
Common Stock (and no shares of Redeemable Preferred Stock) issuable upon
the conversion of a share of such Convertible Preferred Stock pursuant
to Section A.6 immediately prior to the occurrence of any such
Liquidation Event (taking into account the rights of holders of any
other class or series of capital stock of the Corporation entitled to
share in such distribution), then the holders of such Convertible
Preferred Stock shall not be entitled to the Convertible Preferred
Liquidation Preference Amount and shall only be entitled to receive
their ratable share of any distribution as if each share of such
Convertible Preferred Stock had been converted solely into the number of
shares of Common Stock (and no shares of Redeemable Preferred Stock)
issuable upon the conversion of a share of such Convertible Preferred
Stock immediately prior to the occurrence of any such Liquidation Event;
provided further, however, that nothing in this Section A.4(a) shall in
any way limit the holders' of the Convertible Preferred Stock right of
conversion under Section A.6.
(b) Notice. Prior to the occurrence of any Liquidation Event,
the Corporation will furnish each holder of Convertible Preferred Stock
notice in accordance with Section A.9 hereof, together with a
certificate prepared by the chief financial officer of the Corporation
describing in detail the facts of such Liquidation Event, stating in
detail the amount(s) per share of Convertible Preferred Stock each
holder of Convertible Preferred Stock would receive pursuant to the
provisions of Section A.4(a) hereof and stating in detail the facts upon
which such amount was determined.
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5. Extraordinary Transactions.
(a) Extraordinary Transactions. Upon (i) a merger or
consolidation of the Corporation with or into another corporation (with
respect to which less than a majority of the outstanding voting power of
such surviving corporation is held by stockholders of this Corporation
immediately prior to such event), (ii) the sale or transfer of all or
substantially all of the properties and assets of the Corporation and
its subsidiaries, (iii) any purchase by any party (other than one of the
Investors (as such term is defined in that certain Stockholders'
Agreement among the Corporation and certain stockholders of the
Corporation executed in connection herewith)) of shares of capital stock
of the Corporation (either through a negotiated stock purchase or a
tender for such shares), the effect of which is that such party that did
not beneficially own a majority of the voting power of the outstanding
shares of capital stock of the Corporation immediately prior to such
purchase beneficially owns at least a majority of such voting power
immediately after such purchase, or (iv) the redemption or repurchase of
shares representing a majority of the voting power of the outstanding
shares of capital stock of the Corporation (each an "Extraordinary
Transaction"), then, as a part of and as a condition to the
effectiveness of such Extraordinary Transaction, unless the holders of
Convertible Preferred Stock shall have elected to convert the shares of
Convertible Preferred Stock into Redeemable Preferred Stock and Common
Stock in accordance with the voluntary conversion provisions of Section
A.6 prior to the effective date of such Extraordinary Transaction, the
holders of Convertible Preferred Stock shall, on the effective date of
such Extraordinary Transaction, be paid by the Corporation, in cash to
the extent that cash is paid in such Extraordinary Transaction and then
(or alternatively if no cash payments are involved, as applicable), in
such other consideration (valued as provided in Section A.5(b) below) as
is delivered in such Extraordinary Transaction an amount equal to the
Convertible Preferred Liquidation Preference Amount; provided, however,
that if upon any Extraordinary Transaction the consideration paid or
delivered in connection with such Extraordinary Transaction is
insufficient to pay all amounts payable with respect to the Convertible
Preferred Stock, the holders of the Convertible Preferred Stock shall
share ratably in any distribution or payment of cash or securities,
before any amount shall be paid or distributed to any holder of Common
Stock, Class A Common Stock or any other stock ranking on liquidation
junior to the Convertible Preferred Stock, in proportion to the full
respective preferential amounts to which they are entitled.
(b) Valuation of Distribution Securities. Any securities or
other consideration to be delivered to the holders of the Convertible
Preferred Stock upon any Extraordinary Transaction shall be valued as
follows:
(i) If traded on a nationally recognized securities
exchange or inter-dealer quotation system, the value shall be deemed to
be the average of the closing prices of the securities on such exchange
or system over the 30-day period ending three (3) business days prior to
the closing;
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(ii) If traded over-the-counter, the value shall be
deemed to be the average of the closing bid prices over the 30-day
period ending three (3) business days prior to the closing; and
(iii) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of not less than sixty-six and two-thirds
percent in voting power of the outstanding shares of Convertible
Preferred Stock, provided that if the Corporation and the holders of
sixty-six and two-thirds percent in voting power of the outstanding
shares of Convertible Preferred Stock are unable to reach agreement,
then by independent appraisal by an investment banker hired and paid by
the Corporation, but reasonably acceptable to the holders of sixty-six
and two-thirds percent in voting power of the outstanding shares of
Convertible Preferred Stock.
(c) Notice. Prior to the occurrence of any Extraordinary
Transaction, the Corporation will furnish each holder of Convertible
Preferred Stock notice in accordance with Section A.9 hereof, together
with a certificate prepared by the chief financial officer of the
Corporation describing in detail all material terms of such
Extraordinary Transaction, including without limitation the
consideration to be delivered in connection with such Extraordinary
Transaction, the valuation of the Corporation at the time of such
Extraordinary Transaction and the identities of the parties to the
Extraordinary Transaction.
(d) Surrender of Certificates. On the effective date of any
Extraordinary Transaction, the Corporation shall pay all cash and other
consideration to which the holders of Convertible Preferred Stock shall
be entitled under this Section A.5. Upon receipt of such payment each
holder of shares of Convertible Preferred Stock shall surrender the
certificate or certificates representing such shares, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly
executed stock powers relating thereto), at the principal executive
office of the Corporation or the offices of the transfer agent for the
Convertible Preferred Stock, or shall notify the Corporation or any
transfer agent that such certificates have been lost, stolen or
destroyed and shall execute an affidavit or agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by
it in connection therewith (an "Affidavit of Loss"), and each
surrendered certificate shall be canceled and retired.
6. Conversion. The holders of the Convertible Preferred Stock shall
have the following conversion rights:
(a) Voluntary Conversion. Upon (or at any time following) the
earliest to occur of (i) a Liquidation Event (as defined in Section
A.4(a)), (ii) an Extraordinary Transaction (as defined in Section
A.5(a)), (iii) a public offering of equity securities of the Corporation
which does not constitute a QPO (as defined in Section A.6(b)) (a
"Public Offering"), or (iv) January 31, 2001, the holders of shares of
Convertible Preferred Stock shall be entitled, upon the written election
of the holder or holders of
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not less than sixty-six and two-thirds percent in voting power of the
outstanding shares of Convertible Preferred Stock as provided in Section
A.6(c) below, without the payment of any additional consideration, to
cause all (but not less than all) of the outstanding shares of
Convertible Preferred Stock to be converted into (i) the number of fully
paid and nonassessable shares of Common Stock (as hereinafter defined)
which results from dividing the Conversion Price (as defined in this
Section A.6(a)) per share in effect for the Convertible Preferred Stock
at the time of conversion into the per share Conversion Value (as
defined in this Section A.6(a)) of the Convertible Preferred Stock and
(ii) eight tenths (.8) of a fully paid and nonassessable share of
Redeemable Preferred Stock per share of Convertible Preferred Stock.
Upon the election to so convert in the manner and on the basis specified
in the preceding sentence all holders of the Convertible Preferred Stock
shall be deemed to have elected to voluntarily convert all outstanding
shares of Convertible Preferred Stock pursuant to this Section A.6.
Upon the filing of this Amended and Restated Certificate of
Incorporation with the Delaware Secretary of State, the "Conversion
Price" per share of Convertible Preferred Stock shall be $2.0834, and
the per share "Conversion Value" of Convertible Preferred Stock shall be
$2.0834. The Conversion Price of Convertible Preferred Stock and the
Conversion Rate shall be subject to adjustment from time to time as
provided in Section A.7 hereof. The number of shares of Common Stock
into which a share of a Convertible Preferred Stock is convertible is
hereinafter referred to as the "Common Stock Conversion Rate." The
number of shares of Redeemable Preferred Stock into which a share of
Convertible Preferred Stock is convertible is hereinafter referred to as
the "Redeemable Conversion Rate." If the holders of shares of
Convertible Preferred Stock elect to convert the outstanding shares of
Convertible Preferred Stock at a time when there are any declared but
unpaid dividends or other amounts due on or in respect of such shares,
such dividends and other amounts shall be paid in full in cash by the
Corporation in connection with such conversion.
(b) Automatic Conversion Upon QPO. Each share of Convertible
Preferred Stock shall automatically be converted, without the payment of
any additional consideration, into shares of Common Stock and Redeemable
Preferred Stock as of, and in all cases subject to, the closing of the
Corporation's first firm commitment public offering pursuant to an
effective registration statement under Securities Act of 1933, as
amended, provided that (i) such registration statement covers the offer
and sale of Common Stock of which the aggregate net proceeds
attributable to sales for the account of the Corporation exceed
$20,000,000 at a price per share reflecting a valuation for the
Corporation of at least $50,000,000, and (ii) either all outstanding
shares of Redeemable Preferred Stock are redeemed immediately upon and
as of the closing of such offering or contemporaneously with such
offering cash in an amount sufficient to redeem all outstanding shares
of Redeemable Preferred Stock is segregated and irrevocably held by the
Corporation for payment to holders of Redeemable Preferred Stock in
connection with the redemption thereof pursuant to Section B.5(a)(i) (a
"QPO"); provided that if a closing of a QPO occurs, all outstanding
shares of Convertible Preferred Stock shall be deemed to have been
converted into shares of Common Stock and Redeemable Preferred Stock
immediately prior to such closing.
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Any such conversion shall be at the Common Stock Conversion Rate and
Redeemable Conversion Rate in effect upon the closing of a QPO, as
applicable.
(c) Procedure for Voluntary Conversion; Effective Date. Upon
election to convert pursuant to Section A.6(a), each holder of
Convertible Preferred Stock (i) shall provide written notice of
conversion (the "Voluntary Conversion Notice") to the Corporation and
(ii) shall surrender the certificate or certificates representing its
Convertible Preferred Stock, duly assigned or endorsed for transfer to
the Corporation (or accompanied by duly executed stock powers relating
thereto), at the principal executive office of the Corporation or the
offices of the transfer agent for the Convertible Preferred Stock or
such office or offices in the continental United States of an agent for
conversion as may from time to time be designated by notice to the
holders of the Convertible Preferred Stock by the Corporation, or shall
deliver an Affidavit of Loss with respect to such certificates. The
Voluntary Conversion Notice shall specify (i) the number of shares of
Convertible Preferred Stock held by such holder, (ii) the name or names
in which such holder wishes the certificate or certificates for Common
Stock and Redeemable Preferred Stock to be issued upon such conversion
and (iii) the address to which such holder wishes delivery to be made of
such new certificates to be issued upon such conversion. The issuance
by the Corporation of shares of Common Stock and Redeemable Preferred
Stock upon a conversion of Convertible Preferred Stock pursuant to
Section A.6(a) hereof shall be effective as of the surrender of the
certificate or certificates for the Convertible Preferred Stock to be
converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), or as of
the delivery of an Affidavit of Loss. Upon surrender of a certificate
representing Convertible Preferred Stock for conversion, or delivery of
an Affidavit of Loss, the Corporation shall issue and send by hand
delivery, by courier or by first class mail (postage prepaid) to the
holder thereof or to such holder's designee, at the address designated
by such holder, certificates for the number of shares of Common Stock
and Redeemable Preferred Stock to which such holder shall be entitled
upon conversion. The issuance of certificates for Common Stock and
Redeemable Preferred Stock upon conversion of Convertible Preferred
Stock will be made without charge to the holders of such shares for any
issuance tax in respect thereof or other costs incurred by the
Corporation in connection with such conversion and the related issuance
of such stock. Notwithstanding anything to the contrary set forth in
this Section A.6(c), in the event that the holders of shares of
Convertible Preferred Stock elect to convert such shares pursuant to
Section A.6(a) in connection with any Liquidation Event, Extraordinary
Transaction or Public Offering, (i) the Voluntary Conversion Notice
shall be delivered to the Corporation no later than five (5) days before
the occurrence of such Liquidation Event or the closing of such
Extraordinary Transaction or Public Offering and such Voluntary
Conversion Notice shall be effective as of, and shall in all cases be
subject to, the occurrence of such Liquidation Event or closing of such
Extraordinary Transaction or Public Offering and (ii) if such
Liquidation Event, Extraordinary Transaction or Public Offering occurs,
all outstanding shares of Convertible Preferred Stock shall be deemed to
have been converted into shares of Common Stock and Redeemable Preferred
Stock immediately
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prior thereto, provided that the Corporation shall make appropriate
provisions (x) for the Common Stock issued upon such conversion to be
treated on the same basis as all other Common Stock in such Liquidation
Event, Extraordinary Transaction or Public Offering provided that the
foregoing shall not be construed to provide or require the registration
of any shares of Common Stock for sale and (y) for the payment of the
Redeemable Preferred Liquidation Preference Amount (as defined in
Section B.4) in connection with any Liquidation Event or the redemption
of the Redeemable Preferred Stock (issued upon such conversion) upon
election of such redemption in connection with any Extraordinary
Transaction, if applicable, as provided herein.
(d) Procedure for Automatic Conversion. As of, and in all
cases subject to, the closing of a QPO (the "Automatic Conversion
Date"), all outstanding shares of Convertible Preferred Stock shall be
converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares
of Convertible Preferred Stock are surrendered to the Corporation or its
transfer agent; provided, however, that all holders of Convertible
Preferred Stock shall be given prior written notice of the occurrence
of a QPO in accordance with Section A.9 hereof. The Corporation shall
not be obligated to issue certificates evidencing the shares of
Redeemable Preferred Stock or Common Stock issuable on the Automatic
Conversion Date (or the cash payment for the shares of Redeemable
Preferred Stock which are redeemed immediately after such automatic
conversion as provided below and in Section B.5(a)(i) unless
certificates evidencing such shares of the Convertible Preferred Stock
being converted, or an Affidavit of Loss with respect to such
certificates, are delivered to the Corporation or its transfer agent.
On the Automatic Conversion Date, all rights with respect to the
Convertible Preferred Stock so converted shall terminate, except any of
the rights of the holders thereof upon surrender of their certificate or
certificates therefor or delivery of an Affidavit of Loss thereof to
receive certificates for the number of shares of Common Stock and
Redeemable Preferred Stock into which such Convertible Preferred Stock
has been converted (or the cash payment to which such holder is entitled
as provided below and in Section B.5(a)(i)). If so required by the
Corporation, certificates surrendered for conversion shall be endorsed
or accompanied by written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder
or by his or its attorney duly authorized in writing. Upon surrender of
such certificates or Affidavit of Loss the Corporation shall issue and
deliver to such holder, promptly (and in any event in such time as is
sufficient to enable such holder to participate in such QPO) at such
office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of
Common Stock and number of shares of Redeemable Preferred Stock into
which the shares of the Convertible Preferred Stock surrendered were
convertible on the Automatic Conversion Date. Notwithstanding anything
to the contrary set forth in this Section A.6(d), the Corporation may
deliver, in lieu of certificates for Redeemable Preferred Stock, cash in
an amount determined pursuant to Section B.5(b) hereof on account of the
redemption of such Redeemable Preferred Stock, and upon payment of such
cash the Redeemable
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Preferred Stock into which such Convertible Preferred Stock would have
been converted shall be deemed to have been issued and redeemed by the
Corporation.
(e) No Impairment. The Corporation shall not, by amendment of
this Amended and Restated Certificate of Incorporation or through any
Extraordinary Transaction or other reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation but shall at all times in good faith assist in the
carrying out of all the provisions of this Section A.6 and in the taking
of all such action as may be necessary or appropriate in order to
protect the conversion and other rights of the holders of the
Convertible Preferred Stock and the Redeemable Preferred Stock against
impairment.
(f) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock and Redeemable Preferred
Stock solely for the purpose of effecting the conversion of the shares
of Convertible Preferred Stock such number of its shares of Common Stock
and Redeemable Preferred Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Convertible
Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock and Redeemable Preferred Stock shall not
be sufficient to effect the conversion of all then outstanding shares of
Convertible Preferred Stock, the Corporation will take such corporate
action as may be necessary to increase its authorized but unissued
shares of Common Stock and Redeemable Preferred Stock to such number of
shares as shall be sufficient for such purpose.
(g) No Closing of Transfer Books. The Corporation shall not
close its books against the transfer of shares of Convertible Preferred
Stock in any manner which would interfere with the timely conversion of
any shares of Convertible Preferred Stock.
7. Adjustments.
(a) If the number of shares of Common Stock outstanding at any
time after the date hereof is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, on the date such payment is made or such change is
effective, the Conversion Price of the Convertible Preferred Stock shall
be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of any shares of Convertible Preferred Stock
shall be increased in proportion to such increase of outstanding shares
of Common Stock.
(b) If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination or reverse
split of the outstanding shares
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of Common Stock, then, on the effective date of such combination or
reverse split, the Conversion Price of the Convertible Preferred Stock
shall be appropriately increased so that the number of shares of Common
Stock issuable on conversion of any shares of Convertible Preferred
Stock shall be decreased in proportion to such decrease in outstanding
shares of Common Stock.
(c) In case, at any time after the date hereof, of any capital
reorganization (other than a reorganization constituting an
Extraordinary Transaction), or any reclassification of the stock of the
Corporation (other than as a result of a stock dividend payable on
shares of Common Stock in the form of Common Stock or subdivision,
split-up or combination involving the Common Stock), the shares of
Convertible Preferred Stock shall, after such capital reorganization or
reclassification, be convertible into the kind and number of shares of
stock or other securities or property of the Corporation or otherwise to
which such holder would have been entitled if immediately prior to such
capital reorganization or reclassification he or it had converted his or
its shares of Convertible Preferred Stock into Common Stock and
Redeemable Preferred Stock. The provisions of this clause (c) shall
similarly apply to successive capital reorganizations or
reclassifications.
(d) All calculations under this Section A.7 shall be made to
the nearest cent or to the nearest one hundredth (1/100) of a share, as
the case may be.
(e) Upon the occurrence of each adjustment or readjustment
pursuant to this Section A.7, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Convertible
Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or readjustment is based. The Corporation shall, upon written request
at any time of any holder of Convertible Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the Conversion Prices
before and after such adjustment or readjustment, and (iii) the number
of shares of Common Stock and Redeemable Preferred Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of such holder's shares of Convertible Preferred Stock.
8. Covenants. So long as any shares of Convertible Preferred Stock
(or Redeemable Preferred Stock, as applicable) shall be outstanding, the
Corporation shall not, without first having provided the written notice of such
proposed action to each holder of outstanding shares of Convertible Preferred
Stock (or Redeemable Preferred Stock, as applicable) and having obtained the
affirmative vote or written consent of the holders of not less than sixty-six
and two-thirds percent in voting power of the outstanding shares of Convertible
Preferred Stock (or Redeemable Preferred Stock, as applicable), voting as a
single class, with each share of Convertible Preferred Stock (or Redeemable
Preferred Stock, as applicable) entitling the holder thereof to one vote per
share of Convertible Preferred Stock held by such holder:
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(a) amend, alter or repeal any provision of, or add any
provision to, the Corporation's Amended and Restated Certificate of
Incorporation or by-laws if such action would alter or change the
preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, any of the Convertible Preferred Stock or
the Redeemable Preferred Stock;
(b) reclassify any capital stock;
(c) create, obligate itself to create, authorize or issue any
new class or classes of stock or new series of common stock or preferred
stock or any security convertible into or evidencing the right to
purchase shares of any new class or series of common stock or preferred
stock or any new capital stock of the Corporation having preference over
or being on parity with the Convertible Preferred Stock or the
Redeemable Preferred Stock in any respect;
(d) apply any of its assets to the redemption, retirement,
purchase or other acquisition, directly or indirectly, through
subsidiaries or otherwise, of any shares of Common Stock or Class A
Common Stock except from employees, officers or Directors of, or
consultants, advisors or independent contractors to, the Corporation or
any of its subsidiaries (including for this purpose any employees or
consultants of any professional corporation whose practice is managed by
the Corporation or any of its subsidiaries) upon termination of their
status as such pursuant to an agreement containing vesting and/or
repurchase provisions approved by the Board of Directors of the
Corporation or a committee thereof; or
(e) effect (I) any Liquidation Event, (II) any Extraordinary
Transaction or other sale or transfer of all or any substantial portion
of the properties and assets of any subsidiary of the Corporation, (III)
any recapitalization of the Corporation or (IV) any other transaction or
series of related transactions in which more than 50% of the voting
power of the Corporation is disposed of.
9. Notice
(a) Liquidation Events, Extraordinary Transactions, Etc. In
the event (i) the Corporation establishes a record date to determine the
holders of any class of securities who are entitled to receive any
dividend or other distribution or who are entitled to vote at a meeting
(or by written consent) in connection with any of the transactions
identified in clause (ii) hereof, or (ii) any Liquidation Event (as
defined in Section A.4), any Extraordinary Transaction (as defined in
Section A.5), any Public Offering (as defined in Section A.6) or any QPO
(as defined in Section A.6) becomes reasonably likely to occur, the
Corporation shall mail or cause to be mailed by first class mail
(postage prepaid) to each holder of Convertible Preferred Stock (or each
holder of Redeemable Preferred Stock, as applicable) at least forty-five
(45) days prior to such record date specified therein or the expected
effective date of any such transaction, a notice specifying (A) the date
of such record date for the purpose of such dividend or
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distribution or meeting or consent and a description of such dividend or
distribution or the action to be taken at such meeting or by such
consent, (B) the date on which any such Liquidation Event, Extraordinary
Transaction, Public Offering or QPO is expected to become effective, and
(C) the date on which the books of the Corporation shall close or a
record shall be taken with respect to any such event.
(b) Waiver of Notice. The holder or holders of not less than
sixty-six and two-thirds percent in voting power of the outstanding
shares of Convertible Preferred Stock (or Redeemable Preferred Stock, as
applicable) may, at any time upon written notice to the Corporation,
waive any notice provisions specified herein for the benefit of such
holders.
(c) General. In the event that the Corporation provides any
notice, report or statement to any holder of Common Stock, the
Corporation shall at the same time provide a copy of any such notice,
report or statement to each holder of outstanding shares of Convertible
Preferred Stock (or Redeemable Preferred Stock, as applicable).
10. No Reissuance of Convertible Preferred Stock. No share or shares
of Convertible Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
B. REDEEMABLE PREFERRED STOCK
1. Designation; Ranking. A total of 3,840,000 shares of the
Corporation's Preferred Stock shall be designated as Redeemable Preferred
Stock, $.01 par value per share (the "Redeemable Preferred Stock").
2. Election of Directors; Voting.
(a) Election of Directors. The holders of outstanding shares
of Redeemable Preferred Stock shall, voting together as a separate
class, be entitled to elect one (1) Director. Such Director shall be
the candidate receiving the highest number of affirmative votes (with
each holder of Convertible Preferred Stock entitled to cast one vote for
or against each candidate with respect to each share of Redeemable
Preferred Stock held by such holder) of the outstanding shares of
Redeemable Preferred Stock (the "Redeemable Preferred Stock Director
Designee"), with votes cast against such candidate and votes withheld
having no legal effect. The election of the Redeemable Preferred Stock
Director Designee by the holders of the Redeemable Preferred Stock shall
occur (i) at the annual meeting of holders of capital stock, (ii) at any
special meeting of holders of capital stock, (iii) at any special
meeting of holders of Redeemable Preferred Stock called by holders of a
majority of the outstanding shares of Redeemable Preferred Stock or (iv)
by the unanimous written consent of holders of the outstanding shares of
Redeemable Preferred Stock. Upon conversion of the Convertible
Preferred Stock, the holders of Redeemable Preferred Stock shall
designate one of the Convertible
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Preferred Stock Director Designees currently serving on the
Corporation's board of directors as the Redeemable Preferred Stock
Designee, in the manner and on the basis specified above. If at any
time when any share of Redeemable Preferred Stock is outstanding the
Redeemable Preferred Stock Director Designee should cease to be a
Director for any reason, the vacancy shall only be filled by the vote or
written consent of holders of the outstanding shares of Redeemable
Preferred Stock, voting together as a separate class, in the manner and
on the basis specified above.
(b) Voting Generally. Except as set forth above with respect
to the election of the Redeemable Preferred Stock Director Designee, the
holders of Redeemable Preferred Stock shall not be entitled to vote on
any matters except to the extent otherwise required under the General
Corporation Law of the State of Delaware.
3. Dividends. The holders of outstanding shares of Redeemable
Preferred Stock shall be entitled to receive, out of any funds legally
available therefor, cumulative dividends on the Redeemable Preferred Stock in
cash, at the rate per annum of five percent (5%) of the Redeemable Base
Liquidation Amount (as defined in Section B.4 below) per share of Redeemable
Preferred Stock (a "Redeemable Cumulative Dividend"). Such dividends will
accrue commencing as of the date of issuance of the Redeemable Preferred Stock
and be cumulative, to the extent unpaid, whether or not they have been declared
and whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. Redeemable Cumulative
Dividends shall become due and payable with respect to any share of Redeemable
Preferred Stock as provided in Section B.4 and Section B.5. So long as any
shares of Redeemable Preferred Stock are outstanding: (A) no dividend
whatsoever shall be paid or declared, and no distribution shall be made, on any
capital stock of the Corporation ranking junior to the Redeemable Preferred
Stock; and (B) no shares of capital stock of the Corporation ranking junior to
the Redeemable Preferred Stock shall be purchased, redeemed or acquired by the
Corporation and no monies shall be paid into or set aside or made available for
a sinking fund for the purchase, redemption or acquisition thereof except as
contemplated by Section A.8(d).
4. Liquidation. Upon any Liquidation Event, each holder of
outstanding shares of Redeemable Preferred Stock shall be entitled to be paid
out of the assets of the Corporation available for distribution to
stockholders, whether such assets are capital, surplus, or earnings as follows,
and before any amount shall be paid or distributed to the holders of Common
Stock, Class A Common Stock or of any other stock ranking on liquidation junior
to the Redeemable Preferred Stock an amount in cash equal to the sum of (a)
$2.0834 per share (adjusted appropriately for stock splits, stock dividends,
recapitalizations and the like with respect to the Redeemable Preferred Stock)
(the "Redeemable Base Liquidation Amount"), plus (b) any unpaid dividends to
which such holder of outstanding shares of Redeemable Preferred Stock is
entitled pursuant to Section B.3 and B.5(d) hereof, plus (c) any interest
accrued pursuant to Section B.5(c) (the "Redeemable Liquidation Preference
Amount"); provided, however, that if, upon any Liquidation Event, the amounts
payable with respect to the Redeemable Preferred Stock are not paid in full,
the holders of the Redeemable Preferred
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<PAGE> 15
Stock shall share ratably in any distribution of assets in proportion to the
full respective preferential amounts to which they are entitled
5. Redemption.
(a) Mandatory Redemption.
(i) Automatic. Immediately upon and as of, and in all
cases subject to, the closing of a QPO, the Corporation shall
redeem all (and not less than all) of the outstanding shares of
Redeemable Preferred Stock at the Redemption Price specified in
Section B.5(b).
(ii) After January 31, 2001. Upon the election of the
holder or holders of not less than sixty-six and two-thirds
percent in voting power of the outstanding Redeemable Preferred
Stock (or the holder or holders of not less than sixty-six and
two thirds percent of the outstanding Convertible Preferred Stock
proposing to convert the same in order to effect a redemption
hereunder) made at any time on or after January 31, 2001 the
Corporation shall, to the extent it may do so under applicable
law, redeem all (and not less than all, other than pursuant to
Section B.5(c) below) of the outstanding shares of Redeemable
Preferred Stock. The foregoing election shall be made by such
holders giving the Corporation and each of the other holders of
Redeemable Preferred Stock (or Convertible Preferred Stock, as
applicable) not less than fifteen (15) days prior written notice
which notice shall set forth the date for such redemption.
(iii) Upon Extraordinary Transactions. Upon the election
of the holder or holders of not less than sixty-six and
two-thirds percent in voting power of the outstanding Redeemable
Preferred Stock (or Convertible Preferred Stock, as applicable
proposing to convert the same in order to effect a redemption
hereunder), the Corporation shall, to the extent it may do so
under applicable law, redeem all (and not less than all, other
than pursuant to Section B.5(c) below) of the outstanding shares
of Redeemable Preferred Stock upon the occurrence of an
Extraordinary Transaction (as defined in Section A.5). The
foregoing election shall be made by such holders giving the
Corporation and each other holder of Redeemable Preferred Stock
(or Convertible Preferred Stock, as applicable) not less that
five (5) days prior written notice, which notice shall set forth
the date for such redemption.
(b) Redemption Date; Redemption Price. Upon the election of
the holders of not less than sixty-six and two-thirds percent in voting
power of the outstanding Redeemable Preferred Stock to cause the
Corporation to redeem the Redeemable Preferred Stock pursuant to Section
B.5(a)(ii) or (iii), all holders of Redeemable Preferred Stock shall be
deemed to have elected to cause the Redeemable Preferred Stock to be so
redeemed. Any date upon which a redemption shall occur in accordance
with Section B.5(a) shall be referred to as a "Redemption Date." The
redemption price
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<PAGE> 16
for each share of Redeemable Preferred Stock redeemed pursuant to this
Section B.5 shall be the sum of (x) the Redeemable Base Liquidation
Amount, plus (y) any unpaid dividends to which such holder of
outstanding shares of Redeemable Preferred Stock is entitled under
Section B.3 and Section B.5(d) hereof (the "Redemption Price");
provided, however, that if at a Redemption Date shares of Redeemable
Preferred Stock are unable to be redeemed (as contemplated by Section
B.5(c) below), in addition to the Redemption Price the holders of
Redeemable Preferred Stock shall be entitled to any interest accrued
pursuant to Section B.5(c). The Redemption Price shall be payable in
cash in immediately available funds on the Redemption Date. Until the
full Redemption Price, including any interest thereon, has been paid in
cash for all shares of Redeemable Preferred Stock redeemed as of the
applicable Redemption Date: (A) no dividend whatsoever shall be paid or
declared, and no distribution shall be made, on any capital stock of the
Corporation; and (B) no shares of capital stock of the Corporation
(other than the Redeemable Preferred Stock in accordance with this
Section B.5) shall be purchased, redeemed or acquired by the Corporation
and no monies shall be paid into or set aside or made available for a
sinking fund for the purchase, redemption or acquisition thereof.
(c) Insufficient Funds For Redemption. If, at a Redemption
Date, the Corporation is prohibited under the General Corporation Law of
the State of Delaware from redeeming all shares of Redeemable Preferred
Stock for which redemption is required hereunder, then it shall redeem
such shares on a pro-rata basis among the holders of Redeemable
Preferred Stock in proportion to the full respective redemption amounts
to which they are entitled hereunder to the extent possible and shall
redeem the remaining shares to be redeemed as soon as the Corporation is
not prohibited from redeeming some or all of such shares under the
General Corporation Law of the State of Delaware. The shares of
Redeemable Preferred Stock not redeemed shall remain outstanding and
entitled to all of the rights and preferences provided in this Article
IV. In the event that the Corporation fails to redeem shares for which
redemption is required pursuant to Section B.5, then during the period
from the applicable Redemption Date through the date on which such
shares are redeemed, the applicable Redemption Price of such shares
shall bear interest at the rate of 10% per annum, which interest rate
shall increase by an additional .5% at the end of each six (6) month
period thereafter until the Redemption Price (and any interest thereon)
is paid in full, subject to a maximum rate of 15% per annum and with
such interest to be compounded annually. In the event the Corporation
fails to redeem shares for which redemption is required pursuant to
Section B.5 within six (6) months after the date on which redemption is
required, for any reason, and such failure thereafter continues (the
period during which such failure shall continue being referred to herein
as a "Voting Period"), the number of Directors constituting the Board of
Directors shall be automatically increased by a number equal to the
number of Directors then constituting the Board of Directors, plus two,
and the holders of shares of Redeemable Preferred Stock then outstanding
shall be entitled, voting as a class on a one-vote-per-share basis (to
the exclusion of the holders of all other securities and classes of
capital stock of the Corporation), to elect such additional Directors.
As soon as practicable after the
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<PAGE> 17
commencement of the Voting Period, the Corporation shall call a special
meeting of the holders of shares of Redeemable Preferred Stock by
mailing a notice of such special meeting to such holders, such meeting
to be held not less than ten (10) nor more than thirty (30) days after
the date of mailing of such notice. If the Corporation fails to send a
notice, the meeting may be called by any such holder on like notice.
The record date for determining the holders entitled to notice of and to
vote at such special meeting shall be the close of business on the fifth
business day preceding the day on which such notice is mailed. At any
such special meeting and at each meeting of holders of shares of
Redeemable Preferred Stock held during a Voting Period at which
Directors are to be elected (or with respect to any action by written
consent in lieu of a meeting of shareholders), such holders, voting
together as a class (to the exclusion of the holders of all other
securities and classes of capital stock of the Corporation), shall be
entitled to elect the number of Directors prescribed in this Section
B.5(c), and each share of Redeemable Preferred Stock shall be entitled
to one (1) vote (whether voted in person by the holder thereof or by
proxy or pursuant to a shareholders' consent). The terms of office of
all persons who are Directors of the Corporation at the time of a
special meeting of the holders of Redeemable Preferred Stock to elect
Directors shall continue, notwithstanding the election at such meeting
of the additional Directors that such holders are entitled to elect, and
the persons so elected by such holders, together with the remaining
incumbent Directors, shall constitute the duly elected Directors of the
Corporation. Simultaneously with the termination of a Voting Period
upon the redemption of all outstanding shares of Redeemable Preferred
Stock, the terms of office of the additional Directors elected by the
holders of the Redeemable Preferred Stock shall terminate, the remaining
Directors shall constitute the Directors of the Corporation and the
voting rights of such holders to elect additional Directors pursuant to
this Section B.5(c) shall cease.
(d) Dividend After Redemption Date. From and after a
Redemption Date, no shares of Redeemable Preferred Stock subject to
redemption shall be entitled to any further dividends pursuant to
Section B.3 hereof, provided, however, that in the event that shares of
Redeemable Preferred Stock are unable to be redeemed and continue to be
outstanding in accordance with Section B.5(c), such shares shall
continue to be entitled to dividends and interest thereon as provided in
Sections B.5(b) and B.5(c) until the date on which such shares are
actually redeemed by the Corporation.
(e) Surrender of Certificates. Upon receipt of the applicable
Redemption Price by certified check or wire transfer, each holder of
shares of Redeemable Preferred Stock to be redeemed shall surrender the
certificate or certificates representing such shares to the Corporation,
duly assigned or endorsed for transfer (or accompanied by duly executed
stock powers relating thereto), or shall deliver an Affidavit of Loss
with respect to such certificates at the principal executive office of
the Corporation or the office of the transfer agent for the Redeemable
Preferred Stock or such office or offices in the continental United
States of an agent for redemption as may from time to time be designated
by notice to the holders of Redeemable Preferred
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<PAGE> 18
Stock (or the holders of Convertible Preferred Stock, as applicable),
and each surrendered certificate shall be canceled and retired.
6. Notice. In the event that the Corporation provides or is
required to provide notice to any holder of Convertible Preferred Stock or any
holder of Common Stock in accordance with the provisions of this Amended and
Restated Certificate of Incorporation (including the provisions of Section
A.5(c) and Section A.9) and/or the Corporation's by-laws, the Corporation shall
at the same time provide a copy of any such notice to each holder of
outstanding shares of Redeemable Preferred Stock.
7. No Reissuance of Redeemable Preferred Stock. No share or shares
of Redeemable Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued, and all such
shares shall be canceled, retired and eliminated from the shares which the
Corporation shall be authorized to issue.
8. Covenants. So long as any shares of Redeemable Preferred Stock
shall be outstanding the provisions of Section A.8 shall apply to all shares of
Redeemable Preferred Stock as if such shares were shares of Convertible
Preferred Stock.
C. COMMON STOCK AND CLASS A COMMON STOCK
1. Designation; Ranking. A total of 65,900,000 shares of the
Corporation's common stock shall be designated as Common Stock, $.01 par value
per share (the "Common Stock"), and a total of 1,000,000 shares of the
Corporation's common stock shall be designated as Class A Common Stock, $.01
par value per share (the "Class A Common Stock"). Except as herein otherwise
expressly provided, all shares of Common Stock and Class A Common Stock shall
be identical and shall entitle the holders thereof to the same rights and
privileges.
2. Voting.
(a) Election of Directors. The holders of Common Stock voting
together with the holders of outstanding Convertible Preferred Stock or
outstanding Redeemable Preferred Stock, as the case may be, voting as a
single class, shall be entitled to elect a number of Directors
(excluding those Directors that are subject to election by the holders
of Convertible Preferred Stock or Redeemable Preferred Stock as a
separate class) equal to (i) for so long as any shares of Convertible
Preferred Stock remain outstanding, four (4) Directors, (ii) for so long
as any shares of Redeemable Preferred Stock remain outstanding, five (5)
Directors and (iii) thereafter, such number of Directors as may be
designated by the stockholders or Directors in accordance with the
applicable provisions hereof, of the Corporation's by-laws and of
applicable law. Such Directors shall be the candidates receiving the
highest number of affirmative votes entitled to be cast (with each
holder entitled to cast one vote for or against each candidate with
respect to each share held by such holder), with votes cast against such
candidates and votes withheld having no legal effect. The election of
such Directors
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<PAGE> 19
shall occur at the annual meeting of holders of capital stock or at any
special meeting called and held in accordance with the by-laws of the
Corporation. If a person elected in accordance with the foregoing
provisions should cease to be a Director for any reason, the vacancy
shall only be filled by the vote or written consent of holders of the
outstanding shares entitled to vote for such Directors, in the manner
and on the basis specified above.
(b) Other Voting. The holder of each share of Common Stock
shall be entitled to one vote for each such share as determined on the
record date for the vote or consent of stockholders and shall vote
together with the holders of the Convertible Preferred Stock (to the
extent provided by the provisions of Part A of this Article IV) as a
single class upon any items submitted to a vote of stockholders, except
as otherwise provided herein.
(c) Class A Common Stock - Non-Voting. The holders of Class A
Common Stock shall not be entitled to vote on any matters except to the
extent otherwise required under the General Corporation Law of the State
of Delaware.
3. Dividends. Apart from voting power, the shares of Common Stock
and Class A Common Stock shall be deemed to be shares of stock of the same
class and shall have equal rights and privileges (including, without
limitation, in liquidation and as to dividends, whether paid in stock or cash),
except that stock dividends declared shall be paid in shares of Common Stock to
the holders of Common Stock and in shares of Class A Common Stock to the
holders of Class A Common Stock unless any such stock dividend is payable in a
class of stock other than Common Stock or Class A Common Stock. The holders of
Common Stock and of Class A Common Stock shall be entitled to receive dividends
out of funds legally available therefor at such times and in such amounts as
the Board of Directors may determine in its sole discretion, with holders of
Convertible Preferred Stock, Common Stock and Class A Common Stock sharing pari
passu in such dividends as contemplated by Section A.3.
4. Liquidation. Upon any Liquidation Event, after the payment or
provision for payment of all debts and liabilities of the Corporation and all
preferential amounts to which the holders of Convertible Preferred Stock or
Redeemable Preferred Stock, as applicable, are entitled with respect to the
distribution of assets in liquidation, the holders of Common Stock, Class A
Common Stock (and to the extent applicable under Section A.4(a) Convertible
Preferred Stock) shall be entitled to share ratably in the remaining assets of
the Corporation available for distribution, with such stock being considered a
single class for this purpose.
5. Conversion of Class A Common Stock Upon Public Offering. As of
and immediately prior to the closing of a QPO each outstanding share of Class A
Common Stock shall automatically be converted into one share of Common Stock.
Upon such conversion, (a) each converted share of Class A Common Stock shall be
deemed retired and such shares of Class A Stock shall not be reissued, and (b)
the provisions of this Amended and Restated Certificate of Incorporation
regarding Class A Common Stock shall have no further force and effect and shall
be deemed to be deleted from this Amended and Restated Certificate of
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<PAGE> 20
Incorporation and any other references to Class A Common Stock in this Amended
and Restated Certificate of Incorporation or any other agreement to which the
Corporation is a party shall be deemed to refer to the same number of shares of
Common Stock. Until presented and surrendered for cancellation following such
conversion, each certificate for shares of Class A Common Stock outstanding
shall be deemed to represent the number of shares of Common Stock determined in
accordance with this paragraph, and upon such presentation and surrender each
holder of a certificate or certificates for such Class A Common Stock shall be
entitled to receive a certificate for the appropriate number of shares of
Common Stock. The Corporation shall reserve for issuance the number of shares
of Common Stock into which all outstanding shares of Class A Common Stock may
be converted pursuant to this Section C.5.
6. Fractional Shares; Uncertificated Shares. The Corporation may
issue fractional shares (up to five decimal places) of Common Stock and Class A
Common Stock. Fractional shares shall be entitled to dividends (on a pro rata
basis), and the holders of fractional shares shall be entitled to all rights as
stockholders of the Corporation to the extent provided herein and under
applicable law in respect of such fractional shares. Shares of Common Stock
and Class A Common Stock, or fractions thereof, may, but need not be
represented by share certificates. Such shares, or fractions thereof, not
represented by share certificates ("Uncertificated Common Shares") shall be
registered in the stock records book of the Corporation. The Corporation at
any time at its sole option may deliver to any registered holder of such shares
share certificates to represent Uncertificated Common Shares previously issued
(or deemed issued) to such holder.
ARTICLE V
In furtherance of and not in limitation of powers conferred by statute,
it is further provided:
1. The number of Directors shall be fixed in the manner provided in
this Amended and Restated Certificate of Incorporation.
2. Election of Directors need not be by written ballot unless the
by-laws of the Corporation so provide.
3. The Board of Directors is expressly authorized to adopt, amend or
repeal the by-laws of the Corporation to the extent specified therein.
ARTICLE VI
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. No action required to be taken or which
may be taken at any annual or special meeting of stockholders of the
Corporation may be taken, except at a duly convened
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meeting or by unanimous written consent of the stockholders entitled to vote
thereat with respect to the matters submitted thereto, and the power of
stockholders to act by other than unanimous written consent without a meeting,
is specifically denied, provided that the foregoing shall not apply with
respect to consent, approval or waiver rights of the holders of the Convertible
or Redeemable Preferred Stock set forth herein in cases for which less than
unanimous consent is expressly provided.
ARTICLE VII
To the extent permitted by law, the books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated in
the by-laws of the Corporation or from time to time by its Board of Directors.
ARTICLE VIII
No person shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
Director of the Corporation, except for liability (a) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of the State of Delaware, or (d) for any transaction from which the Director
derived an improper personal benefit. If the General Corporation Law of the
State of Delaware is amended after the effective date of this Amended and
Restated Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of each past or present Director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended.
Any repeal or modification of this Article VIII by (a) the stockholders
of the Corporation or (b) an amendment to the General Corporation Law of the
State of Delaware (unless such statutory amendment specifically provides to the
contrary) shall not adversely affect any right or protection existing at the
time of such repeal or modification with respect to any acts or omissions
occurring either before or after such repeal or modification, of a person
serving as a Director prior to or at the time of such repeal or modification.
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ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed as of
this 31st day of January, 1996.
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
-------------------------------------
Name: Warren F. Melamed
Title: President
ATTEST:
/s/ WARREN F. MELAMED
- ---------------------------------
Name: Warren F. Melamed
Title: Secretary
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<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MONARCH DENTAL CORPORATION
Monarch Dental Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), pursuant to Section 242
of the General Corporation Law of the State of Delaware (the "DGCL"), DOES
HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, by unanimous
written consent dated December 20, 1996, in accordance with the provisions of
Section 141(f) of the DGCL, duly adopted resolutions in accordance with Section
242 of the DGCL (i) proposing an amendment of the Amended and Restated
Certificate of Incorporation of the Corporation, (ii) declaring such amendment
to be advisable and in the best interests of the Corporation, and (iii)
directing that such amendment be submitted to and be considered by the
shareholders of the Corporation entitled to vote thereon for approval by the
affirmative vote of such shareholders. Such resolution proposed to amend the
Amended and Restated Certificate of Incorporation as follows:
(1) the first paragraph of Article IV of the Amended and Restated
Certificate of Incorporation is hereby amended to read in its entirety
as follows:
"The total number of shares of capital stock which the
Corporation shall have authority to issue is 30,144,550, of which
(a) 10,344,550 shares shall be preferred stock, par value $.01
per share ("Preferred Stock"), and (b) 19,800,000 shares shall be
common stock, par value $.01 per share."
(2) the first paragraph of Section C (Common Stock and Class A Common Stock)
of Article IV of the Amended and Restated Certificate of the
Incorporation of the Corporation is hereby amended to read in its
entirety as follows:
<PAGE> 2
"1. Designation; Ranking. A total of 17,000,000 shares of the
Corporation's common stock shall be designated as Common Stock,
$.01 par value per share (the "Common Stock"), and a total of
2,800,000 shares of the Corporation's common stock shall be
designated as Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"). Except as herein otherwise expressly
provided, all shares of Common Stock and Class A Common Stock
shall be identical and shall entitle the holders thereof to the
same rights and privileges."
(3) Article IV of the Amended and Restated Certificate of Incorporation is
hereby amended by adding the following new Section D:
"D. SERIES A CONVERTIBLE JUNIOR PREFERRED STOCK
A total of 1,704,550 shares of the Corporation's Preferred Stock
shall be designated as Series A Convertible Junior Preferred
Stock, $.01 par value per share (the "Series A Preferred Stock").
Section 1. Dividends. The holders of Series A Preferred Stock
shall be entitled to receive dividends out of funds legally
available therefor at such times and in such amounts as the Board
of Directors may determine in its sole discretion, provided,
however, that no such dividend may be declared or paid on any
shares of Series A Preferred Stock unless at the same time a
dividend is declared or paid on all outstanding shares of Common
Stock, Class A Common Stock, Convertible Preferred Stock and vice
versa, with holders of Series A Preferred Stock, Common Stock,
Class A Common Stock and Convertible Preferred Stock sharing in
any such dividends as if they constituted a single class of stock
and with each holder of a share of Series A Preferred Stock
entitled to receive such dividends based on the number of shares
of Class A Common Stock into which such share of Series A
Preferred Stock is then convertible hereunder. The right to
dividends on shares of Series A Preferred Stock shall not be
cumulative, and no right shall accrue to holders of Series A
Preferred Stock by reason of the fact that dividends on said
shares are not declared in any prior period.
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<PAGE> 3
Section 2. Liquidation, Dissolution or Winding Up.
(a) Distributions to Holders of Series A Preferred Stock. In
the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, holders of each
share of Series A Preferred Stock outstanding shall not be
entitled to be paid out of the assets of the Corporation
available for distribution to stockholders unless and until all
preferential amounts due to the holders of Senior Stock shall
have been paid in full. Upon payment in full to the holders of
Senior Stock upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, holders of
each share of Series A Preferred Stock outstanding shall be
entitled to be paid out of the assets of the Corporation
available for distribution to stockholders an amount equal to the
original purchase price paid by such holder for each such share
of Series A Preferred Stock held (appropriately adjusted for
stock splits, stock dividends and the like) an amount equal to
the original purchase price paid by such holder for each such
share of Series A Preferred Stock held (appropriately adjusted
for stock splits, stock dividends and the like). Until the
holders of the Series A Preferred Stock have been paid such
liquidation preference in full, no payment will be made to any
holder of Junior Stock upon the liquidation, dissolution or
winding up of the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders
of Series A Preferred Stock shall be insufficient to pay in full
the preferential amount aforesaid and liquidating payments on any
other shares of any class or series of Parity Stock, then such
assets, or the proceeds thereof, shall be distributed among the
holders of Series A Preferred Stock and any such other Parity
Stock ratably in the same proportion as the respective amounts
that would be payable on such Series A Preferred Stock and any
such other Parity Stock if all amounts payable thereon were paid
in full. Upon any liquidation, dissolution or winding up of the
Corporation, after payment shall have been made in full to the
holders of Series A Preferred Stock as provided in this Section
2, any other series or class or classes of Junior Stock or Parity
Stock, in accordance with the respective rights and subject to
the respective terms thereof, shall be entitled to receive any
and all assets remaining to be paid or distributed, and the
holders of the Series A Preferred Stock shall not be
3
<PAGE> 4
entitled to share therein. Notwithstanding the foregoing, if
upon any liquidation, dissolution or winding up of the
Corporation the holders of the outstanding shares of Series A
Preferred Stock would receive more than the liquidation
preference amount described above in the event their shares were
converted into Class A Common Stock immediately prior to the
record date for distributions in connection with such event, then
each outstanding share of Series A Preferred Stock shall share
ratably with the holders of Common Stock, Class A Common Stock
and all other classes of such ranking junior to the Series A
Preferred Stock in the assets available for distribution, with
such distributions to be made as if each share of Series A
Preferred Stock had been converted into the number of shares of
Class A Common Stock issuable upon the conversion of such share
of Series A Preferred Stock immediately prior to any such event.
(b) Deemed Liquidations. A consolidation or merger of the
Corporation (other than a consolidation or merger upon
consummation of which the holders of voting securities of the
Corporation immediately prior to such transaction continue to own
directly or indirectly not less than a majority of the voting
power of the surviving corporation) or a sale of all or
substantially all of the assets of the Corporation shall be
regarded as a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this Section 2.
Upon any such transaction, the holders of Series A Preferred
Stock shall receive the amount per share specified in Section
2(a), payable in cash or in kind as provided herein unless prior
thereto (and effective concurrently and contingent upon the
closing of such transaction) the Series A Preferred Stock shall
have been converted into Class A Common Stock in accordance with
Section 4, whereupon the Class A Common Stock issued on such
conversion shall be treated on the same basis as all other Class
A Common Stock in such transaction. Series A Preferred Stock
shall not remain outstanding following any such transaction.
For purposes of this Section 2 and Section 6 hereof, a sale of
substantially all of the assets of the Corporation shall mean the
sale or other disposition other than in the ordinary course of
business of more than 50% of such assets, as determined by
reference to either (A) the book value, or (B) the fair market
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<PAGE> 5
value, of such assets, determined on a consolidated basis under
generally accepted accounting principles.
(c) Non-Cash Distributions. In the event of a liquidation,
dissolution or winding up of the Corporation (including any
deemed liquidation under Section 2(b)) resulting in the
availability of assets other than cash for distribution to the
holders of the Series A Preferred Stock, the holders of the
Series A Preferred Stock shall be entitled to a distribution of
cash and/or assets equal in value to the liquidation preference
and other distribution rights stated in Sections 2(a) and 2(b)
hereof. In the event that such distribution to the holders of
the Series A Preferred Stock shall include any assets other than
cash, the following provisions shall govern unless the holders of
Common Stock, Class A Common Stock and Convertible Preferred
Stock shall also receive assets other than cash such that all
holders of capital stock of the Corporation are treated on
substantially the same basis including payment of the
preferential amount to which the holders of Series A Preferred
Stock are entitled (if applicable) through delivery of securities
of any successor or acquiring corporation having a value equal to
such preferential amount.
Absent such circumstances, the Board of Directors shall first
determine the value of such assets for such purpose, and shall
notify all holders of shares of Series A Preferred Stock of such
determination. The value of such assets for purposes of the
distribution under this Section 2(c) shall be the value as
determined by the Board of Directors in good faith and with due
care, unless the holders of a majority of the outstanding shares
of Series A Preferred Stock shall object thereto in writing
within 15 days after the date of such notice. In the event of
such objection, the valuation of such assets for purposes of such
distribution shall be determined by an arbitrator selected by the
objecting stockholders and the Board of Directors, or in the
event a single arbitrator cannot be agreed upon within 10 days
after the written objection sent by the objecting stockholders in
accordance with the previous sentence, the valuation of such
assets shall be determined by arbitration in which (i) the
objecting stockholders shall name in their notice of objection
one arbitrator, (ii) the Board of Directors shall name a second
arbitrator within 15 days from the receipt of such notice, (iii)
the two arbitrators thus selected shall select a third arbitrator
within 15 days thereafter,
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<PAGE> 6
and (iv) the three arbitrators thus selected shall determine the
valuation of such assets within 15 days thereafter for purposes
of such distribution by majority vote. The costs of such
arbitration shall be borne by the Corporation or by the holders
of the Series A Preferred Stock (on a pro rata basis out of the
assets otherwise distributable to them) as follows: (i) if the
valuation as determined by the arbitrators is greater than 95% of
the valuation as determined by the Board of Directors, the
holders of the Series A Preferred Stock shall pay the costs of
the arbitration, and (ii) otherwise, the Corporation shall bear
the costs of the arbitration.
Section 3. Voting Rights. The Series A Preferred Stock shall
not be entitled to vote on any matters, except to the extent
otherwise required under the General Corporation Law of the State
of Delaware.
Section 4. Conversion. The holders of the Series A Preferred
Stock shall have the following conversion rights:
(a) Right to Convert. Subject to and in compliance with the
provisions of this Section 4, any shares of the Series A
Preferred Stock may, at any time or from time to time at the
option of the holder, be converted into fully-paid and
non-assessable shares of Class A Common Stock. The number of
shares of Class A Common Stock to which a holder of the Series A
Preferred Stock shall be entitled upon conversion shall be the
product obtained by multiplying the Applicable Conversion Rate
(determined as provided in Section 4(c)) by the number of shares
of Series A Preferred Stock being converted.
(b) Automatic Conversion.
(i) Each share of Series A Preferred Stock outstanding
shall automatically be converted into the number of shares of
Class A Common Stock into which such shares are convertible upon
application of the then effective Applicable Conversion Rate
(determined as provided in Section 4(c)) immediately upon (A) the
written election to so convert by holders of a majority in
interest of the Series A Preferred Stock or (B) the closing of a
QPO (as defined in Section A.6(b) of this Article IV).
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<PAGE> 7
(ii) Upon the occurrence of an event specified in
Section (4)(b)(i), the outstanding shares of Series A Preferred
Stock shall be converted automatically without any further action
by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or
its transfer agent; provided, however, that the Corporation shall
not be obligated to issue certificates evidencing the shares of
Class A Common Stock issuable upon such conversion unless
certificates evidencing such shares of the Series A Preferred
Stock being converted are either delivered to the Corporation or
any transfer agent, as hereinafter provided, or the holder
notifies the Corporation or any transfer agent, as hereinafter
provided, that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred
by it in connection therewith. Conversion of the Series A
Preferred Stock in connection with any merger or other sale may
be conditioned upon and subject to the consummation thereof.
Upon the occurrence of the automatic conversion of all of the
outstanding Series A Preferred Stock, the holders of the Series A
Preferred Stock shall surrender the certificates representing
such shares at the office of the Corporation or of any transfer
agent for the Class A Common Stock. Thereupon, there shall be
issued and delivered to each such holder, promptly at such office
and in his name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of
shares of Class A Common Stock into which the shares of the
Series A Preferred Stock surrendered were convertible on the date
on which such automatic conversion occurred and cash as provided
in Section 4(i) below in respect of any fraction of a share of
Class A Common Stock issuable upon such automatic conversion.
(c) Applicable Conversion Rate. The conversion rate in effect
at any time (the "Applicable Conversion Rate") shall equal the
quotient obtained by dividing $1.76 by the Applicable Conversion
Value, calculated as hereinafter provided.
(d) Applicable Conversion Value. The Applicable Conversion
Value in effect initially, and until first adjusted in accordance
with Section 4(e) or 4(f) hereof, shall be $1.76.
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<PAGE> 8
(e) Adjustment to Applicable Conversion Value. Upon the
happening of an Extraordinary Common Stock Event (as hereinafter
defined), the Applicable Conversion Value shall, simultaneously
with the happening of such Extraordinary Common Stock Event, be
adjusted by dividing the then effective Applicable Conversion
Value by a fraction, the numerator of which shall be the number
of shares of Class A Common Stock outstanding (excluding treasury
stock) immediately after such Extraordinary Common Stock Event
and the denominator of which shall be the number of shares of
Class A Common Stock outstanding (excluding treasury stock)
immediately prior to such Extraordinary Common Stock Event, and
the quotient so obtained shall thereafter be the Applicable
Conversion Value. The Applicable Conversion Value, as so
adjusted, shall be readjusted in the same manner upon the
happening of any successive Extraordinary Common Stock Event or
Events.
(f) Adjustments for Reclassification. If the Class A Common
Stock issuable upon the conversion of the Series A Preferred
Stock shall be changed into the same or different number of
shares of any class or classes of stock, whether by
reclassification or otherwise (other than an Extraordinary Common
Stock Event, or a reorganization, merger, consolidation or sale
of assets provided for elsewhere in this Section 4), including
pursuant to Section C.5 of this Article IV, then and in each such
event the holder of each share of Series A Preferred Stock shall
have the right thereafter to convert such share (or such share
shall convert) into the kind and amount of shares of stock and
other securities and property receivable upon such
reorganization, reclassification or other change by holders of
the number of shares of Class A Common Stock into which such
shares of Series A Preferred Stock might have been converted
immediately prior to such reorganization, reclassification or
change, all subject to further adjustment as provided herein.
(g) Certificate as to Adjustments. In each case of an
adjustment or readjustment of the Applicable Conversion Rate, the
Corporation will promptly furnish each holder of Series A
Preferred Stock with a certificate, prepared by the chief
financial officer of the Corporation, showing such adjustment or
readjustment, and stating in detail the facts upon which such
adjustment or readjustment is based.
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<PAGE> 9
(h) Mechanics of Conversion. To exercise its conversion
privilege, a holder of Series A Preferred Stock shall surrender
the certificate or certificates representing the shares being
converted to the Corporation at its principal office, and shall
give written notice to the Corporation at that office that such
holder elects to convert such shares. Such notice shall also
state the name or names (with address or addresses) in which the
certificate or certificates for shares of Class A Common Stock
issuable upon such conversion shall be issued. The certificate
or certificates for shares of Series A Preferred Stock
surrendered for conversion shall be accompanied by proper
assignment thereof to the Corporation or in blank. The date when
such written notice is received by the Corporation together with
the certificate or certificates representing the shares of Series
A Preferred Stock being converted, shall be the "Conversion
Date." As promptly as practicable after the Conversion Date, the
Corporation shall issue and shall deliver to the holder of the
shares of Series A Preferred Stock being converted, a certificate
or certificates in such denominations as it may request in
writing for the number of full shares of Class A Common Stock
issuable upon the conversion of such shares of Series A Preferred
Stock in accordance with the provisions of this Section 4 and
cash as provided in Section 4(i) below in respect of any fraction
of a share of Class A Common Stock issuable upon such conversion.
Such conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date, and at
such time the rights of the holder as holder of the converted
shares of Series A Preferred Stock shall cease and the person or
persons in whose name or names any certificate or certificates
for shares of Class A Common Stock shall be issuable upon such
conversion shall be deemed to have become the holder or holders
of record of shares of Class A Common Stock represented thereby.
(i) Fractional Shares. No fractional shares of Class A Common
Stock or scrip representing fractional shares shall be issued
upon conversion of Series A Preferred Stock. Instead of any
fractional shares of Class A Common Stock that would otherwise be
issuable upon conversion of Series A Preferred Stock, the
Corporation shall pay to the holder of the shares of Series A
Preferred Stock that were converted a cash adjustment in respect
of such fraction in an amount equal to the same
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<PAGE> 10
fraction of the market price per share of the Class A Common
Stock (as determined in a manner prescribed by the Board of
Directors) at the close of business on the Conversion Date.
(j) Partial Conversion. In the event some but not all of the
shares of Series A Preferred Stock represented by a certificate
or certificates surrendered by a holder are converted, the
Corporation shall execute and deliver to or on the order of the
holder, at the expense of the Corporation, a new certificate
representing the number of shares of Series A Preferred Stock
which were not converted.
(k) Reservation of Class A Common Stock. The Corporation
shall at all times reserve and keep available out of its
authorized but unissued shares of Class A Common Stock, solely
for the purpose of effecting the conversion of the shares of the
Series A Preferred Stock, such number of its shares of Class A
Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of the Series A
Preferred Stock, and if at any time the number of authorized but
unissued shares of Class A Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, the Corporation shall take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Class
A Common Stock to such number of shares as shall be sufficient
for such purpose.
(l) Extraordinary Common Stock Event. "Extraordinary Common
Stock Event" shall mean (i) the issuance of additional shares of
common stock of any class as a dividend or other distribution on
outstanding common stock, (ii) the subdivision of outstanding
shares of common stock of any class into a greater number of
shares of common stock, or (iii) the combination of outstanding
shares of common stock of any class into a smaller number of
shares of common stock.
Section 5. No Reissuance of Series A Preferred Stock. No
share or shares of the Series A Preferred Stock acquired by the
Corporation by reason of redemption, purchase, conversion or
otherwise shall be reissued, and all such shares shall be
canceled, retired, and eliminated from the shares which the
Corporation shall be authorized to issue. The Corporation may
from time to
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<PAGE> 11
time take such appropriate corporate action as may be necessary
to reduce the authorized number of shares of the Series A
Preferred Stock accordingly.
Section 6. Notices of Record Date. In the event (i) the
Corporation establishes a record date to determine the holders of
any class of securities who are entitled to receive any dividend
or other distribution, or (ii) there occurs any capital
reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any
merger or consolidation of the Corporation, or any transfer of
all or substantially all of the assets of the Corporation to any
other corporation, or any other entity or person, or any
voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, the Corporation shall mail to each holder of
Series A Preferred Stock at least 10 days prior to the record
date specified therein, a notice specifying (a) the date of such
record date for the purpose of such dividend or distribution and
a description of such dividend or distribution, (b) the date on
which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is
expected to become effective, and (c) the time, if any, that is
to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other
property deliverable upon such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or
winding up.
Section 7. Other Rights. Except as otherwise provided in the
charter documents of the Corporation, as amended, shares of
Series A Preferred Stock and shares of Class A Common Stock shall
be identical in all respects (each share of Series A Preferred
Stock having equivalent rights to the number of shares of Class A
Common Stock into which it is then convertible), shall have the
same powers, preferences and rights, without preference of any
such class or share over any other such class or share, and shall
be treated as a single class of stock for all purposes.
Section 8. Ranking. Any class or series of capital stock of
the Corporation shall be deemed to rank:
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<PAGE> 12
(a) prior or senior to the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon
liquidation, dissolution or winding up (including any deemed
liquidation under Section 2(b)), if such stock or series shall be
Convertible Preferred Stock or Redeemable Preferred Stock or, if
the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up (including any deemed
liquidation under Section 2(b)), as the case may be, in
preference or priority to the holders of shares of Series A
Preferred Stock ("Senior Stock");
(b) on a parity with the Series A Preferred Stock, as to the
payment of dividends and as to distribution of assets upon
liquidation, dissolution or winding up (including any deemed
liquidation under Section 2(b)), whether or not the dividend
rates, dividend payment dates or redemption or liquidation prices
per share thereof be different from those of the Series A
Preferred Stock, if the holders of such class of stock or series
and the Series A Preferred Stock shall be entitled to the receipt
of dividends and of amounts distributable upon liquidation,
dissolution or winding up (including any deemed liquidation under
Section 2(b)) in proportion to their respective amounts of
accrued and unpaid dividends per share or liquidation
preferences, without preference or priority one over the other
("Parity Stock"); and
(c) junior to the Series A Preferred Stock, as to the payment
of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up (including any deemed
liquidation under Section 2(b)), if such stock or series shall be
Class A Common Stock or Common Stock or if the holders of Series
A Preferred Stock shall be entitled to receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up
(including any deemed liquidation under Section 2(b)), as the
case may be, in preference or priority to the holders of shares
of such class or series ("Junior Stock").
Section 9. Miscellaneous.
(a) All notices referred to herein shall be in writing, and
all notices hereunder shall be deemed to have been given upon the
earlier of delivery
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<PAGE> 13
thereof by hand delivery, by courier, or by standard form of
telecommunication, addressed: (i) if to the Corporation, to its
principal executive office (Attention: President) and to the
transfer agent, if any, for the Series A Preferred Stock or other
agent of the Corporation designated as permitted hereby or (ii)
if to any holder of the Series A Preferred Stock or Class A
Common Stock, as the case may be, to such holder at the address
of such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent
for the Series A Preferred Stock or Class A Common Stock, as the
case may be) or (iii) to such other address as the Corporation or
any such holder, as the case may be, shall have designated by
notice similarly given.
(b) In the event that, at any time as a result of an
adjustment made pursuant to Section 4 hereof, the holder of any
shares of the Series A Preferred Stock upon thereafter
surrendering such shares for conversion shall become entitled to
receive any shares or other securities of the Corporation other
than shares of Class A Common Stock, the Applicable Conversion
Rate in respect of such other shares or securities so receivable
upon conversion of shares of Series A Preferred Stock shall
thereafter be adjusted, and shall be subject to further
adjustment from time to time, in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Class
A Common Stock contained in Section 4 hereof, and the remaining
provisions hereof with respect to the Class A Common Stock shall
apply on like or similar terms to any such other shares or
securities.
(c) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any
issuance or delivery of shares of Series A Preferred Stock or
shares of Class A Common Stock or other securities issued on
account of Series A Preferred Stock pursuant hereto or
certificates representing such shares or securities. The
Corporation shall not, however, be required to pay any such tax
which may be payable in respect of any transfer involved in the
issuance or delivery of shares of Series A Preferred Stock or
Class A Common Stock or other securities in a name other than
that in which the shares of Series A Preferred Stock with respect
to which such shares or other securities are issued or delivered
were registered, or in respect of any payment to any person with
respect to any such shares or securities other than a payment to
the registered holder thereof, and shall not be required to make
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<PAGE> 14
any such issuance, delivery or payment unless and until the
person otherwise entitled to such issuance, delivery or payment
has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
(d) The Corporation may appoint, and from time to time
discharge and change, a transfer agent of the Series A Preferred
Stock. Upon any such appointment or discharge of a transfer
agent, the Corporation shall send notice thereof by hand
delivery, by courier, by standard form of telecommunication or by
first class mail (postage prepaid), to each holder of record of
Series A Preferred Stock."
(4) the Amended and Restated Certificate of Incorporation is hereby amended
by adding the following new Article IX and renumbering the old Article
IX as Article X:
"ARTICLE IX
AUTHORIZED SHARES
Notwithstanding anything contained herein to the contrary, the
number of authorized shares of Class A Common Stock may be
increased or decreased (but not below the number of shares
thereof then outstanding) an amendment to the Amended and
Restated Certificate of Incorporation of the Corporation which is
approved by the affirmative vote of the holders of a majority of
the then outstanding shares of the capital stock of the
Corporation entitled to vote thereon irrespective of the
provisions of Subsection 2 of Section 242(b) of the General
Corporation Law of the State of Delaware."
SECOND: This Certificate of Amendment of the Amended and Restated
Certificate of Incorporation was duly adopted by the affirmative vote of the
shareholders holding a majority of the outstanding shares of each of the
Company's Common Stock, Convertible Participating Preferred Stock, Common Stock
and Convertible Participating Preferred Stock (voting as a single class), and
Class A Common Stock, in accordance with the provisions of Section 242 of the
DGCL.
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<PAGE> 15
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of the Amended and Restated Certificate of Incorporation to be signed
by Warren F. Melamed, its President, and attested by Warren F. Melamed, its
Secretary, this 30th day of December, 1996.
<TABLE>
<S> <C> <C>
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
----------------------------------
Warren F. Melamed
President
ATTEST:
By: /s/ WARREN F. MELAMED
-----------------------------
Warren F. Melamed
Secretary
</TABLE>
15
<PAGE> 1
EXHIBIT 3.3
FORM OF
RESTATED
CERTIFICATE OF INCORPORATION
OF
MONARCH DENTAL CORPORATION
Monarch Dental Corporation, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is Monarch Dental Corporation. The
date of the filing of its original Certificate of Incorporation with the
Secretary of State of the State of Delaware was December 28, 1994.
2. This Restated Certificate of Incorporation restates and
integrates and does not further amend the provisions of the Second Amended and
Restated Certificate of Incorporation of the Corporation filed with the
Secretary of State of the State of Delaware on __________ ____ ___, 1997 (the
"Second Amended and Restated Certificate of Incorporation"), there is no
discrepancy between the provisions of this Restated Certificate of
Incorporation and the provisions of the Second Amended and Restated Certificate
of Incorporation, and was duly adopted by the Board of Directors in accordance
with the provisions of Section 245 of the General Corporation Law of the State
of Delaware (the "DGCL").
3. The text of the Second Amended and Restated Certificate of
Incorporation is hereby restated in its entirety to provide as herein set forth
in full.
ARTICLE I
NAME
The name of the Corporation is Monarch Dental Corporation.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
<PAGE> 2
ARTICLE III
PURPOSES
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
Section 1. Number of Shares.
The total number of shares of capital stock which the Corporation shall
have the authority to issue is Fifty-Two Million (52,000,000) shares, of which
(i) Fifty Million (50,000,000) shares shall be Common Stock, par value $.01 per
share (the "Common Stock") and (ii) Two Million (2,000,000) shares shall be
Undesignated Preferred Stock, par value $.01 per share (the "Undesignated
Preferred Stock"). As set forth in this Article IV, the Board of Directors or
any authorized committee thereof is authorized from time to time to establish
and designate one or more series of Undesignated Preferred Stock, to fix and
determine the variations in the relative rights and preferences as between the
different series of Undesignated Preferred Stock in the manner hereinafter set
forth in this Article IV, and to fix or alter the number of shares comprising
any such series and the designation thereof to the extent permitted by law.
The number of authorized shares of the class of Undesignated Preferred
Stock may be increased or decreased (but not below the number of shares
outstanding) by the affirmative vote of the holders of a majority of the Common
Stock, without a vote of the holders of the Undesignated Preferred Stock,
pursuant to the resolution or resolutions establishing the class of
Undesignated Preferred Stock or this Restated Certificate of Incorporation, as
it may be amended from time to time.
Section 2. General.
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of
stock shall be determined in accordance with, or as set forth below in,
Sections 3 and 4 of this Article IV.
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<PAGE> 3
Section 3. Common Stock.
Subject to all of the rights, powers and preferences of the Undesignated
Preferred Stock, and except as provided by law or in this Article IV (or in any
certificate of designation of any series of Undesignated Preferred Stock) or by
the Board of Directors or any authorized committee thereof pursuant to this
Article IV:
(a) the holders of the Common Stock shall have the exclusive
right to vote for the election of Directors and on all other matters requiring
stockholder action, each share being entitled to one vote;
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as declared
by the Board of Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock in accordance with
their respective rights and interests.
Section 4. Undesignated Preferred Stock.
Subject to any limitations prescribed by law, the Board of Directors or
any authorized committee thereof is expressly authorized to provide for the
issuance of the shares of Undesignated Preferred Stock in one or more series of
such stock, and by filing a certificate pursuant to applicable law of the State
of Delaware, to establish or change from time to time the number of shares to
be included in each such 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 thereof. Any action by the Board of Directors or any authorized
committee thereof under this Article IV.5 shall require the affirmative vote of
a majority of the Directors then in office or a majority of the members of such
committee. The Board of Directors or any authorized committee thereof shall
have the right to determine or fix one or more of the following with respect to
each series of Undesignated Preferred Stock to the extent permitted by law:
(a) The distinctive serial designation and the number of
shares constituting such series;
(b) The dividend rates or the amount of dividends to be paid
on the shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
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<PAGE> 4
(c) The voting powers, full or limited, if any, of the shares
of such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions on which,
such shares may be redeemed;
(e) The amount or amounts payable upon the shares of such
series and any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation
and, if so convertible or exchangeable, the conversion price or prices, or the
rate or rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
(h) The price or other consideration for which the shares of
such series shall be issued;
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of
Undesignated Preferred Stock (or series thereof) and whether such shares may be
reissued as shares of the same or any other class or series of stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any
authorized committee thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
Any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
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ARTICLE VI
DIRECTORS
Section 1. General.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors except as otherwise provided herein or
required by law.
Section 2. Election of Directors.
Election of Directors need not be by written ballot unless the By-laws
of the Corporation shall so provide.
Section 3. Terms of Directors.
The number of Directors of the Corporation shall be fixed by resolution
duly adopted from time to time by the Board of Directors. The Directors, other
than those who may be elected by the holders of any series of Undesignated
Preferred Stock of the Corporation, shall be classified, with respect to the
term for which they severally hold office, into three classes, as nearly equal
in number as possible. The initial Class I Director of the Corporation shall
be Dr. Charles G. Shears; the initial Class II Directors of the Corporation
shall be Dr. Warren F. Melamed and Roger B. Kafker; and the initial Class III
Directors of the Corporation shall be Gary W. Cage and Glenn E. Hemmerle. The
initial Class I Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 1998, the initial Class II Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 1999,
and the initial Class III Directors shall serve for a term expiring at the
annual meeting of stockholders to be held in 2000. At each annual meeting of
stockholders, the successor or successors of the class of Directors whose term
expires at that meeting shall be elected by a plurality of the votes cast at
such meeting and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
Directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Restated Certificate of Incorporation, the holders of any
one or more series of Undesignated Preferred Stock shall have the right, voting
separately as a series or together with holders of other such series, to elect
Directors at an annual or special meeting of stockholders, the election, term
of office, filling of vacancies and other features of such directorships shall
be governed by the terms of this Restated Certificate of Incorporation and any
certificate of designations applicable thereto, and such Directors so elected
shall not be divided into classes pursuant to this Article V.3.
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During any period when the holders of any series of Undesignated
Preferred Stock have the right to elect additional Directors as provided for or
fixed pursuant to the provisions of Article IV hereof, then upon commencement
and for the duration of the period during which such right continues: (i) the
then otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Undesignated Preferred Stock shall be entitled to elect the
additional Directors so provided for or fixed pursuant to said provisions, and
(ii) each such additional Director shall serve until such Director's successor
shall have been duly elected and qualified, or until such Director's right to
hold such office terminates pursuant to said provisions, whichever occurs
earlier, subject to such Director's earlier death, disqualification,
resignation or removal. Except as otherwise provided by the Board in the
resolution or resolutions establishing such series, whenever the holders of any
series of Undesignated Preferred Stock having such right to elect additional
Directors are divested of such right pursuant to the provisions of such stock,
the terms of office of all such additional Directors elected by the holders of
such stock, or elected to fill any vacancies resulting from the death,
resignation, disqualification or removal of such additional Directors, shall
forthwith terminate and the total and authorized number of Directors of the
Corporation shall be reduced accordingly.
Section 4. Vacancies.
Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
if less than a quorum of the Board of Directors. Any Director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred and until such Director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
Undesignated Preferred Stock to elect Directors, when the number of Directors
is increased or decreased, the Board of Directors shall determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided
by law, may exercise the powers of the full Board of Directors until the
vacancy is filled.
Section 5. Removal.
Subject to the rights, if any, of any series of Undesignated Preferred
Stock to elect Directors and to remove any Director whom the holders of any
such stock have the right to elect, any Director (including persons elected by
Directors to fill vacancies in the Board of
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Directors) may be removed from office (i) only with cause and (ii) only 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. At least
30 days prior to any meeting of stockholders at which it is proposed that any
Director be removed from office, written notice of such proposed removal shall
be sent to the Director whose removal will be considered at the meeting. For
purposes of this Restated Certificate of Incorporation, "cause," with respect
to the removal of any Director shall mean only (i) conviction of a felony, (ii)
declaration of unsound mind by order of court, (iii) gross dereliction of duty,
(iv) commission of any action involving moral turpitude, or (v) commission of
an action which constitutes intentional misconduct or a knowing violation of
law if such action in either event results both in an improper substantial
personal benefit and a material injury to the Corporation.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation 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 Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the Director derived an improper personal benefit. If
the DGCL is amended after the effective date of this Restated Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
Section 1. Amendment by Directors
Except as otherwise provided by law, the By-laws of the Corporation may
be amended or repealed by the Board of Directors.
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Section 2. Amendment by Stockholders
The By-laws of the Corporation may be amended or repealed at any annual
meeting of stockholders, or special meeting of stockholders called for such
purpose, by the affirmative vote of at least two-thirds of the total votes
eligible to be cast on such amendment or repeal by holders of voting stock,
voting together as a single class; provided, however, that if the Board of
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Restated
Certificate of Incorporation in the manner now or hereafter prescribed by
statute and this Restated Certificate of Incorporation, and all rights
conferred upon stockholders herein are granted subject to this reservation. No
amendment or repeal of this Restated Certificate of Incorporation shall be made
unless the same is first approved by the Board of Directors pursuant to a
resolution adopted by the Board of Directors in accordance with Section 242 of
the DGCL, and, except as otherwise provided by law, thereafter approved by the
stockholders. Whenever any vote of the holders of voting stock is required,
and in addition to any other vote of holders of voting stock that is required
by this Restated Certificate of Incorporation or by law, 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, voting together as a single class, at
a duly constituted meeting of stockholders called expressly for such purpose
shall be required to amend or repeal any provisions of this Restated
Certificate of Incorporation; provided, however, that the affirmative vote of
not less than 80% of the total votes eligible to be cast by holders of voting
stock, voting together as a single class, shall be required to amend or repeal
any of the provisions of Article VI or Article IX of this Restated Certificate
of Incorporation.
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I,[______________], President of the Corporation, for the purpose of
amending and restating the Corporation's Second Amended and Restated
Certificate of Incorporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed on behalf of the Corporation this ____ day of
_____________, 1997.
---------------------------------------
[______________], President
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BY-LAWS
of
MONARCH DENTAL CORPORATION
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held
on such date during April, May or June of each year commencing in 1997 as may
be specified by the Board of Directors or the President, at the principal
office of the corporation at ten o'clock, a.m. unless a different hour or place
within or without the State of Delaware is fixed by the Board of Directors or
the President. The purposes for which the annual meeting is to be held, in
addition to those prescribed by law, by the Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") or by these Amended and
Restated By-laws (the "By-Laws"), may be specified by the Board of Directors or
the President. If no annual meeting has been held on the date fixed above, a
special meeting in lieu thereof may be held or there may be action by written
consent of stockholders, and such special meeting or written consent shall have
for the purposes of these By-Laws or otherwise all the force and effect of an
annual meeting.
2. Special Meetings. Special meetings of stockholders may be called
by the President or by the Board of Directors, provided that Special meetings
of stockholders holding particular classes or series of stock may be held as
contemplated by the Certificate of Incorporation. Special meetings shall be
called by the Secretary, or in case of death, absence, incapacity or refusal of
the Secretary, by any other officer, upon written application of one or more
stockholders who hold at least twenty-five percent in interest of the capital
stock entitled to vote at such meeting. The call for the meeting may be oral
or written and shall state the place, date, hour and purposes of the meeting.
3. Notice of Meetings. A written notice stating the place, date and
hour of all meetings of stockholders, and in the case of special meetings, the
purposes of the meeting shall be given by the Secretary (or other person
authorized by these By-Laws or by law) not less than ten nor more than fifty
days before the meeting to each stockholder entitled to vote thereat and to
each stockholder who, under the Certificate of Incorporation or under these
By-laws is entitled to such notice, by delivering such notice to him or by
mailing it, postage prepaid, and addressed to such stockholder at his address
as it appears in the records of the corporation. Notice need not be given to a
stockholder if a written waiver of notice is executed before or after the
meeting by such stockholder, if communication with such stockholder is
unlawful, or if such stockholder attends the meeting in question, unless such
attendance was for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business
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because the meeting was not lawfully called or convened. If a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at the meeting at which the
adjournment is taken, except that if the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
4. Quorum. The holders of a majority in interest of all stock
issued, outstanding and entitled to vote at a meeting (whether comprising the
stockholders entitled to vote generally or stockholders of a particular class
or series, as contemplated by the Certificate of Incorporation) shall
constitute a quorum. Any meeting may be adjourned from time to time by a
majority of the votes properly cast upon the question, whether or not a quorum
is present.
5. Voting and Proxies. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the books
of the corporation unless otherwise provided by law or by the Certificate of
Incorporation. Stockholders may vote either in person or by written proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting, or of any adjournment thereof. Except as otherwise
limited therein, proxies shall entitle the persons authorized thereby to vote
at any adjournment of such meeting. A proxy purporting to be executed by or on
behalf of a stockholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
6. Action at Meeting. When a quorum is present, any matter before
the meeting shall be decided by vote of the holders of a majority of the shares
of stock voting on such matter except where a larger or different vote is
required by law, by the Certificate of Incorporation or by these By-laws. Any
election by stockholders shall be determined by a plurality of the votes cast,
except where a larger or different vote is required by law, by the Certificate
of Incorporation or by these By-laws. No ballot shall be required for any
election unless requested by a stockholder entitled to vote in the election.
The corporation shall not directly or indirectly vote any share of its own
stock; provided, however, that the corporation may vote shares which it holds
in a fiduciary capacity to the extent permitted by law.
7. Action without a Meeting. Any action required or permitted by
law to be taken at any annual or special meeting of stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the number of votes specified in the
Certificate of Incorporation. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent, if and to the
extent action by less than unanimous written consent is authorized under the
Certificate of Incorporation, shall be given to those stockholders who have not
consented in writing.
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8. Stockholder Lists. The Secretary (or other person authorized by
these By-laws or by law) shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a
Board of Directors who may exercise all the powers of the corporation except as
otherwise provided by law, by the Certificate of Incorporation or by these
By-laws. In the event of a vacancy in the Board of Directors, the remaining
Directors, except as otherwise provided by law, may exercise the powers of the
full Board until the vacancy is filled.
2. Election and Qualification. Subject to the provisions of the
Certificate of Incorporation relating to the election of Directors, at each
annual meeting the stockholders shall fix the number of Directors (which shall
not be less than three or the number of stockholders if fewer than three) and
shall elect not more than the number of Directors so designated. No Director
need be a stockholder.
3. Vacancies; Reduction of Board. Subject to the provisions of the
Certificate of Incorporation relating to the election of Directors, any vacancy
in the Board of Directors however occurring including a vacancy resulting from
the enlargement of the Board of Directors may be filled by the stockholders or
by the Directors then in office or by a sole remaining Director, provided that
in lieu of filling any such vacancy the stockholders or Board of Directors may
reduce the number of Directors but not to a number fewer than three or the
number of stockholders if fewer than three. When one or more Directors shall
resign from the Board of Directors, effective at a future date, a majority of
the Directors then in office, including those who so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, subject to the provisions
of the Certificate of Incorporation relating to the election of Directors.
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4. Enlargement of the Board. Subject to the provisions of the
Certificate of Incorporation relating to the election of Directors, the Board
of Directors may be enlarged by the stockholders at any meeting or by vote of a
majority of the Directors then in office.
5. Tenure. Except as otherwise provided by law, by the Certificate
of Incorporation or by these By-laws, Directors shall hold office until their
successors are elected and qualified or until their earlier resignation or
removal. Any Director may resign by delivering his written resignation to the
corporation. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some
other event.
6. Removal. Subject to the provisions of the Certificate of
Incorporation relating to the election of Directors, a Director may be removed
from office (a) with or without cause by vote of the holders of a majority of
the shares of stock entitled to vote in the election of Directors, or (b) for
cause by vote of a majority of the Directors then in office. A Director may be
removed for cause only after reasonable notice and opportunity to be heard
before the body proposing to remove him.
7. Meetings. Regular meetings of the Board of Directors may be held
without notice at such time, date and place as the Board of Directors may from
time to time determine. Special meetings of the Board of Directors may be
called, orally or in writing, by the President, Treasurer or two or more
Directors, designating the time, date and place thereof. Directors may
participate in meetings of the Board of Directors by means of conference
telephone or similar communications equipment by means of which all Directors
participating in the meeting can hear each other, and participation in a
meeting in accordance herewith shall constitute presence in person at such
meeting.
8. Notice of Meetings. Notice of the time, date and place of all
special meetings of the Board of Directors shall be given to each Director by
the Secretary, or Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the officer or one of the Directors
calling the meeting. Notice shall be given to each Director in person or by
telephone or by telecopy sent to his business or home address at least
twenty-four hours in advance of the meeting, or by written notice mailed to his
business or home address at least forty-eight hours in advance of the meeting.
Notice need not be given to any Director if a written waiver of notice is
executed by him before or after the meeting, or if communication with such
Director is unlawful. A notice or waiver of notice of a meeting of the Board
of Directors need not specify the purposes of the meeting.
9. Quorum. At any meeting of the Board of Directors, a majority of
the Directors then in office shall constitute a quorum. Less than a quorum may
adjourn any meeting from time to time and the meeting may be held as adjourned
without further notice.
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10. Action at Meeting. At any meeting of the Board of Directors at
which a quorum is present, a majority of the Directors present may take any
action on behalf of the Board of Directors, unless a larger number is required
by law, by the Certificate of Incorporation or by these By-laws.
11. Action by Consent. Any action required or permitted to be taken
at any meeting of the Board of Directors may be taken without a meeting if a
written consent thereto is signed by all the Directors and filed with the
records of the meetings of the Board of Directors. Such consent shall be
treated as a vote of the Board of Directors for all purposes.
12. Committees. The Board of Directors, by vote of a majority of the
Directors then in office, may establish one or more committees, each committee
to consist of one or more Directors, and may delegate thereto some or all of
its powers except those which by law, by the Certificate of Incorporation, or
by these By-laws may not be delegated. Except as the Board of Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but in the absence of such rules its business shall be conducted so
far as possible in the same manner as is provided in these By-laws for the
Board of Directors. All members of such committees shall hold their committee
offices at the pleasure of the Board of Directors, and the Board may abolish
any committee at any time. Each such committee shall report its action to the
Board of Directors who shall have power to rescind any action of any committee
without retroactive effect.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Secretary, and such other officers, including a
Chairman and one or more Vice Presidents, Assistant Treasurers and Assistant
Secretaries, as the Board of Directors may determine.
2. Election. The President, Treasurer and Secretary shall be
elected annually by the Board of Directors at their first meeting following the
annual meeting of stockholders. Other officers may be chosen by the Board of
Directors at such meeting or at any other meeting.
3. Qualification. No officer need be a stockholder or Director.
Any two or more offices may be held by the same person. Any officer may be
required by the Board of Directors to give bond for the faithful performance of
his duties in such amount and with such sureties as the Board of Directors may
determine.
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4. Tenure. Except as otherwise provided by the Certificate of
Incorporation or by these By-laws, each of the officers of the corporation
shall hold his office until his successor is elected and qualified or until his
earlier resignation or removal. Any officer may resign by delivering his
written resignation to the corporation, and such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event.
5. Removal. The Board of Directors may remove any officer with or
without cause by a vote of a majority of the entire number of Directors then in
office; provided, that an officer may be removed for cause only after
reasonable notice and opportunity to be heard by the Board of Directors.
6. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
7. President, Chairman and Vice Presidents. The President shall be
the chief executive officer of the corporation and shall, subject to the
direction of the Board of Directors, have general supervision and control of
its business. Unless otherwise provided by the Board of Directors he shall
preside, when present, at all meetings of stockholders and of the Board of
Directors.
The Chairman (if any, and who may also be the President) and any Vice
President shall have such powers and shall perform such duties as the Board of
Directors may from time to time designate.
8. Treasurer and Assistant Treasurers. The Treasurer shall, subject
to the direction of the Board of Directors, have general charge of the
financial affairs of the corporation and shall cause to be kept accurate books
of account. He shall have custody of all funds, securities, and valuable
documents of the corporation, except as the Board of Directors may otherwise
provide.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors may from time to time designate.
9. Secretary and Assistant Secretaries. The Secretary shall record
all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose.
In his absence from any such meeting or at the request of the Board of
Directors, an Assistant Secretary, or if there be none or he is absent, a
temporary secretary chosen at the meeting, shall record the proceedings
thereof.
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The Secretary shall have charge of the stock ledger (which may, however,
be kept by any transfer or other agent of the corporation) and shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the President.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors may from time to time designate.
10. Other Powers and Duties. Subject to these By-laws, each officer
of the corporation shall have in addition to the duties and powers specifically
set forth in these By-laws, such duties and powers as are customarily incident
to his office, and such duties and powers as may be designated from time to
time by the Board of Directors.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Each stockholder shall be entitled to a
certificate of the capital stock of the corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall
be signed by the President or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary. Such
signatures may be facsimile if the certificate is signed by a transfer agent or
registrar, other than the corporation or its employee. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the time of its issue. Every certificate for shares of stock
which are subject to any restriction on transfer and every certificate issued
when the corporation is authorized to issue more than one class or series of
stock shall contain such legend with respect thereto as is required by law.
2. Transfers. Subject to any restrictions on transfer shares of
stock may be transferred on the books of the corporation by the surrender to
the corporation or its transfer agent of the certificate therefor properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the corporation or its transfer agent may
reasonably require.
3. Record Holders. Except as may otherwise be required by law, by
the Certificate of Incorporation or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-laws.
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It shall be the duty of each stockholder to notify the corporation of
his post office address.
4. Record Date. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty nor fewer than ten days before the
date of such meeting, nor more than sixty days prior to any other action. In
such case only stockholders of record on such record date shall be so entitled
notwithstanding any transfer of stock on the books of the corporation after the
record date.
If no record date is fixed, (a) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held, (b) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed,
and (c) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate
may be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
Indemnification of Directors, Officers and Others
1. Indemnification of Directors and Officers. The corporation shall
indemnify, to the fullest extent permitted by the General Corporation Law of
the State of Delaware, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the corporation to provide broader indemnification rights than said law
permitted the corporation to provide prior to such amendment):
(a) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
or suit by or in the right of the corporation) by reason of the fact that he is
or was a Director or officer of the corporation or
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any of its subsidiaries, or is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such suit, action or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
Notwithstanding the foregoing, the corporation shall indemnify any such person
seeking indemnification in connection with an action, suit or proceeding
initiated by such person only if the initiation and continued prosecution of
such action, suit or proceeding was authorized by the Board of Directors of the
corporation.
(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of the fact
that he is or was a Director or officer of the corporation, or is or was
serving at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation unless, and only to the extent that, the Court
of Chancery of the State of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
(c) To the extent that a Director or officer of the corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) or (b), or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
2. Indemnification of Employees and Agents. The Board of Directors,
in its discretion, may authorize the corporation to indemnify:
(a) Any person who was or is a party or is threatened to be made a
party to any threatened pending or completed action, suit or proceeding,
whether civil, criminal,
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<PAGE> 10
administrative or investigative by reason of the fact that he is or was an
employee or agent of the corporation, or is or was serving at the request of
the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of the fact
that he is or was an employee or agent of the corporation, or is or was serving
at the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the corporation unless, and only to the extent that, the Court
of Chancery of the State of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnify for such expenses which the Court
of Chancery or such other court shall deem proper.
3. Determination of Entitlement. Any indemnification hereunder
(unless required by law or ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the Director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in paragraphs 1 or 2. The determination shall be made by (i) a majority vote
of those Directors who are not involved in such Proceeding (the "Disinterested
Directors"); (ii) by the stockholders of the corporation; or (iii) if directed
by a majority of Disinterested Directors, by independent legal counsel in a
written opinion. However, if fewer than a majority of the Directors are
Disinterested Directors, the determination shall be made by (i) a majority vote
of a committee of one or more disinterested Director(s) chosen by the
Disinterested Director(s) at a regular or special meeting; (ii) by the
stockholders of the corporation; or (iii) by independent legal counsel in a
written opinion.
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<PAGE> 11
4. Advance Payments. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding, only as authorized
by the Board of Directors in the specific case (including by one or more
Directors who may be parties to such action, suit or proceeding), upon receipt
of an undertaking by or on behalf of the Director, officer, employee or agent
to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the corporation as authorized in this Article V.
5. Non-Exclusive Nature of Indemnification. The indemnification
provided herein shall not be deemed exclusive of any other rights to which any
person, whether or not entitled to be indemnified hereunder, may be entitled
under any statute, by-law, agreement, vote of stockholders or Directors or
otherwise, both as to action in his or her official capacity and as to action
in another capacity while holding such office, and shall continue as to a
person who has ceased to be a Director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Each person who is or becomes a Director or officer as aforesaid shall
be deemed to have served or to have continued to serve in such capacity in
reliance upon the indemnity provided for in this Article V.
6. Insurance. The corporation may purchase and maintain insurance
on behalf of any person who is or was a Director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of the General Corporation Law of the State
of Delaware (as presently in effect or hereafter amended), the Certificate of
Incorporation of the corporation or these By-laws.
7. No Duplicate Payments. The corporation's indemnification under
paragraphs 1 and 2 of this Article V of any person who is or was a Director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
reduced by any amounts such person receives as indemnification (i) under any
policy of insurance purchased and maintained on his behalf by the corporation,
(ii) from such other corporation, partnership, joint venture, trust or other
enterprise, or (iii) under any other applicable indemnification provision.
8. Limitation. Notwithstanding anything herein to the contrary, the
corporation shall not be required to indemnify any person hereunder as to any
matter with respect to which such person or his or its affiliates are obligated
to indemnify the corporation or any of its affiliates pursuant to any agreement
with the corporation or any of its affiliates.
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<PAGE> 12
9. Amendment. This Article V may be amended only so as to have a
prospective effect. Any amendment to this Article V which would result in any
person having a more limited entitlement to indemnification may be approved
only by the stockholders.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the corporation shall end on December 31 of each
year.
2. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations authorized to be executed by an
officer of the corporation in its behalf shall be signed by the President or
the Treasurer except as the Board of Directors may generally or in particular
cases otherwise determine.
3. Voting of Securities. Unless otherwise provided by the Board of
Directors, the President or Treasurer may waive notice of and act on behalf of
this corporation, or appoint another person or persons to act as proxy or
attorney in fact for this corporation with or without discretionary power
and/or power of substitution, at any meeting of stockholders or stockholders of
any other corporation or organization, any of whose securities are held by this
corporation.
4. Resident Agent. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the corporation.
5. Corporate Records. The original or attested copies of the
Certificate of Incorporation, By-laws and records of all meetings of the
incorporators, stockholders and the Board of Directors and the stock and
transfer records, which shall contain the names of all stockholders, their
record addresses and the amount of stock held by each, shall be kept at the
principal office of the corporation, at the office of its counsel, or at an
office of its transfer agent.
6. Certificate of Incorporation. All references in these By-laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
7. Amendments. These By-laws may be amended or repealed or
additional By-laws adopted by the stockholders or by the Board of Directors
except as provided in Article V, Section 8; provided, that (a) the Board of
Directors may not amend or repeal this Section 7 or any provision of these
By-laws which by law, by the Certificate of Incorporation or by these By-laws
requires action by the stockholders, (b) any amendment or repeal of these
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<PAGE> 13
By-laws by the Board of Directors and any By-law adopted by the Board of
Directors may be amended or repealed by the stockholders.
Adopted and Effective
as of February 4, 1996, superseding
and replacing all By-laws previously
in effect.
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<PAGE> 1
EXHIBIT 3.5
FORM OF
SECOND AMENDED AND RESTATED
BY-LAWS
OF
MONARCH DENTAL CORPORATION
(the "Corporation")
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of stockholders shall be
held at the hour, date and place within or without the United States which is
fixed by the majority of the Board of Directors, the Chairman of the Board, if
one is elected, or the President, which time, date and place may subsequently
be changed at any time by vote of the Board of Directors. If no annual meeting
has been held for a period of thirteen months after the Corporation's last
annual meeting of stockholders, a special meeting in lieu thereof may be held,
and such special meeting shall have, for the purposes of these By-laws or
otherwise, all the force and effect of an annual meeting. Any and all
references hereafter in these By-laws to an annual meeting or annual meetings
also shall be deemed to refer to any special meeting(s) in lieu thereof.
SECTION 2. Matters to be Considered at Annual Meetings. At any annual
meeting of stockholders or any special meeting in lieu of annual meeting of
stockholders (the "Annual Meeting"), only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before such Annual Meeting. To be considered as properly brought before an
Annual Meeting, business must be: (a) specified in the notice of meeting, (b)
otherwise properly brought before the meeting by, or at the direction of, the
Board of Directors, or (c) otherwise properly brought before the meeting by any
holder of record (both as of the time notice of such proposal is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of capital stock of the Corporation entitled to vote
at such Annual Meeting who complies with the requirements set forth in this
Section 2.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (a) give timely notice as required by this Section 2 to the
Secretary of the Corporation and (b) be present at such meeting, either in
person or by a representative. For the first Annual Meeting following the
initial public
<PAGE> 2
offering of common stock of the Corporation, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(a) the 75th day prior to the scheduled date of such Annual Meeting or (b) the
15th day following the day on which public announcement of the date of such
Annual Meeting is first made by the Corporation. For all subsequent Annual
Meetings, a stockholder's notice shall be timely if delivered to, or mailed to
and received by, the Corporation at its principal executive office not less
than 75 days nor more than 120 days prior to the anniversary date of the
immediately preceding Annual Meeting (the "Anniversary Date"); provided,
however, that in the event the Annual Meeting is scheduled to be held on a date
more than 30 days before the Anniversary Date or more than 60 days after the
Anniversary Date, a stockholder's notice shall be timely if delivered to, or
mailed to and received by, the Corporation at its principal executive office
not later than the close of business on the later of (a) the 75th day prior to
the scheduled date of such Annual Meeting or (b) the 15th day following the day
on which public announcement of the date of such Annual Meeting is first made
by the Corporation.
For purposes of these By-laws, "public announcement" shall mean: (a)
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service, (b) a report or other
document filed publicly with the Securities and Exchange Commission (including,
without limitation, a Form 8-K), or (c) a letter or report sent to stockholders
of record of the Corporation at the time of the mailing of such letter or
report.
A stockholder's notice to the Secretary shall set forth as to each
matter proposed to be brought before an Annual Meeting: (a) a brief
description of the business the stockholder desires to bring before such Annual
Meeting and the reasons for conducting such business at such Annual Meeting,
(b) the name and address, as they appear on the Corporation's stock transfer
books, of the stockholder proposing such business, (c) the class and number of
shares of the Corporation's capital stock beneficially owned by the stockholder
proposing such business, (d) the names and addresses of the beneficial owners,
if any, of any capital stock of the Corporation registered in such
stockholder's name on such books, and the class and number of shares of the
Corporation's capital stock beneficially owned by such beneficial owners, (e)
the names and addresses of other stockholders known by the stockholder
proposing such business to support such proposal, and the class and number of
shares of the Corporation's capital stock beneficially owned by such other
stockholders, and (f) any material interest of the stockholder proposing to
bring such business before such meeting (or any other stockholders known to be
supporting such proposal) in such proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2 in any material respect, such proposal shall not be presented for
action at the Annual Meeting in question. If neither the Board of Directors
nor
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<PAGE> 3
such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the Annual
Meeting shall determine whether the stockholder proposal was made in accordance
with the terms of this Section 2. If the presiding officer determines that any
stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2 in any material respect, such proposal shall not be presented for
action at the Annual Meeting in question. If the Board of Directors, a
designated committee thereof or the presiding officer determines that a
stockholder proposal was made in accordance with the requirements of this
Section 2, the presiding officer shall so declare at the Annual Meeting and
ballots shall be provided for use at the meeting with respect to such proposal.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder with respect to the matters set forth in this Section 2, and nothing
in this Section 2 shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of preferred stock,
special meetings of the stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution approved by the affirmative
vote of a majority of the directors then in office.
SECTION 4. Matters to be Considered at Special Meetings. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice of each
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given by the Secretary or an Assistant Secretary (or other person authorized by
these By-laws or by law) not less than 10 days nor more than 60 days before the
Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Restated Certificate of Incorporation of
the Corporation (as the same may hereafter be amended and/or restated, the
"Certificate") or under these By-laws, is entitled to such notice, by
delivering such notice to him or by mailing it, postage prepaid, addressed to
such stockholder at the address of such stockholder as it appears on the
Corporation's stock transfer books. Such notice shall be deemed to be
delivered when hand delivered to such address or deposited in the mail so
addressed, with postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for Annual Meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
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<PAGE> 4
Notice of an Annual Meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any Annual Meeting or special meeting of stockholders need
be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously
scheduled Annual Meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure
with respect to any such meeting has been sent or made pursuant to Section 2 of
this Article I or Section 3 of Article II hereof or otherwise. In no event
shall the public announcement of an adjournment, postponement or rescheduling
of any previously scheduled meeting of stockholders commence a new time period
for the giving of a stockholder's notice under Section 2 of Article I and
Section 3 of Article II of these By-laws.
When any meeting is convened, the presiding officer may adjourn the
meeting if (a) no quorum is present for the transaction of business, (b) the
Board of Directors determines that adjournment is necessary or appropriate to
enable the stockholders to consider fully information which the Board of
Directors determines has not been made sufficiently or timely available to
stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting other than an announcement at
the meeting at which the adjournment is taken of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who,
by law or under the Certificate or these By-laws, is entitled to such notice.
SECTION 6. Quorum. The holders of shares of voting stock representing a
majority of the voting power of the outstanding shares of voting stock issued,
outstanding and entitled to vote at a meeting of stockholders, represented in
person or by proxy at such meeting, shall constitute a quorum; but if less than
a quorum is present at a meeting, the holders of voting stock representing a
majority of the voting power present at the meeting or the presiding officer
may adjourn the meeting from time to time, and the meeting may be held as
adjourned without further notice, except as provided in Section 5 of this
Article I. At such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The stockholders present at a duly constituted meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
4
<PAGE> 5
SECTION 7. Voting and Proxies. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
books of the Corporation, unless otherwise provided by law or by the
Certificate. Stockholders may vote either in person or by written proxy, but
no proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Proxies shall be filed with the
Secretary of the meeting before being voted. Except as otherwise limited
therein or as otherwise provided by law, proxies shall entitle the persons
authorized thereby to vote at any adjournment of such meeting, but they shall
not be valid after final adjournment of such meeting. A proxy with respect to
stock held in the name of two or more persons shall be valid if executed by or
on behalf of any one of them unless at or prior to the exercise of the proxy
the Corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid, and the burden of proving invalidity shall rest on the
challenger.
SECTION 8. Action at Meeting. When a quorum is present, any matter
before any meeting of stockholders shall be decided by the vote of a majority
of the voting power of shares of voting stock, present in person or represented
by proxy at such meeting and entitled to vote on such matter, except where a
larger vote is required by law, by the Certificate or by these By-laws. Any
election by stockholders shall be determined by a plurality of the votes cast,
except where a larger vote is required by law, by the Certificate or by these
By-laws. The Corporation shall not directly or indirectly vote any shares of
its own stock; provided, however, that the Corporation may vote shares which it
holds in a fiduciary capacity to the extent permitted by law.
SECTION 9. Stockholder Lists. The Secretary or an Assistant Secretary
(or the Corporation's transfer agent or other person authorized by these By-
laws or by law) shall prepare and make, at least 10 days before every Annual
Meeting or special meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the hour,
date and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
SECTION 10. Presiding Officer. The Chairman of the Board, if one is
elected, or if not elected or in his or her absence, the President, shall
preside at all Annual Meetings or special meetings of stockholders and shall
have the power, among other things, to adjourn such meeting at any time and
from time to time, subject to Sections 5 and 6 of this Article I. The order of
business and all other matters of procedure at any meeting of the stockholders
shall be determined by the presiding officer.
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<PAGE> 6
SECTION 11. Voting Procedures and Inspectors of Elections. The
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able
to act at a meeting of stockholders, the presiding officer shall appoint one or
more inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to
the best of his or her ability. The inspectors shall perform such duties as
are required by the General Corporation Law of the State of Delaware, as
amended from time to time (the "DGCL"), including the counting of all votes and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors. The
presiding officer may review all determinations made by the inspectors, and in
so doing the presiding officer shall be entitled to exercise his or her sole
judgment and discretion and he or she shall not be bound by any determinations
made by the inspectors. All determinations by the inspectors and, if
applicable, the presiding officer, shall be subject to further review by any
court of competent jurisdiction.
ARTICLE II
Directors
SECTION 1. Powers. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors except as
otherwise provided by the Certificate or required by law.
SECTION 2. Number and Terms. The number of directors of the
Corporation shall be fixed by resolution duly adopted from time to time by the
Board of Directors. The directors shall hold office in the manner provided in
the Certificate.
SECTION 3. Director Nominations. Nominations of candidates for
election as directors of the Corporation at any Annual Meeting may be made only
(a) by, or at the direction of, a majority of the Board of Directors or (b) by
any holder of record (both as of the time notice of such nomination is given by
the stockholder as set forth below and as of the record date for the Annual
Meeting in question) of any shares of the capital stock of the Corporation
entitled to vote at such Annual Meeting who complies with the timing,
informational and other requirements set forth in this Section 3. Any
stockholder who has complied with the timing, informational and other
requirements set forth in this Section 3 and who seeks to make such a
nomination, or his, her or its representative, must be present in person at the
Annual Meeting. Only persons nominated in accordance with the procedures set
forth in this Section 3 shall be eligible for election as directors at an
Annual Meeting.
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<PAGE> 7
Nominations, other than those made by, or at the direction of, the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 3. For the first
Annual Meeting following the initial public offering of common stock of the
Corporation, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office not later
than the close of business on the later of (a) the 75th day prior to the
scheduled date of such Annual Meeting or (b) the 15th day following the day on
which public announcement of the date of such Annual Meeting is first made by
the Corporation. For all subsequent Annual Meetings, a stockholder's notice
shall be timely if delivered to, or mailed to and received by, the Corporation
at its principal executive office not less than 75 days nor more than 120 days
prior to the Anniversary Date; provided, however, that in the event the Annual
Meeting is scheduled to be held on a date more than 30 days before the
Anniversary Date or more than 60 days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed and received
by, the Corporation at its principal executive office not later than the close
of business on the later of (a) the 75th day prior to the scheduled date of
such Annual Meeting or (b) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation.
A stockholder's notice to the Secretary shall set forth as to each
person whom the stockholder proposes to nominate for election or re-election as
a director: (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the
class and number of shares of the Corporation's capital stock which are
beneficially owned by such person on the date of such stockholder notice, and
(d) the consent of each nominee to serve as a director if elected. A
stockholder's notice to the Secretary shall further set forth as to the
stockholder giving such notice: (a) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholder and of the beneficial
owners (if any) of the Corporation's capital stock registered in such
stockholder's name and the name and address of other stockholders known by such
stockholder to be supporting such nominee(s), (b) the class and number of
shares of the Corporation's capital stock which are held of record,
beneficially owned or represented by proxy by such stockholder and by any other
stockholders known by such stockholder to be supporting such nominee(s) on the
record date for the Annual Meeting in question (if such date shall then have
been made publicly available) and on the date of such stockholder's notice, and
(c) a description of all arrangements or understandings between such
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by such stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not made in accordance with the terms of
this Section 3 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3 in any material
respect, then such nomination shall not be considered at the Annual Meeting in
question. If neither the Board of Directors nor such committee makes a
determination as to whether a nomination was made in accordance with the
provisions of this
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Section 3, the presiding officer of the Annual Meeting shall determine whether
a nomination was made in accordance with such provisions. If the presiding
officer determines that any stockholder nomination was not made in accordance
with the terms of this Section 3 or that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section 3 in any material respect, then such nomination shall not be considered
at the Annual Meeting in question. If the Board of Directors, a designated
committee thereof or the presiding officer determines that a nomination was
made in accordance with the terms of this Section 3, the presiding officer
shall so declare at the Annual Meeting and ballots shall be provided for use at
the meeting with respect to such nominee.
Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 3, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement by the Corporation naming all of the nominees
for director or specifying the size of the increased Board of Directors at
least 75 days prior to the Anniversary Date, a stockholder's notice required by
this Section 3 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if such notice shall
be delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the 15th day following
the day on which such public announcement is first made by the Corporation.
No person shall be elected by the stockholders as a director of the
Corporation unless nominated in accordance with the procedures set forth in
this Section. Election of directors at an Annual Meeting need not be by
written ballot, unless otherwise provided by the Board of Directors or
presiding officer at such Annual Meeting. If written ballots are to be used,
ballots bearing the names of all the persons who have been nominated for
election as directors at the Annual Meeting in accordance with the procedures
set forth in this Section shall be provided for use at the Annual Meeting.
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SECTION 4. Qualification. No director need be a stockholder of the
Corporation.
SECTION 5. Vacancies. Subject to the rights, if any, of the holders of
any series of preferred stock to elect directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a director, shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
if less than a quorum of the Board of Directors. Any director appointed in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been duly elected and qualified or until his or her earlier resignation or
removal. Subject to the rights, if any, of the holders of any series of
preferred stock to elect directors, when the number of directors is increased
or decreased, the Board of Directors shall determine the class or classes to
which the increased or decreased number of directors shall be apportioned;
provided, however, that no decrease in the number of directors shall shorten
the term of any incumbent director. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board of Directors until the vacancy is filled.
SECTION 6. Removal. Directors may be removed from office in the manner
provided in the Certificate.
SECTION 7. Resignation. A director may resign at any time by giving
written notice to the Chairman of the Board, if one is elected, the President
or the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
SECTION 8. Regular Meetings. The regular annual meeting of the Board
of Directors shall be held, without notice other than this Section 8, on the
same date and at the same place as the Annual Meeting following the close of
such meeting of stockholders. Other regular meetings of the Board of Directors
may be held at such hour, date and place as the Board of Directors may by
resolution from time to time determine without notice other than such
resolution.
SECTION 9. Special Meetings. Special meetings of the Board of
Directors may be called, orally or in writing, by or at the request of a
majority of the directors, the Chairman of the Board, if one is elected, or the
President. The person calling any such special meeting of the Board of
Directors may fix the hour, date and place thereof.
SECTION 10. Notice of Meetings. Notice of the hour, date and place of
all special meetings of the Board of Directors shall be given to each director
by the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated
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by the Chairman of the Board, if one is elected, or the President. Notice of
any special meeting of the Board of Directors shall be given to each director
in person, by telephone, or by facsimile, telex, telecopy, telegram, or other
written form of electronic communication, sent to his or her business or home
address, at least 24 hours in advance of the meeting, or by written notice
mailed to his or her business or home address, at least 48 hours in advance of
the meeting. Such notice shall be deemed to be delivered when hand delivered
to such address, read to such director by telephone, deposited in the mail so
addressed, with postage thereon prepaid if mailed, dispatched or transmitted if
faxed, telexed or telecopied, or when delivered to the telegraph company if
sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given
as in the case of an original meeting. It shall not be necessary to give any
notice of the hour, date or place of any meeting adjourned for less than 30
days or of the business to be transacted thereat, other than an announcement at
the meeting at which such adjournment is taken of the hour, date and place to
which the meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate or
by these By-laws, neither the business to be transacted at, nor the purpose of,
any meeting of the Board of Directors need be specified in the notice or waiver
of notice of such meeting.
SECTION 11. Quorum. At any meeting of the Board of Directors, a
majority of the directors then in office shall constitute a quorum for the
transaction of business, but if less than a quorum is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time,
and the meeting may be held as adjourned without further notice, except as
provided in Section 10 of this Article II. Any business which might have been
transacted at the meeting as originally noticed may be transacted at such
adjourned meeting at which a quorum is present.
SECTION 12. Action at Meeting. At any meeting of the Board of
Directors at which a quorum is present, a majority of the directors present may
take any action on behalf of the Board of Directors, unless otherwise required
by law, by the Certificate or by these By-laws.
SECTION 13. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting
if all members of the Board of Directors consent thereto in writing. Such
written consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
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SECTION 14. Manner of Participation. Directors may participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
SECTION 15. Committees. The Board of Directors, by vote of a majority
of the directors then in office, may elect from its number one or more
committees, including, without limitation, an Executive Committee, a
Compensation and Option Committee and an Audit Committee, and may delegate
thereto some or all of its powers except those which by law, by the Certificate
or by these By-laws may not be delegated. Except as the Board of Directors may
otherwise determine, any such committee may make rules for the conduct of its
business, but unless otherwise provided by the Board of Directors or in such
rules, its business shall be conducted so far as possible in the same manner as
is provided by these By-laws for the Board of Directors. All members of such
committees shall hold such offices at the pleasure of the Board of Directors.
The Board of Directors may abolish any such committee at any time. Any
committee to which the Board of Directors delegates any of its powers or duties
shall keep records of its meetings and shall report its action to the Board of
Directors. The Board of Directors shall have power to rescind any action of
any committee, to the extent permitted by law, but no such rescission shall
have retroactive effect.
SECTION 16. Compensation of Directors. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as directors of the
Corporation.
ARTICLE III
Officers
SECTION 1. Enumeration. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a Chairman of the Board, a Chief Executive Officer and one
or more Vice Presidents (including Executive Vice Presidents or Senior Vice
Presidents), Assistant Vice Presidents, Assistant Treasurers and Assistant
Secretaries, as the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the Board
following the Annual Meeting of stockholders, the Board of Directors shall
elect the President, the Treasurer and the Secretary. Other officers may be
elected by the Board of Directors at such regular annual meeting of the Board
of Directors or at any other regular or special meeting.
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SECTION 3. Qualification. No officer need be a stockholder or a
director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for
the faithful performance of his or her duties in such amount and with such
sureties as the Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate or
by these By-laws, each of the officers of the Corporation shall hold office
until the regular annual meeting of the Board of Directors following the next
Annual Meeting of stockholders and until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his or
her written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some
other event.
SECTION 6. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
SECTION 7. Absence or Disability. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 9. Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and
of the Board of Directors. The Chairman of the Board shall have such other
powers and shall perform such other duties as the Board of Directors may from
time to time designate.
SECTION 10. Chief Executive Officer. The Chief Executive Officer, if
one is elected, shall, subject to the direction of the Board of Directors, have
general supervision and control of the Corporation's business. If there is no
Chairman of the Board or if he or she is absent, the Chief Executive Officer
shall preside, when present, at all meetings of stockholders and of the Board
of Directors. The Chief Executive Officer shall have such other powers and
perform such other duties as the Board of Directors may from time to time
designate.
SECTION 11. President. The President shall generally have such powers
and shall perform such duties as the Board of Directors may from time to time
designate. However, if no Chief Executive Officer is elected, the President
shall have general supervision and control of the Corporation's business. If
there is neither a Chairman of the Board nor a Chief
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Executive Officer or if both such officers are absent, the President shall
preside, when present, at all meetings of stockholders and of the Board of
Directors.
SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time
to time designate.
SECTION 13. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have
such other duties and powers as may be designated from time to time by the
Board of Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose.
In his or her absence from any such meeting, a temporary secretary chosen at
the meeting shall record the proceedings thereof. The Secretary shall have
charge of the stock ledger (which may, however, be kept by any transfer or
other agent of the Corporation). The Secretary shall have custody of the seal
of the Corporation, and the Secretary, or an Assistant Secretary, shall have
authority to affix it to any instrument requiring it, and, when so affixed, the
seal may be attested by his or her signature or that of an Assistant Secretary.
The Secretary shall have such other duties and powers as may be designated from
time to time by the Board of Directors or the Chief Executive Officer. In the
absence of the Secretary, any Assistant Secretary may perform his or her duties
and responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. Other Powers and Duties. Subject to these By-laws and to
such limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
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ARTICLE IV
Capital Stock
SECTION 1. Certificates of Stock. Each stockholder shall be entitled
to a certificate of the capital stock of the Corporation in such form as may
from time to time be prescribed by the Board of Directors. Such certificate
shall be signed by the Chairman of the Board of Directors, the President or a
Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on
transfer and every certificate issued when the Corporation is authorized to
issue more than one class or series of stock shall contain such legend with
respect thereto as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and
unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required by law,
by the Certificate or by these By-laws, the Corporation shall be entitled to
treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to
vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the Corporation in accordance with the requirements of these By-laws.
It shall be the duty of each stockholder to notify the Corporation of
his or her post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date: (a) in the case of determination of stockholders entitled to
vote at any meeting of stockholders, shall, unless
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otherwise required by law, not be more than sixty nor less than ten days before
the date of such meeting and (b) in the case of any other action, shall not be
more than sixty days prior to such other action. If no record date is fixed:
(a) the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held and (b) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate
may be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
Indemnification
SECTION 1. Definitions. For purposes of this Article: (a) "Officer"
means any person who serves or has served as a director or officer of the
Corporation or in any other office filled by election or appointment by the
stockholders or the Board of Directors of the Corporation and any heirs,
executors, administrators or personal representatives of such person; (b) "Non-
Officer Employee" means any person who serves or has served as an employee of
the Corporation, but who is not or was not an Officer, and any heirs,
executors, administrators or personal representatives of such person; (c)
"Proceeding" means any threatened, pending, or completed action, suit or
proceeding (or part thereof), whether civil, criminal, administrative,
arbitrative or investigative, any appeal of such an action, suit or proceeding,
and any inquiry or investigation which could lead to such an action, suit, or
proceeding; and (d) "Expenses" means any liability fixed by a judgment, order,
decree or award in a Proceeding, any amount reasonably paid in settlement of a
Proceeding and any professional fees and other expenses and disbursements
reasonably incurred in a Proceeding or in settlement of a Proceeding, including
fines, taxes and penalties relating thereto.
SECTION 2. Officers. Except as provided in Section 4 of this Article
V, each Officer of the Corporation shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the DGCL, as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader rights than said law permitted the Corporation to provide prior to such
amendment) against any and all Expenses incurred by such Officer in connection
with any Proceeding in which such Officer is involved as a result of serving or
having served (a) as an Officer or employee of the Corporation, (b) as a
director, officer or employee of any subsidiary of the Corporation, or (c) in
any capacity with any other corporation, organization, partnership, joint
venture, trust or other entity at the written request or direction of the
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Corporation, including service with respect to employee or other benefit plans,
and shall continue as to an Officer after he or she has ceased to be an Officer
and shall inure to the benefit of his or her heirs, executors, administrators
and personal representatives; provided, however, that the Corporation shall
indemnify any such Officer seeking indemnification in connection with a
Proceeding initiated by such Officer only if such Proceeding was authorized by
the Board of Directors of the Corporation.
SECTION 3. Non-Officer Employees. Except as provided in Section 4 of
this Article V, each Non-Officer Employee of the Corporation may, in the
discretion of the Board of Directors, be indemnified by the Corporation to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader rights than said law
permitted the Corporation to provide prior to such amendment) against any or
all Expenses incurred by such Non-Officer Employee in connection with any
Proceeding in which such Non-Officer Employee is involved as a result of
serving or having served (a) as a Non-Officer Employee of the Corporation, (b)
as a director, officer or employee of any subsidiary of the Corporation, or (c)
in any capacity with any other corporation, organization, partnership, joint
venture, trust or other entity at the request or direction of the Corporation,
including service with respect to employee or other benefit plans, and shall
continue as to a Non-Officer Employee after he or she has ceased to be a
Non-Officer Employee and shall inure to the benefit of his or her heirs,
personal representatives, executors and administrators; provided, however, that
the Corporation may indemnify any such Non-Officer Employee seeking
indemnification in connection with a Proceeding initiated by such Non-Officer
Employee only if such Proceeding was authorized by the Board of Directors of
the Corporation.
SECTION 4. Good Faith. No indemnification shall be provided pursuant
to this Article V to an Officer or to a Non-Officer Employee with respect to a
matter as to which such person shall have been finally adjudicated in any
Proceeding (a) not to have 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
Corporation, and (b) with respect to any criminal Proceeding, to have had
reasonable cause to believe his or her conduct was unlawful. In the event that
a Proceeding is compromised or settled prior to final adjudication so as to
impose any liability or obligation upon an Officer or Non-Officer Employee, no
indemnification shall be provided pursuant to this Article V to said Officer or
Non-Officer Employee with respect to a matter if there be a determination that
with respect to such matter such person did not act in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal Proceeding, had
no reasonable cause to believe his or her conduct was unlawful. The
determination contemplated by the preceding sentence shall be made by (a) a
majority vote of those directors who are not involved in such Proceeding (the
"Disinterested Directors"); (b) by the stockholders; or (c) if directed by a
majority of Disinterested Directors, by independent legal counsel in a written
opinion. However, if more than half of the directors are not Disinterested
Directors, the determination
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shall be made by (a) a majority vote of a committee of one or more
disinterested director(s) chosen by the Disinterested Director(s) at a regular
or special meeting; (b) by the stockholders; or (c) by independent legal
counsel chosen by the Board of Directors in a written opinion.
SECTION 5. Prior to Final Disposition. Unless otherwise determined by
(a) the Board of Directors, (b) if more than half of the directors are involved
in a Proceeding by a majority vote of a committee of one or more Disinterested
Director(s) chosen in accordance with the procedures specified in Section 4 of
this Article or (c) if directed by the Board of Directors, by independent legal
counsel in a written opinion, any indemnification extended to an Officer or
Non-Officer Employee pursuant to this Article V shall include payment by the
Corporation or a subsidiary of the Corporation of Expenses as the same are
incurred in defending a Proceeding in advance of the final disposition of such
Proceeding upon receipt of an undertaking by such Officer or Non-Officer
Employee seeking indemnification to repay such payment if such Officer or Non-
Officer Employee shall be adjudicated or determined not to be entitled to
indemnification under this Article V.
SECTION 6. Contractual Nature of Rights. The foregoing provisions of
this Article V shall be deemed to be a contract between the Corporation and
each Officer and Non-Officer Employee who serves in such capacity at any time
while this Article V is in effect, and any repeal or modification thereof shall
not affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any Proceeding theretofore or thereafter
brought based in whole or in part upon any such state of facts. If a claim for
indemnification or advancement of expenses hereunder by an Officer or Non-
Officer Employee is not paid in full by the Corporation within 60 days after a
written claim for indemnification or documentation of expenses has been
received by the Corporation, such Officer or Non-Officer Employee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, and if successful in whole or in part, such Officer or Non-
Officer Employee shall also be entitled to be paid the expenses of prosecuting
such claim. The failure of the Corporation (including its Board of Directors
or any committee thereof, independent legal counsel, or stockholders) to make a
determination concerning the permissibility of such indemnification or
advancement of expenses under this Article V shall not be a defense to the
action and shall not create a presumption that such indemnification or
advancement is not permissible
SECTION 7. Non-Exclusivity of Rights. The provisions in respect of
indemnification and the payment of expenses incurred in defending a Proceeding
in advance of its final disposition set forth in this Article V shall not be
exclusive of any right which any person may have or hereafter acquire under any
statute, provision of the Certificate or these By-laws, agreement, vote of
stockholders or disinterested directors or otherwise; provided, however, that
in the event the provisions of this Article V in any respect conflict with the
terms of any agreement between the Corporation or any of its subsidiaries and
any person entitled to
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indemnification under this Article V, then, notwithstanding anything contained
herein to the contrary, the provision which is more favorable to the relevant
individual shall govern.
SECTION 8. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Officer or Non-Officer Employee against any
liability of any character asserted against or incurred by the Corporation or
any such Officer or Non-Officer Employee, or arising out of any such status,
whether or not the Corporation would have the power to indemnify such person
against such liability under the DGCL or the provisions of this Article V.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
December of each year.
SECTION 2. Seal. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one
is elected, the President or the Treasurer or any other officer, employee or
agent of the Corporation as the Board of Directors or Executive Committee may
authorize.
SECTION 4. Voting of Securities. Unless the Board of Directors
otherwise provides, the Chairman of the Board, if one is elected, the President
or the Treasurer may waive notice of and act on behalf of this Corporation, or
appoint another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution,
at any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a
resident agent upon whom legal process may be served in any action or
proceeding against the Corporation.
SECTION 6. Corporate Records. The original or attested copies of the
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of Directors and the stock transfer books, which
shall contain the names of all stockholders, their record addresses and the
amount of stock held by each, may be kept outside the State of Delaware and
shall be kept at the principal office of the Corporation, at the office of its
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counsel or at an office of its transfer agent or at such other place or places
as may be designated from time to time by the Board of Directors.
SECTION 7. Certificate. All references in these By-laws to the
Certificate shall be deemed to refer to the Restated Certificate of
Incorporation of the Corporation, as amended and in effect from time to time.
SECTION 8. Amendment of By-laws.
(a) Amendment by Directors. Except as provided otherwise by law,
these By-laws may be amended or repealed by the Board of Directors.
(b) Amendment by Stockholders. These By-laws may be amended or
repealed at any Annual Meeting of stockholders, or special meeting of
stockholders called for such purpose, by the affirmative vote of at least two-
thirds of the total votes eligible to be cast on such amendment or repeal by
holders of voting stock, voting together as a single class; provided, however,
that if the Board of Directors recommends that stockholders approve such
amendment or repeal at such meeting of stockholders, such amendment or repeal
shall only require the affirmative vote of a majority of the total votes
eligible to be cast on such amendment or repeal by holders of voting stock,
voting together as a single class.
Adopted May 1, 1997 and effective as of ________ ___, 1997.
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EXHIBIT 5.1
[LETTERHEAD OF GOODWIN, PROCTER & HOAR LLP]
May 20, 1997
Monarch Dental Corporation
3201 Spring Valley Road, Suite 320
Dallas, Texas 75244
Ladies and Gentlemen:
Re: Registration Statement on Form S-1
This opinion is delivered in our capacity as special counsel to Monarch
Dental Corporation (the "Company") in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities Act of
1933, as amended, of a Registration Statement on Form S-1 (the "Registration
Statement") relating to 3,162,500 shares of Common Stock, par value $.01 per
share (the "Registered Shares"), including 412,500 shares which the
underwriters have an option to purchase solely for the purpose of covering
over-allotments. All of the Registered Shares are to be sold by the Company to
the several underwriters (the "Underwriters") of which Hambrecht & Quist LLC,
Montgomery Securities and Salomon Brothers Inc are the representatives (the
"Representatives") pursuant to an Underwriting Agreement (the "Underwriting
Agreement") to be entered into between the Company and the Representatives of
the Underwriters.
As counsel for the Company, we have examined the form of the proposed
Underwriting Agreement being filed as an exhibit to the Registration Statement,
the Company's Amended and Restated Certificate of Incorporation, as amended,
and the Company's By-laws, each as presently in effect, and such records,
certificates and other documents of the Company as we have deemed necessary or
appropriate for the purposes of this opinion.
Based on the foregoing, we are of the opinion that when the Underwriting
Agreement is completed (including the insertion therein of pricing terms) and
executed by the Company and on behalf of the Underwriters, and the Registered
Shares are sold to the Underwriters and paid for pursuant to the terms of the
Underwriting Agreement, the Registered Shares will be duly authorized, legally
issued, fully paid and non-assessable by the Company under the General
Corporation Law of the State of Delaware.
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Monarch Dental Corporation
May 20, 1997
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We hereby consent to being named as counsel to the Company in the
Registration Statement, to the references therein to our firm under the caption
"Legal Matters," and to the inclusion of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
GOODWIN, PROCTER & HOAR LLP
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EXHIBIT 10.1
MONARCH DENTAL CORPORATION
1996 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Monarch Dental Corporation 1996 Stock Option
and Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and
enable the officers, employees, Directors, advisors, consultants and key
persons of Monarch Dental Corporation (the "Company") and its Subsidiaries
(including for this purpose dental health providers for whom the Company or any
of its Subsidiaries provides management services and who provide services in
connection with the business of the Company or its Subsidiaries either directly
or through one or more professional corporations ("Dental Providers")) upon
whose judgment, initiative and efforts the Company largely depends for the
successful conduct of its business to acquire a proprietary interest in the
Company. It is anticipated that providing such persons with a direct stake in
the Company's welfare will assure a closer identification of their interests
with those of the Company, thereby stimulating their efforts on the Company's
behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified
Stock Options, Restricted Stock Awards, Unrestricted Stock Awards, Performance
Share Awards and Dividend Equivalent Rights.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" has the meaning specified in Section 2.
"Dividend Equivalent Right" means Awards granted pursuant to Section 9.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 15.
"Fair Market Value" of the Stock on any given date means the fair market
value of the Stock determined in good faith by the Committee; provided,
however, that (i) if the Stock is admitted to quotation on the National
Association of Securities Dealers
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Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date
shall not be less than the average of the highest bid and lowest asked prices
of the Stock reported for such date or, if no bid and asked prices were
reported for such date, for the last day preceding such date for which such
prices were reported, or (ii) if the Stock is admitted to trading on a national
securities exchange or the NASDAQ National Market System, the Fair Market Value
on any date shall not be less than the closing price reported for the Stock on
such exchange or system for such date or, if no sales were reported for such
date, for the last date preceding the date for such a sale was reported.
"Incentive Stock Option" means any Stock Option designated and qualified
as an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not also an
employee or officer of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Share Award" means Awards granted pursuant to Section 8.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
"Stock" means the Common Stock, par value $.01 per share, of the
Company, subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the
Company) in any unbroken chain of corporations or other entities beginning with
the Company if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section
7.
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT
PARTICIPANTS AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by the Board of
Directors of the Company, or at the discretion of the Board, by a committee of
the Board consisting
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of not less than two Independent Directors. On and after the date the Company
becomes subject to the Act, each member of the Committee shall be a "Non-
Employee Director" within the meaning of Rule 16b-3(a)(3) promulgated under the
Act, or any successor definition under said rule. On and after the date grants
made under this Plan become subject to Section 162(m) of the Code, each member
of the Committee shall be an "Outside Director" within the meaning of Section
162(m) of the Code and the regulations promulgated thereunder. All references
herein to the Committee shall be deemed to refer to the entity then responsible
for administration of the Plan at the relevant time (i.e., either the Board of
Directors or a committee of the Board, as applicable).
(b) Powers of Committee. The Committee shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the officers, employees, Independent Directors,
consultants, advisors and key persons of the Company and its
Subsidiaries (including for this purpose Dental Providers) to whom
Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent,
if any, of Incentive Stock Options, Non-Qualified Stock Options,
Restricted Stock Awards, Unrestricted Stock Awards, Performance Share
Awards and Dividend Equivalent Rights, or any combination of the
foregoing, granted to any one or more participants;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of
the Plan, of any Award, which terms and conditions may differ among
individual Awards and participants, and to approve the form of written
instruments evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of
all or any portion of any Award and/or to include provisions in Awards
providing for such acceleration;
(vi) to impose any limitations on Awards granted under the
Plan, including limitations on transfers, repurchase provisions and the
like;
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(vii) subject to the provisions of Section 5(a)(iii), to extend
at any time the period in which Stock Options may be exercised;
(viii) to determine at any time whether, to what extent, and
under what circumstances Stock and other amounts payable with respect to
an Award shall be deferred either automatically or at the election of
the participant and whether and to what extent the Company shall pay or
credit amounts constituting interest (at rates determined by the
Committee) or dividends or deemed dividends on such deferrals; and
(ix) at any time to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms
and provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and to otherwise supervise the administration of the
Plan.
All decisions and interpretations of the Committee shall be binding on
all persons, including the Company and Plan participants.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved
and available for issuance under the Plan shall be 1,376,250 shares of Stock.
For purposes of this limitation, the shares of Stock underlying any Awards
which are forfeited, cancelled, reacquired by the Company, satisfied without
the issuance of Stock or otherwise terminated (other than by exercise) shall be
added back to the shares of Stock available for issuance under the Plan.
Subject to such overall limitation, shares of Stock may be issued up to such
maximum number pursuant to any type or types of Award; provided, however, that
on and after the date the Company is subject to Section 162(m) of the Code,
Stock Options with respect to no more than 300,000 shares of Stock may be
granted to any one individual participant during any one calendar year period.
The shares available for issuance under the Plan may be authorized but unissued
shares of Stock or shares of Stock reacquired by the Company.
(b) Recapitalizations. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction, the outstanding shares
of Stock of either class are increased or decreased or are exchanged for a
different number or kind of shares or other securities of the Company, or
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of
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Stock or other securities, the Committee shall make an appropriate or
proportionate adjustment in (i) the maximum number of shares reserved for
issuance under the Plan, (ii) the number of Stock Options that can be granted
to any one individual participant, (iii) the number and kind of shares or other
securities subject to any then outstanding Awards under the Plan, and (iv) the
price for each share subject to any then outstanding Stock Options under the
Plan, without changing the aggregate exercise price (i.e., the exercise price
multiplied by the number of Stock Options) as to which such Stock Options
remain exercisable. The adjustment by the Committee shall be final, binding
and conclusive. No fractional shares of Stock shall be issued under the Plan
resulting from any such adjustment, but the Committee in its discretion may
make a cash payment in lieu of fractional shares.
(c) Mergers and Other Transactions. In the case of (i) the
dissolution or liquidation of the Company, (ii) a merger, reorganization or
consolidation in which the Company is acquired by another person or entity
(other than a holding company formed by the Company and other than a merger,
reorganization or consolidation where shareholders of the Company immediately
prior to the transaction continue immediately after the transaction, to own
shares representing in the aggregate 50 percent or more of the voting shares of
the corporation issuing cash or securities in the merger, reorganization or
consolidation), (iii) the sale of all or substantially all of the assets of the
Company to an unrelated person or entity, or (iv) the sale of all of the Stock
of the Company to an unrelated person or entity, then unless otherwise provided
in the Award agreement the outstanding Options shall become fully vested. Upon
the effectiveness of any such transaction or event, the Plan and all Dividend
Equivalent Rights and Performance Share Awards ("Contractual Awards") granted
hereunder shall terminate, unless provision is made in connection with such
transaction for the assumption of Contractual Awards heretofore granted, or the
substitution of such Contractual Awards of new Contractual Awards of the
successor entity or parent thereof, with appropriate adjustment as to the
number and kind of shares and, if appropriate, the per share exercise prices,
as provided in Section 3(b) above. In the event of such termination, each
optionee shall be permitted to exercise for a period of at least 15 days prior
to the termination all outstanding vested Options. The treatment of Restricted
Stock Awards and Unrestricted Stock Awards in connection with any such
transaction shall be as specified in the relevant Award agreement.
(d) Substitute Awards. The Committee may grant Awards under the Plan
in substitution for stock and stock based awards held by employees of another
corporation who become employees of the Company or a Subsidiary as the result
of a merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Committee may direct that the
substitute awards be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.
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SECTION 4. ELIGIBILITY
Participants in the Plan will be such officers, and other employees,
advisors, consultants and key persons of the Company and its Subsidiaries
(including for this purpose Dental Providers) who are responsible for or
contribute to the management, growth or profitability of the Company and its
Subsidiaries as are selected from time to time by the Committee, in its sole
discretion. Independent Directors are also eligible to participate in the
Plan.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be pursuant to a stock
option agreement which shall be in such form as the Committee may from time to
time approve. Option agreements need not be identical.
Stock Options granted under the Plan may be either Incentive Stock
Options or Non-Qualified Stock Options. Incentive Stock Options may be granted
only to employees of the Company or any Subsidiary that is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code. Non-Qualified
Stock Options may be granted to officers, employees, Independent Directors,
advisors, consultants and key persons of the Company and its Subsidiaries
(including for this purpose Dental Providers). To the extent that any Option
does not qualify as an Incentive Stock Option, it shall be deemed a Non-
Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after January
31, 2006.
(a) Terms of Stock Options. Stock Options granted under the Plan
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan,
as the Committee shall deem desirable:
(i) Exercise Price. The exercise price per share for the
Stock covered by a Stock Option shall be determined by the Committee at
the time of grant but shall not be less than 100% of the Fair Market
Value on the date of grant in the case of Incentive Stock Options. If
an employee owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company or any
parent or subsidiary corporation and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock
Option shall be not less than 110% of the Fair Market Value on the grant
date.
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(ii) Grant of Discount Options in Lieu of Cash Compensation.
Upon the request of an eligible participant and with the consent of the
Committee, such participant may elect each calendar year to receive a
Non-Qualified Stock Option in lieu of any cash bonus or other
compensation to which he may become entitled during the following
calendar year, but only if such participant makes an irrevocable
election to waive receipt of all or a portion of such cash compensation.
Such election shall be made on or before the date set by the Committee
which date shall be no later than 15 days (or such shorter period
permitted by the Committee) preceding January 1 of the calendar year for
which the cash compensation would otherwise be paid. A Non-Qualified
Stock Option shall be granted to each participant who made such an
irrevocable election on the date the waived cash compensation would
otherwise be paid. The exercise price per share shall be determined by
the Committee. The number of shares of Stock subject to the Stock
Option shall be determined by dividing the amount of the waived cash
compensation by the difference between the Fair Market Value of the
Stock on the date the Stock Option is granted and the exercise price per
Stock Option. The Stock Option shall be granted for whole number of
shares so determined; the value of any fractional share shall be paid in
cash. A participant may revoke his election under this Section 5(a)(ii)
on a prospective basis at any time.
(iii) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Incentive Stock Option shall be exercisable
more than ten years after the date the option is granted. If an
employee owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than 10% of the combined voting power
of all classes of stock of the Company or any Subsidiary or parent
corporation and an Incentive Stock Option is granted to such employee,
the term of such option shall be no more than five years from the date
of grant.
(iv) Exercisability; Rights of a Stockholder. Stock Options
shall become vested and exercisable at such time or times, whether or
not in installments, as shall be determined by the Committee at or after
the grant date; provided, however, that Stock Options granted in lieu of
cash compensation shall be exercisable in full as of the grant date.
The Committee may at any time accelerate the exercisability of all or
any portion of any Stock Option. An optionee shall have the rights of a
stockholder only as to shares acquired upon the exercise of a Stock
Option and not as to unexercised Stock Options.
(v) Method of Exercise. Stock Options may be exercised in
whole or in part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the
purchase price may be made by one or more of the following methods;
provided, however, that the
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methods set forth in subsections (B) and (C) below shall become
available only after the closing of the first underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Stock
to the public:
(A) In cash, by certified or bank check or other
instrument acceptable to the Committee;
(B) In the form of shares of Stock that are not then
subject to restrictions under any Company plan and that have been
held by the optionee for at least six months, if permitted by the
Committee in its discretion. Such surrendered shares shall be
valued at Fair Market Value on the exercise date; or
(C) By the optionee delivering to the Company a
properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company cash
or a check payable and acceptable to the Company to pay the
purchase price; provided that in the event the optionee chooses
to pay the purchase price as so provided, the optionee and the
broker shall comply with such procedures and enter into such
agreements of indemnity and other agreements as the Committee
shall prescribe as a condition of such payment procedure.
Payment instruments will be received subject to collection. The
delivery of certificates representing the shares of Stock to be
purchased pursuant to the exercise of a Stock Option will be contingent
upon receipt from the optionee (or a purchaser acting in his stead in
accordance with the provisions of the Stock Option) by the Company of
the full purchase price for such shares and the fulfillment of any other
requirements contained in the Stock Option or applicable provisions of
laws.
(vi) Termination. Unless otherwise provided in the option
agreement or determined by the Committee, upon the optionee's
termination of employment (or other business relationship) with the
Company and its Subsidiaries, the optionee's rights in his Stock Options
shall automatically terminate.
(vii) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of the
Code, the aggregate Fair Market Value (determined as of the time of
grant) of the shares of Stock with respect to which Incentive Stock
Options granted under this Plan and any other plan of the Company or its
parent and subsidiary corporations become exercisable for the first time
by an optionee during any calendar year shall not
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exceed $100,000. To the extent that any Stock Option exceeds this
limit, it shall constitute a Non-Qualified Stock Option.
(b) Reload Options. At the discretion of the Committee, Options
granted under Section 5(a) may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(v)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with the same expiration
date as the original Option being exercised, and with such other terms as the
Committee may provide) to purchase that number of shares of Stock equal to the
number delivered to exercise the original Option.
(c) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee. Notwithstanding the foregoing, the
Committee may provide in an option agreement that the optionee may transfer,
without consideration for the transfer, his Non-Qualified Stock Options to
members of his immediate family, to trusts for the benefit of such family
members and to partnerships in which such family members are the only partners.
SECTION 6. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. The Committee may grant
Restricted Stock Awards to any officer, employee, Independent Director,
advisor, consultant or key person of the Company and its Subsidiaries
(including for this purpose Dental Providers). A Restricted Stock Award is an
Award entitling the recipient to acquire, at par value or such other purchase
price determined by the Committee, shares of Stock subject to such restrictions
and conditions as the Committee may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives.
(b) Rights as a Stockholder. Upon execution of a written instrument
setting forth the Restricted Stock Award and payment of any applicable purchase
price, a participant shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the Committee
shall otherwise determine, certificates evidencing the Restricted Stock shall
remain in the possession of the Company until such Restricted Stock is vested
as provided in Section 6(e) below.
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(c) Restrictions. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the written instrument evidencing the
Restricted Stock Award. If a participant's employment (or other business
relationship) with the Company and its Subsidiaries terminates for any reason,
the Company or its assigns shall have the right or shall agree, as may be
specified in the relevant restricted stock agreement, to repurchase Restricted
Stock with respect to which conditions have not lapsed at their purchase price
from the participant or the participant's legal representative.
(d) Vesting of Restricted Stock. The Committee at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which Restricted Stock
shall become vested, subject to such further rights of the Company or its
assigns as may be specified in the instrument evidencing the Restricted Stock
Award. Except as may otherwise be provided by the Committee at any time, a
participant's rights in any shares of Restricted Stock that have not vested
shall automatically terminate upon the participant's termination of employment
(or other business relationship) with the Company and its Subsidiaries and such
shares shall be subject to the Company's right or agreement to repurchase as
provided in Section 6(c) above.
(e) Waiver, Deferral and Reinvestment of Dividends. The written
instrument evidencing the Restricted Stock Award may require or permit the
immediate payment, waiver, deferral or investment of dividends paid on the
Restricted Stock.
SECTION 7. UNRESTRICTED STOCK AWARDS
(a) Grant or Sale of Unrestricted Stock. The Committee may, in its
sole discretion, grant (or sell at a purchase price determined by the
Committee) an Unrestricted Stock Award to any officer, employee, Independent
Director, advisor, consultant or key person of the Company or its Subsidiaries
(including for this purpose Dental Providers), pursuant to which such
individual may receive shares of Stock free of any vesting restrictions
("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be
granted or sold as described in the preceding sentence in respect of past
services or other valid consideration, or in lieu of any cash compensation due
to such individual.
(b) Elections to Receive Unrestricted Stock In Lieu of Compensation.
Upon the request of an officer, employee, advisor, consultant or a key person
of the Company and its Subsidiaries (including for this purpose Dental
Providers) and with the consent of the Committee, each such individual may,
pursuant to an irrevocable written election delivered to the Company no later
than the date or dates specified by the Committee, receive a portion of the
cash compensation otherwise due to such individual in the form
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of shares of Unrestricted Stock (valued at Fair Market Value on the date or
dates the cash compensation would otherwise be paid).
(c) Elections to Receive Unrestricted Stock in Lieu of Director Fees.
Each Independent Director may, pursuant to an irrevocable written election
delivered to the Company, receive all or a portion of such Independent
Director's director fees in shares of Unrestricted Stock (valued at Fair Market
Value on the date or dates that the director fees would otherwise be paid in
cash).
(d) Deferral of Awards. Each participant who has made an election to
receive shares of Unrestricted Stock under this Section 7 will have the right
to defer receipt of up to 100% of such shares of Unrestricted Stock payable to
such participant in accordance with such rules and procedures as may from time
to time be established by the Company for that purpose. The deferred
Unrestricted Stock shall be entitled to receive Dividend Equivalent Rights
settled in shares of Stock.
(e) Restrictions on Transfers. The right to receive Unrestricted
Stock on a deferred basis may not be sold, assigned, transferred, pledged or
otherwise encumbered, other than by will or the laws of descent and
distribution.
SECTION 8. PERFORMANCE SHARE AWARDS
(a) Nature of Performance Share Awards. A Performance Share Award is
an Award entitling the recipient to acquire shares of Stock upon the attainment
of specified performance goals. The Committee may make Performance Share
Awards independent of or in connection with the granting of any other Award
under the Plan. Performance Share Awards may be granted under the Plan to any
officer, employee, Independent Director, advisor, consultant or key person of
the Company or its Subsidiaries (including for this purpose Dental Providers),
including those who qualify for awards under other performance plans of the
Company. The Committee in its sole discretion shall determine whether and to
whom Performance Share Awards shall be made, the performance goals applicable
under each such Award, the periods during which performance is to be measured,
and all other limitations and conditions applicable to the awarded Performance
Shares; provided, however, that the Committee may rely on the performance goals
and other standards applicable to other performance unit plans of the Company
in setting the standards for Performance Share Awards under the Plan.
(b) Restrictions on Transfer. Performance Share Awards and all
rights with respect to such Awards may not be sold, assigned, transferred,
pledged or otherwise encumbered.
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(c) Rights as a Shareholder. A participant receiving a Performance
Share Award shall have the rights of a shareholder only as to shares actually
received by the participant under the Plan and not with respect to shares
subject to the Award but not actually received by the participant. A
participant shall be entitled to receive a stock certificate evidencing the
acquisition of shares of Stock under a Performance Share Award only upon
satisfaction of all conditions specified in the written instrument evidencing
the Performance Share Award (or in a performance plan adopted by the
Committee).
(d) Termination. Except as may otherwise be provided by the
Committee at any time, a participant's rights in all Performance Share Awards
shall automatically terminate upon the participant's termination of employment
(or business relationship) with the Company and its Subsidiaries for any
reason.
(e) Acceleration, Waiver, Etc. At any time prior to the
participant's termination of employment (or other business relationship) by the
Company and its Subsidiaries, the Committee may in its sole discretion
accelerate, waive or, subject to Section 12, amend any or all of the goals,
restrictions or conditions imposed under any Performance Share Award.
SECTION 9. DIVIDEND EQUIVALENT RIGHTS
(a) Dividend Equivalent Rights. A Dividend Equivalent Right is an
Award entitling the recipient to receive credits based on cash dividends that
would be paid on the shares of Stock specified in the Dividend Equivalent Right
(or other award to which it relates) if such shares were held by the recipient.
A Dividend Equivalent Right may be granted hereunder to any officer, employee,
Independent Director, advisor, consultant or key person, as a component of
another Award or as a freestanding award. The terms and conditions of Dividend
Equivalent Rights shall be specified in the grant. Dividend equivalents
credited to the holder of a Dividend Equivalent Right may be paid currently or
may be deemed to be reinvested in additional shares of Stock, which may
thereafter accrue additional equivalents. Any such reinvestment shall be at
Fair Market Value on the date of reinvestment or such other price as may then
apply under a dividend reinvestment plan sponsored by the Company, if any.
Dividend Equivalent Rights may be settled in cash or shares of Stock or a
combination thereof, in a single installment or installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement, or
payment of, or lapse of restrictions on, such other award, and that such
Dividend Equivalent Right shall expire or be forfeited or annulled under the
same conditions as such other award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other award.
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(b) Interest Equivalents. Any Award under this Plan that is settled
in whole or in part in cash on a deferred basis may provide in the grant for
interest equivalents to be credited with respect to such cash payment.
Interest equivalents may be compounded and shall be paid upon such terms and
conditions as may be specified by the grant.
SECTION 10. TAX WITHHOLDING
Each participant shall, no later than the date as of which the value of
an Award or of any Stock or other amounts received thereunder first becomes
includable in the gross income of the participant for Federal income tax
purposes, pay to the Company, or make arrangements satisfactory to the
Committee regarding payment of, any Federal, state, or local taxes of any kind
required by law to be withheld with respect to such income. The Company and
its Subsidiaries shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
participant.
SECTION 11. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or
from the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or
for any other purpose approved by the Company, if the employee's right to re-
employment is guaranteed either by a statute or by contract or under the policy
pursuant to which the leave of absence was granted or if the Committee
otherwise so provides in writing.
SECTION 12. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Committee may, at any time, amend or cancel any outstanding Award (or provide
substitute Awards at the same or reduced exercise or purchase price or with no
exercise or purchase price in a manner not inconsistent with the terms of the
Plan), but such price, if any, must satisfy the requirements which would apply
to the substitute or amended Award if it were then initially granted under this
Plan for the purpose of satisfying changes in law or for any other lawful
purpose, but no such action shall adversely affect rights under any outstanding
Award without the holder's consent. If and to the extent determined by the
Committee to be required by the Act to ensure that Incentive Stock Options
granted under the Plan are qualified under Section 422 of the Code, Plan
13
<PAGE> 14
amendments shall be subject to approval by the Company stockholders who are
eligible to vote at a meeting of stockholders.
SECTION 13. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised
and any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly
determine in connection with any Award or Awards. In its sole discretion, the
Committee may authorize the creation of trusts or other arrangements to meet
the Company's obligations to deliver Stock or make payments with respect to
Awards hereunder, provided that the existence of such trusts or other
arrangements is consistent with the foregoing sentence.
SECTION 14. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The
Committee may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Committee may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards
as it deems appropriate.
(b) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements, including trusts, and such arrangements
may be either generally applicable or applicable only in specific cases. The
adoption of this Plan and the grant of Awards do not confer upon any employee
any right to continued employment with the Company or any Subsidiary.
SECTION 15. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a
majority of the shares of Stock of the Company present or represented and
entitled to vote at a meeting of stockholders. Subject to such approval by the
stockholders and to the requirement that no Stock may be issued hereunder prior
to such approval, Stock Options and other Awards may be granted hereunder on
and after adoption of this Plan by the Board.
14
<PAGE> 15
SECTION 16. GOVERNING LAW
This Plan shall be governed by Delaware law except to the extent such
law is preempted by federal law.
Adopted and Effective: February 5, 1996
Amended and Restated Effective as of: June , 1997
15
<PAGE> 1
EXHIBIT 10.2
MONARCH DENTAL CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Monarch Dental Corporation 1997 Employee Stock
Purchase Plan ("the Plan") is to provide eligible employees of Monarch Dental
Corporation (the "Company") and its subsidiaries with opportunities to purchase
shares of the Company's common stock, par value $.01 per share (the "Common
Stock"). Two hundred fifty thousand (250,000) shares of Common Stock in the
aggregate have been approved and reserved for this purpose. The Plan is
intended to constitute an "employee stock purchase plan" within the meaning of
Section 423(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
and shall be interpreted in accordance with that intent.
1. Administration. The Plan will be administered by the Company's
Board of Directors (the "Board") or by a committee appointed by the Board for
such purpose (the "Committee"). The Board or the Committee has authority to
make rules and regulations for the administration of the Plan, and its
interpretations and decisions with regard thereto shall be final and
conclusive. No member of the Board or the Committee shall be liable for any
action or determination with respect to the Plan or any option granted
hereunder.
2. Offerings. The Company will make one or more offerings to
eligible employees to purchase the Common Stock under the Plan ("Offerings").
The initial Offering will begin on August 1, 1997 and will end on December 31,
1997. Thereafter, an Offering will begin on the first business day occurring
on or after each July 1 and January 1 and will end on the last business day
occurring on or before the following June 30 and December 31, respectively.
The Committee may, in its discretion, choose an Offering period of six months
or less for each of the Offerings and choose a different Offering period for
each Offering.
<PAGE> 2
3. Eligibility. All employees of the Company (including employees
who are also directors of the Company) and all employees of each Designated
Subsidiary (as defined in Section 11) are eligible to participate in any one or
more of the Offerings under the Plan, provided that as of the first day of the
applicable Offering (the "Offering Date") they are customarily employed by the
Company or a Designated Subsidiary for more than twenty (20) hours a week.
4. Participation. An employee eligible on any Offering Date may
participate in such Offering by submitting an enrollment form to his or her
appropriate payroll location at least fifteen (15) business days before the
Offering Date (or by such other deadline as shall be established for the
Offering). The form will (a) state a whole percentage to be deducted from such
employee's Compensation (as defined in Section 11) per pay period, (b)
authorize the purchase of Common Stock for such employee in each Offering in
accordance with the terms of the Plan and (c) specify the exact name or names
in which shares of Common Stock purchased for such employee are to be issued
pursuant to Section 10. An employee who does not enroll in accordance with
these procedures will be deemed to have waived the right to participate.
Unless an employee files a new enrollment form or withdraws from the Plan, such
employee's deductions and purchases will continue at the same percentage of
Compensation for future Offerings, provided such employee remains eligible.
Notwithstanding the foregoing, participation in the Plan will neither be
permitted nor be denied contrary to the requirements of the Code.
2
<PAGE> 3
5. Employee Contributions. Each eligible employee may authorize
payroll deductions at a minimum of one percent (1%) up to a maximum of ten
percent (10%) of his or her Compensation for each pay period. The Company will
maintain book accounts showing the amount of payroll deductions made by each
participating employee for each Offering. No interest will accrue or be paid
on payroll deductions.
6. Deduction Changes. An employee may not increase his or her
payroll deduction during any Offering, but may decrease his or her payroll
deduction for the remainder of the Offering. An employee may also terminate
his or her payroll deduction for the remainder of the Offering, either with or
without withdrawing from the Offering under Section 7. To reduce or terminate
his or her payroll deduction (without withdrawing from the Offering), an
employee must submit a new enrollment form at least fifteen (15) business days
(or such shorter period as shall be established) before the payroll date on
which the change becomes effective. Subject to the requirements of Sections 4
and 5, an employee may either increase or decrease his or her payroll deduction
with respect to the next Offering by filing a new enrollment form at least
fifteen (15) business days before the next Offering Date (or by such other
deadline as shall be established for the Offering).
7. Withdrawal. An employee may withdraw from participation in the
Plan by delivering a written notice of withdrawal to his or her appropriate
payroll location. The employee's withdrawal will be effective as of the next
business day. Following an employee's withdrawal, the Company will promptly
refund such employee's entire account balance under the Plan (after payment for
any Common Stock purchased before the effective date of withdrawal). Partial
withdrawals are not permitted. The employee may not begin
3
<PAGE> 4
participation again during the remainder of the Offering, but may enroll in a
subsequent Offering in accordance with Section 4.
8. Grant of Options. On each Offering Date, the Company will grant
to each eligible employee who is then a participant in the Plan an option
("Option") to purchase on the last day of such Offering (the "Exercise Date"),
at the Option Price hereinafter provided for, a maximum of one thousand (1,000)
shares of Common Stock reserved for the purposes of the Plan, or such other
maximum number of shares as shall have been established by the Board or the
Committee in advance of the offering. The purchase price for each share
purchased under such Option (the "Option Price") will be 85% of the Fair Market
Value of the Common Stock on the Offering Date or the Exercise Date, whichever
is less.
Notwithstanding the foregoing, no employee may be granted an option
hereunder if such employee, immediately after the option was granted, would be
treated as owning stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or any
Parent or Subsidiary (as defined in Section 11). For purposes of the preceding
sentence, the attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an employee, and all stock which the
employee has a contractual right to purchase shall be treated as stock owned by
the employee. In addition, no employee may be granted an Option which permits
his or her rights to purchase stock under the Plan, and any other employee
stock purchase plan of the Company and its Parents and Subsidiaries, to accrue
at a rate which exceeds $25,000 of the fair market value of such stock
(determined on the option grant date or dates) for each calendar year in which
the
4
<PAGE> 5
Option is outstanding at any time. The purpose of the limitation in the
preceding sentence is to comply with Section 423(b)(8) of the Code.
9. Exercise of Option and Purchase of Shares. Each employee who
continues to be a participant in the Plan on the Exercise Date shall be deemed
to have exercised his or her Option on such date and shall acquire from the
Company such number of whole shares of Common Stock reserved for the purpose of
the Plan as his or her accumulated payroll deductions on such date will
purchase at the Option Price, subject to any other limitations contained in the
Plan. Any amount remaining in an employee's account at the end of an Offering
solely by reason of the inability to purchase a fractional share will be
carried forward to the next Offering; any other balance remaining in an
employee's account at the end of an Offering will be refunded to the employee
promptly.
10. Issuance of Certificates. Certificates representing shares of
Common Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the employee and another person of legal age as joint
tenants with rights of survivorship, or in the name of a broker authorized by
the employee to be his or her nominee for such purpose.
11. Definitions.
The term "Compensation" means the amount of total cash compensation,
prior to salary reduction pursuant to either Section 125 or 401(k) of the Code,
including base pay, overtime, commissions and bonuses, but excluding allowances
and reimbursements for expenses such as relocation allowances or travel
expenses, income or gains on the exercise of Company stock options, and similar
items.
5
<PAGE> 6
The term "Designated Subsidiary" means any present or future Subsidiary
(as defined below) that has been designated by the Board or the Committee to
participate in the Plan. The Board or the Committee may so designate any
Subsidiary, or revoke any such designation, at any time and from time to time,
either before or after the Plan is approved by the stockholders.
The term "Fair Market Value of the Common Stock" means (i) if the Common
Stock is admitted to trading on a national securities exchange or the National
Association of Securities Dealers National Market System, the closing price
reported for the Common Stock on such exchange or system for such date or, if
no sales were reported for such date, for the last date preceding such date for
which a sale was reported, or (ii) if clause (i) does not apply but the Common
Stock is admitted to quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the average of the highest bid
and lowest asked prices of the Common Stock reported on NASDAQ for such date
or, if no bid and asked prices were reported for such date, for the last day
preceding such date for which such prices were reported.
The term "Parent" means a "parent corporation" with respect to the
Company, as defined in Section 424(e) of the Code.
The term "Subsidiary" means a "subsidiary corporation" with respect to
the Company, as defined in Section 424(f) of the Code.
12. Rights on Termination of Employment. If a participating
employee's employment terminates for any reason before the Exercise Date for
any Offering, no payroll deduction will be taken from any pay due and owing to
such employee and the balance in such
6
<PAGE> 7
employee's account will be paid to such employee or, in the case of death, to
such employee's designated beneficiary as if such employee had withdrawn from
the Plan under Section 7. An employee will be deemed to have terminated
employment, for this purpose, if the corporation that employs such employee,
having been a Designated Subsidiary, ceases to be a Subsidiary, or if such
employee is transferred to any corporation other than the Company or a
Designated Subsidiary.
13. Special Rules. Notwithstanding anything herein to the contrary,
the Board or the Committee may adopt special rules applicable to the employees
of a particular Designated Subsidiary, whenever the Board or the Committee
determines that such rules are necessary or appropriate for the implementation
of the Plan in a jurisdiction where such Designated Subsidiary has employees;
provided that such rules are consistent with the requirements of Section 423(b)
of the Code. Such special rules may include (by way of example, but not by way
of limitation) the establishment of a method for employees of a given
Designated Subsidiary to fund the purchase of shares other than by payroll
deduction, if the payroll deduction method is prohibited by local law or is
otherwise impracticable. Any special rules established pursuant to this
Section 13 shall, to the extent possible, result in the employees subject to
such rules having substantially the same rights as other participants in the
Plan.
14. Optionees Not Stockholders. Neither the granting of an Option to
an employee nor the deductions from his or her pay shall constitute such
employee a holder of the shares of Common Stock covered by an Option under the
Plan until such shares have been purchased by and issued to such employee.
7
<PAGE> 8
15. Rights Not Transferable. Rights under the Plan are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during the employee's lifetime
only by the employee.
16. Application of Funds. All funds received or held by the Company
under the Plan may be combined with other corporate funds and may be used for
any corporate purpose.
17. Adjustment in Case of Changes Affecting Common Stock. In the
event of a subdivision of outstanding shares of Common Stock, or the payment of
a dividend in Common Stock, the number of shares approved for the Plan, and the
share limitation set forth in Section 8, shall be increased proportionately,
and such other adjustment shall be made as may be deemed equitable by the Board
or the Committee. In the event of any other change affecting the Common Stock,
such adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
18. Amendment of the Plan. The Board or the Committee may at any
time, and from time to time, amend the Plan in any respect, except that without
the approval, within twelve (12) months of such Board or Committee action, by
the holders of a majority of the shares of stock of the Company present or
represented and entitled to vote at a meeting of stockholders, no amendment
shall be made increasing the number of shares approved for the Plan or making
any other change that would require stockholder approval in order for the Plan,
as amended, to qualify as an "employee stock purchase plan" under Section
423(b) of the Code.
19. Insufficient Shares. If the total number of shares of Common
Stock that would otherwise be purchased on any Exercise Date plus the number of
shares purchased under
8
<PAGE> 9
previous Offerings under the Plan exceeds the maximum number of shares issuable
under the Plan, the shares then available shall be apportioned among
participants in proportion to the amount of payroll deductions accumulated on
behalf of each participant that would otherwise be used to purchase Common
Stock on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time
by the Board or the Committee. Upon termination of the Plan, all amounts in
the accounts of participating employees shall be promptly refunded.
21. Governmental Regulations. The Company's obligation to sell and
deliver Common Stock under the Plan is subject to obtaining all governmental
approvals required in connection with the authorization, issuance, or sale of
such stock.
The Plan shall be governed by Delaware law except to the extent that
such law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an
Option from authorized but unissued Common Stock, from shares held in the
treasury of the Company, or from any other proper source.
23. Tax Withholding. Participation in the Plan is subject to any
required tax withholding on income of the participant in connection with the
Plan. Each employee agrees, by entering the Plan, that the Company and its
Subsidiaries shall have the right to deduct any such taxes from any payment of
any kind otherwise due to the employee, including shares issuable under the
Plan.
9
<PAGE> 10
24. Notification Upon Sale of Shares. Each employee agrees, by
entering the Plan, to give the Company prompt notice of any disposition of
shares purchased under the Plan where such disposition occurs within two years
after the date of grant of the Option pursuant to which such shares were
purchased.
25. Effective Date and Approval of Shareholders. The Plan shall take
effect on the first day of the Company's initial public offering, subject to
approval by the holders of a majority of the shares of stock of the Company
present or represented and entitled to vote at a meeting of stockholders, which
approval must occur within twelve (12) months of the adoption of the Plan by
the Board.
10
<PAGE> 1
EXHIBIT 10.4
================================================================================
STOCK REDEMPTION AGREEMENT
by and between
MONARCH DENTAL CORPORATION
and
Warren F. Melamed, D.D.S.
As of February 5, 1996
================================================================================
<PAGE> 2
STOCK REDEMPTION AGREEMENT
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. STOCK REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Stock Redemption . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Time and Place of Closing . . . . . . . . . . . . . . . . . . . 2
1.3 Certain Closing Deliveries . . . . . . . . . . . . . . . . . . . 2
1.4 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6 Non-Competition Agreement . . . . . . . . . . . . . . . . . . . 3
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF MELAMED. . . . . . . . . . . . 3
2.1 Making of Representations and Warranties . . . . . . . . . . . . 3
2.2 Organization and Qualification; Capital Stock . . . . . . . . . 3
2.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Authority; Noncontravention . . . . . . . . . . . . . . . . . . 4
2.5 Status of Property . . . . . . . . . . . . . . . . . . . . . . . 5
2.6 Financial Statements; Undisclosed Liabilities . . . . . . . . . 8
2.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.8 Collectibility of Accounts Receivable . . . . . . . . . . . . . 10
2.9 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . 10
2.10 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . . 13
2.11 Banking Relations . . . . . . . . . . . . . . . . . . . . . . . 13
2.12 Intellectual Property . . . . . . . . . . . . . . . . . . . . . 13
2.13 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.14 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.15 Permits; Compliance with Laws; Licensing and Credentialing;
Health Care Providers . . . . . . . . . . . . . . . . . . . . . 17
2.16 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.17 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.18 Transactions with Interested Persons . . . . . . . . . . . . . . 20
2.19 Employee Benefit Programs . . . . . . . . . . . . . . . . . . . 20
2.20 Environmental Matters . . . . . . . . . . . . . . . . . . . . . 22
2.21 List of Certain Employees and Suppliers . . . . . . . . . . . . 23
2.22 Employees; Labor Matters . . . . . . . . . . . . . . . . . . . . 24
2.23 Material Relationships; Government Contracts . . . . . . . . . . 25
2.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.25 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . 25
2.26 Corporate Records . . . . . . . . . . . . . . . . . . . . . . . 25
2.27 List of Directors and Officers . . . . . . . . . . . . . . . . . 25
2.28 Transfer of Equity Interests . . . . . . . . . . . . . . . . . . 26
2.29 Equity Interest Repurchase . . . . . . . . . . . . . . . . . . . 26
2.30 Additional Financial Representations . . . . . . . . . . . . . . 26
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.31 Investment Representations . . . . . . . . . . . . . . . . . . . 26
ARTICLE 3. COVENANTS OF MELAMED . . . . . . . . . . . . . . . . . . . . . . 27
3.1 Making of Covenants and Agreements . . . . . . . . . . . . . . . 27
3.2 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4. COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 28
4.1 Making of Covenants and Agreements . . . . . . . . . . . . . . . 28
4.2 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.3 Availability of Records . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 5. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ARRANGEMENTS, COVENANTS
AND OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE 6. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 28
6.1 Indemnification by Melamed . . . . . . . . . . . . . . . . . . . 28
6.2 Limitations on Indemnification by Melamed . . . . . . . . . . . 29
6.3 Indemnification by Company . . . . . . . . . . . . . . . . . . . 30
6.4 Limitations on Indemnification by the Company . . . . . . . . . 31
6.5 Notice; Defense of Claims . . . . . . . . . . . . . . . . . . . 32
6.6 Satisfaction of Indemnification Obligations . . . . . . . . . . 33
ARTICLE 7. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.1 Fees, Expenses and Certain Taxes . . . . . . . . . . . . . . . . 33
7.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 35
7.5 Assignability; Binding Effect . . . . . . . . . . . . . . . . . 35
7.6 Captions and Gender . . . . . . . . . . . . . . . . . . . . . . 35
7.7 Execution in Counterparts . . . . . . . . . . . . . . . . . . . 35
7.8 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.9 Consent to Jurisdiction; Certain Remedies . . . . . . . . . . . 35
7.10 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . 36
Schedules
Schedule 1.6 - Non-Competition Agreement
Schedule 2.4(a) - Stockholders' Agreement
Schedule 2.4(b) - Employment Agreement
Schedule 2.6 - Financial Statements
</TABLE>
(ii)
<PAGE> 4
STOCK REDEMPTION AGREEMENT
STOCK REDEMPTION AGREEMENT entered into as of February 5, 1996 by and
among Monarch Dental Corporation, a Delaware corporation ("Company") and Warren
F. Melamed, D.D.S. ("Melamed").
W I T N E S S E T H
WHEREAS, immediately prior hereto Melamed owns beneficially and of
record all of the outstanding shares of capital stock of the Company,
consisting of 56,080,447 shares of common stock, par value $.01 per share (the
"Common Stock");
WHEREAS, subject to the terms and conditions hereof the Company wishes
to redeem and Melamed wishes to have redeemed a portion of the shares of Common
Stock owned beneficially and of record by Melamed;
WHEREAS, on the date hereof the Company has entered into (i) an Asset
Contribution Agreement (the "MacGregor Asset Contribution Agreement") by and
between the Company, Shears Vanguard, Ltd., Shears Vanguard, Inc., Shears
Vanguard General, Inc., Shears Vanguard SMI, Inc., MDC Dental, Inc. and Dr.
Charles G. Shears pursuant to which in exchange for shares of Common Stock and
cash and the assumption of specified liabilities the Sellers thereunder will
contribute the assets comprising the MacGregor Dental Centers business in a
transaction (together with the transactions contemplated by the TA Purchase
Agreement and the Melamed/Smith Asset Contribution Agreement (each as defined
below)) intended to qualify as an exchange under Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) the Stock Purchase
Agreement dated as of February 5, 1996, by and between the Company and the
purchasers named therein (the "TA Purchase Agreement"); (iii) the Loan
Agreement dated as of February 5, 1996 among Monarch Dental Associates, L.P.,
MacGregor Dental Associates, L.P., NationsBank of Texas, N.A., as Agent,
NationsBank of Texas, N.A. and the other entities designated therein as Lenders
and related documents entered in connection therewith (the "Bank Financing");
and (iv) an Asset Contribution Agreement (the "Melamed/Smith Asset Contribution
Agreement") by and among the Company, Melamed and Roy D. Smith, III, D.D.S.
("Smith") dated as of February 5, 1996, pursuant to which (A) in exchange for
shares of Common Stock and cash, each of Melamed and Smith will contribute
certain assets comprising their interest in the dental practice conducted in
Mesquite, Texas and (B) in exchange for shares of Common Stock and cash Melamed
will contribute certain additional assets in each case in a transaction
(together with the transactions contemplated by the TA Purchase Agreement and
the MacGregor Asset Contribution Agreement) intended to qualify as an exchange
under Section 351 of the Code (all such assets so contributed as provided in
the Melamed/Smith Asset Contribution Agreement, collectively, the "Subject
Assets"); and
WHEREAS, the closing of the transaction contemplated by this Agreement
shall occur immediately prior to the closings contemplated by each of the
MacGregor Asset Contribution Agreement and the Melamed/Smith Asset Contribution
Agreement.
<PAGE> 5
NOW, THEREFORE, in order to consummate said stock redemption and in
consideration of the mutual agreements set forth herein, the parties hereto
agree as follows:
ARTICLE 1. STOCK REDEMPTION.
1.1 Stock Redemption. Subject to and in reliance upon the terms,
provisions and conditions of this Agreement, at the Closing (as defined in
Section 1.2 hereof), the Company shall redeem 53,068,927 shares of Common Stock
(the "Redeemed Shares") from Melamed for a purchase price of $.125965539 per
share or $6,684,856 in the aggregate (the "Aggregate Redemption Price"). At
the Closing Melamed shall surrender to the Company a certificate or
certificates, together with duly executed stock transfer powers, representing
the Redeemed Shares and the Company shall pay Melamed cash in the amount of the
Aggregate Redemption Price, with such amount to be paid by wire transfer in
immediately available funds to such account as Melamed shall have indicated in
writing to the Company.
1.2 Time and Place of Closing. The closing of the transactions
provided for in this Agreement (herein called the "Closing") shall be held at
the offices of Goodwin, Procter & Hoar at Exchange Place, Boston, Massachusetts
as of the date hereof (such date being herein called the "Closing Date").
1.3 Certain Closing Deliveries.
(a) Consideration Price. At the Closing, the Company shall
deliver to Melamed the Aggregate Redemption Price.
(b) Surrender of Redeemed Shares. At the Closing, Melamed
shall surrender to the Company a certificate or certificates representing the
Redeemed Shares, together with stock transfer powers duly endorsed in blank
transferring to the Company good title to the Redeemed Shares free and clear of
all liens, restrictions and encumbrances.
1.4 Further Assurances. Melamed from time to time after the Closing
at the request of the Company and without further consideration shall execute
and deliver such further instruments of transfer and assignment and take such
other action as the Company may reasonably require to more effectively transfer
and assign to, and vest in, the Company the Redeemed Shares.
1.5 Transfer Taxes. All transfer taxes, fees and duties under
applicable law incurred in connection with the transfer of the Redeemed Shares
under this Agreement will be borne and paid by Melamed, and Melamed hereby
covenants to promptly reimburse the Company for any such tax, fee or duty which
either the Company or Melamed is required to pay under applicable law.
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1.6 Non-Competition Agreement. As a material inducement to and a
condition precedent of the Company's redemption of the Redeemed Shares, Melamed
is executing and delivering at the Closing a Non-Competition Agreement in the
form of Schedule 1.6 attached hereto (the "Non-Competition Agreement").
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF MELAMED.
2.1 Making of Representations and Warranties. As a material
inducement to the Company to enter into this Agreement and to consummate the
transactions contemplated hereby, Melamed hereby makes to the Company the
representations and warranties contained in this Section 2. For the purposes
of this Agreement, references to "knowledge" or "best knowledge" of Melamed or
"known" by Melamed or words of similar import, shall be deemed to include such
knowledge as Melamed or any executive officer or manager of the Company or any
entity (individually, an "Entity," collectively, the "Entities") listed in
Section 2.1 of the Disclosure Schedule (as hereinafter defined) 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 Melamed to the Company on the date
hereof. For the purposes of this Article 2, the Company is deemed to have
knowledge of each of the MacGregor Asset Contribution Agreement, the TA
Purchase Agreement, the Bank Financing, the Melamed/Smith Asset Contribution
Agreement and each other document entered into in connection therewith and the
transactions contemplated thereby.
2.2 Organization and Qualification; Capital Stock. The Company and
each Entity is a corporation or partnership duly organized, validly existing
and in good standing under the laws of the state of its organization as listed
in Section 2.2(i) of the Disclosure Schedule with full corporate or partnership
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. The copies of the charter documents of
the Company and each Entity as amended to date and certified by the Secretary
of State of each relevant jurisdiction, and of the partnership agreement or
by-laws of the Company and each Entity, as amended to date, certified by its
Secretary or general partner, and heretofore delivered to Goodwin, Procter &
Hoar, are complete and correct, no amendments thereto are pending, and neither
the Company nor any Entity is in violation thereof.
The Company and each such Entity are duly qualified to do business as a
corporation or foreign limited partnership in the states or the jurisdictions
listed in Section 2.2(ii) of the Disclosure Schedule, and are not required to
be licensed or qualified to conduct their businesses or own their properties in
any other jurisdiction in which the failure to be so qualified would have a
material adverse effect on the business, operations, results of operations,
assets, condition (financial or other) or prospects of the Company and the
Entities taken as a whole. Immediately prior to the Closing, all of the issued
and outstanding capital stock, partnership interests or other equity interests
of the Company and each Entity is owned beneficially and of record as set forth
in Section 2.2(iii) of the Disclosure Schedule, free and
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clear of any lien, restrictions or encumbrances 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, partnership interests or
other equity interests of the Company or any such Entity.
At the Closing, and after giving effect to each of the transactions
contemplated by (i) this Agreement, (ii) the MacGregor Asset Contribution
Agreement, (iii) the TA Purchase Agreement, (iv) the Bank Financing and (v) the
Melamed/Smith Asset Contribution Agreement, all of the issued and outstanding
capital stock, partnership interests or other equity interests of the Company
and each Entity will be owned beneficially and of record as set forth in
Section 2.2(iv) of the Disclosure Schedule, will be free and clear of any lien,
restrictions or encumbrances (other than those, if any, required by the Bank
Financing) and there will be 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, partnership interests or any other equity interest
of the Company or any Entity.
2.3 Subsidiaries. Neither the Company nor any Entity has any
subsidiaries (as defined in Section 7.10(d)) or owns any securities issued by
any other business organization or governmental authority or has any direct or
indirect interest in or control over any corporation, partnership, joint
venture or entity of any kind relating to the business conducted by the Company
and the Entities (such business, the "Monarch Dental Centers business"), except
as listed in Section 2.3 of the Disclosure Schedule.
2.4 Authority; Noncontravention. Melamed, the Company and each
Entity have full corporate or partnership power and authority or capacity, as
applicable to enter into this Agreement, each agreement, document and
instrument to be executed and delivered by it or them pursuant to or
contemplated by this Agreement, the Stockholders' Agreement dated as of
February 5, 1996 attached hereto as Schedule 2.4(a) (the "Stockholders'
Agreement"), the Employment Agreement dated as of February 5, 1996 attached
hereto as Schedule 2.4(b) (the "Employment Agreement") and the Non-Competition
Agreement and to carry out the transactions contemplated hereby and thereby.
The execution, delivery and performance by Melamed, the Company and each Entity
of this Agreement and each such other agreement, document and instrument have
been duly authorized by all necessary action of Melamed, the Company and each
Entity including any required action of their respective owners and no other
action on the part of Melamed, the Company and each Entity or its owners is
required in connection therewith. This Agreement and each such agreement,
document and instrument executed and delivered by Melamed, the Company and each
Entity pursuant to this Agreement constitute valid and binding obligations of
Melamed, the Company and each Entity enforceable in accordance with their
respective terms.
The execution, delivery and performance by Melamed, the Company and each
Entity of this Agreement and each such agreement, document and instrument
contemplated by this Agreement to which it is a party:
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(i) do not and will not violate any provision of the
charter, by-laws or equivalent constituent documents of Melamed, the
Company or any Entity;
(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 Melamed, the Company or any Entity or require Melamed, the
Company or any Entity except as set forth in Section 2.4 of the
Disclosure Schedule 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 result in a breach of,
constitute a default under, accelerate any obligation under, or give
rise to a right of termination of any indenture or loan or credit
agreement or any other agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award, whether written or oral, to which
Melamed, the Company or any Entity is a party or by which the property
of Melamed, the Company or any Entity is bound or affected, or result in
the creation or imposition of any mortgage, pledge, lien, security
interest or other charge or encumbrance on any of the Subject Assets,
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 the Monarch
Dental Centers business taken as a whole.
2.5 Status of Property.
(a) Real Property. Neither the Company nor any Entity owns
any real estate.
(b) Leased Real Property. All of the real property leased in
connection with the Monarch Dental Centers business is identified in Section
2.5(b) of the Disclosure Schedule (collectively referred to herein as the
"Leased Real Property"). Further:
(i) Leases. All of the leases of any of the Leased
Real Property (collectively, the "Leases") are listed in Section
2.5(b)(i) of the Disclosure Schedule. The copies of the Leases
heretofore delivered or furnished to Goodwin, Procter & Hoar are
complete, accurate, true and correct copies of each of the Leases,
except as set forth in Section 2.5(b)(i) of the Disclosure Schedule.
With respect to each of the Leases, except as set forth in Section
2.5(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 material obligations of the landlord or lessor
under the Leases which have accrued have been performed, and to
the best of the knowledge of Melamed, no landlord or lessor is in
default under or in arrears in the payment
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<PAGE> 9
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 a material adverse effect on the
business, operations, results of operations, assets, condition
(financial or other) or prospects of the Monarch Dental Centers
business taken as a whole;
(C) all material obligations of the tenant or lessee
under the Leases which have accrued have been performed, and none
of Melamed, the Company or any Entity is in default under or in
arrears in the payment of any sum or in the performance of any
material 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 Melamed, the
Company or any Entity; and
(D) Melamed, the Company and each Entity have obtained
the consent of each landlord or lessor under any Leases 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
the Company or any Entity or its assignees, except as set forth
in Section 2.5(b)(i)(D) of the Disclosure Schedule.
(ii) Title and Description. The Company or the relevant
Entity, as applicable, holds a good, clear, marketable (if applicable),
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,
to the best knowledge of Melamed, free and clear of all other prior or
subordinate interests, including, without limitation, mortgages, deeds
of trust, ground leases, leases, subleases, security interests or
similar encumbrances, liens, assessments, tenancies, licenses, claims,
rights of first refusal, options, covenants, conditions, restrictions,
rights of way, easements, judgments or other encumbrances or matters
affecting title, and free of encroachments onto or off of the Leased
Real Property, except for those matters set forth in Section 2.5(b)(ii)
of the Disclosure Schedule (collectively, the "Title Exceptions").
(iii) Compliance with Law; Government Approvals. None of
Melamed, the Company or any Entity has 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 that has not been
heretofore corrected, and to the best knowledge of Melamed, no such
violation or violations now exist which would have a material adverse
effect on the conduct of the Monarch Dental Centers business taken as a
whole. Improvements located on or constituting a part of the Leased
Real Property and the construction, installation, use and operation
thereof (including, without limitation, the construction, installation,
use and operation of any signs located thereon) were completed and
installed and to the
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best knowledge of Melamed are now in compliance, in all material
respects, 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 except as set forth in
Section 2.5(b)(iii) of the Disclosure Schedule, 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 Monarch Dental
Centers business, except as set forth in Section 2.5(b)(iii) of the
Disclosure Schedule. To the best knowledge of Melamed, the Leased Real
Property has at least the minimum access required by applicable
subdivision or similar law.
(iv) Real Property Taxes. Except as set forth in
Section 2.5(b)(iv) of the Disclosure Schedule, none of Melamed, the
Company or any Entity has received notice of any pending or threatened
reassessment of all or any portion of any of the Leased Real Property,
and, to the best knowledge of Melamed, the consummation of the
transactions contemplated by this Agreement or referred to herein will
not result in any such reassessment.
(c) Personal Property. Except as specifically disclosed in
Section 2.5(c) of the Disclosure Schedule or in the Base Balance Sheet (as
defined in Section 2.6(a)(ii)) the Company or the relevant Entity, as
applicable, owns and has good, valid and (if applicable) marketable title to
all of the personal property used in connection with the conduct of the Monarch
Dental Centers business and none of such personal property or assets is subject
to any mortgage, pledge, lien, conditional sale agreement, restriction on
transfer, stockholder or similar agreement, security title, encumbrance or
other charge 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 Monarch Dental Centers business, subject to
dispositions and additions in the ordinary course of business and consistent
with this Agreement. Except as otherwise specified in Section 2.5(c) of the
Disclosure Schedule, all of the tangible personal property of the Company and
the Entities are in generally good operating condition and repair, normal wear
and tear excepted, have been well maintained, and conform in all material
respects with all applicable ordinances, regulations and other laws.
(d) Transfer of Title. At the Closing the Company will
receive good, valid and (if applicable) marketable title to the Redeemed Shares
and all of the Subject Assets, free and clear of all liens, encumbrances,
charges, restrictions on transfer, stockholder or similar agreements, equities
and other claims of every kind, including the right and ability to transfer the
Subject Assets to its subsidiaries.
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2.6 Financial Statements; Undisclosed Liabilities.
(a) Melamed has delivered to Goodwin, Procter & Hoar the
following financial statements, copies of which are attached hereto as Schedule
2.6:
(i) Unaudited pro forma combined balance sheets for the
Monarch Dental Centers business for the fiscal years ended December 31,
1994 and 1993 and related statements of income, retained earnings and
cash flows for the years then ended, certified by the Company; and
(ii) An unaudited pro forma combined balance sheet for
the Monarch Dental Centers business as of December 31, 1995 (herein the
"Base Balance Sheet") and an unaudited statement of income, retained
earnings and cash flows for the twelve-month period then ended for the
Monarch Dental Centers business.
Said financial statements have been prepared by the Company from the books and
records of the Monarch Dental Centers business, present fairly in all material
respects the pro forma combined financial condition of the Monarch Dental
Center business, at the dates of said statements and the results of their
operations for the periods covered thereby.
(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 Monarch
Dental Centers business, except liabilities (i) stated or adequately reserved
against on the Base Balance Sheet or the notes thereto, (ii) specifically
disclosed in Schedule 2.6 furnished to Goodwin, Procter & Hoar 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) As of the date hereof, there are no liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
asserted or unasserted, known or unknown, relating to the Monarch Dental
Centers business, except liabilities (i) stated or adequately reserved against
on the Base Balance Sheet or the notes thereto, (ii) specifically disclosed in
Schedule 2.6 furnished to Goodwin, Procter & Hoar 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.
2.7 Taxes.
(a) The Company, each of the Entities and their 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 and property taxes, whether or not
measured in whole or in
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part by net income, and all deficiencies, or other additions to tax, interest,
fines and penalties owed by it (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, each of the Entities and their predecessors
have in accordance with applicable law filed all federal, state, local and
foreign tax returns required to be filed through the date hereof. Complete and
correct copies of all federal, state, local and foreign income tax returns
filed with respect to the Company, each of the Entities and their predecessors
for taxable periods ended on or after December 31, 1989 have been previously
provided to Coopers & Lybrand, together with any examination reports and
statements of deficiencies assessed against or agreed to with respect to said
returns and all such returns are true, correct and complete in all material
respects.
(c) Neither the Internal Revenue Service nor any other
governmental authority is now asserting or, to the best knowledge of Melamed,
threatening to assert against the Company, each of the Entities or their
predecessors any deficiency or claim for additional Taxes. No claim has ever
been made by an authority in a jurisdiction where the Company, any of the
Entities and their predecessors do not file reports and returns that the
Company, any of the Entities or their predecessors are or may be subject to
taxation by that jurisdiction. There are no security interests on any of the
assets of the Company or any Entity that arose in connection with any failure
(or alleged failure) to pay any Tax. The Company, each of the Entities and
their predecessors have not entered into a closing agreement pursuant to
Section 7121 of the Code.
(d) Except as set forth in Section 2.7 of the Disclosure
Schedule, there has not been during the past five years any audit of any tax
return filed by the Company, any Entity or their predecessors, no audit of any
tax return of the Company, any Entity or their predecessors is in progress, and
neither the Company, any Entity nor their predecessors have been notified by
any tax authority that any such audit is contemplated or pending. Except as
set forth in Section 2.7 of the Disclosure Schedule, no extension of time with
respect to any date on which a tax return was or is to be filed by the Company,
any Entity or their predecessors is in force, and no waiver or agreement by the
Company, any Entity or their predecessors is in force for the extension of time
for the assessment or payment of any Taxes.
(e) The Company, each of the Entities and their 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, any Entity nor their 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, any of the Entities nor
their predecessors own or have ever owned a direct or indirect interest in any
trust, partnership, corporation or other entity except as set forth in Section
2.7(e) of the Disclosure Schedule and neither the Subject Assets nor the assets
of the Company or any Entity include an interest in any such entity. Neither
the Company, any Entity nor their predecessors are parties to any tax sharing
agreement.
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(f) Neither the Company, any Entity nor their 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 any Entity 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) Each of the Company and Partners Dental Corporation is and
always has been an "S corporation" within the meaning of Section 1361(a)(1) of
the Code.
(i) 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.
(j) Section 2.7 of the Disclosure Schedule sets forth the tax
basis of the Subject Assets for federal income tax purposes.
2.8 Collectibility of Accounts Receivable. All of the accounts
receivable of the Monarch Dental Centers business (subject to contractual
allowances consistent with the past practices of the Monarch Dental Centers
business) as described in Section 2.8 of the Disclosure Schedule are valid and
enforceable claims, and to the best knowledge of Melamed are not subject to set
off or counterclaim, provided that the foregoing representation is not a
guarantee of collectibility. Section 2.8 of the Disclosure Schedule contains a
complete and accurate summary of the amount of accounts receivable. Except as
disclosed in Section 2.8 of the Disclosure Schedule, the Monarch Dental Centers
business does not have any accounts receivable or loans receivable from any
person, firm or corporation which is affiliated with Melamed, the Company or
any Entity or from any stockholder, director, officer or employee of the
Company or any Entity or any affiliate thereof.
2.9 Absence of Certain Changes. Except as disclosed in Section 2.9
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) or prospects of the
Monarch Dental Centers business taken as a whole 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 Monarch Dental
Centers business 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 Monarch Dental Centers business;
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(c) Any mortgage, encumbrance or lien placed on any of the
properties used in the Monarch Dental Centers business which remains in
existence on the date hereof;
(d) Any obligation or liability of any nature, whether
accrued, absolute, contingent or otherwise, asserted or unasserted, known or
unknown, incurred by the Company or any Entity other than obligations and
liabilities incurred in the ordinary course of business or the Monarch Dental
Centers and otherwise consistent with the terms of this Agreement;
(e) Any purchase, sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other disposition, of any of the
properties or assets relating to the Monarch Dental Centers business 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 relating to the Monarch Dental Centers business;
(g) Any declaration, setting aside or payment of any dividend
by the Company, Oral Health Concepts, Inc., Partners Dental Corporation or
Warren F. Melamed D.D.S., P.C., or the making of any other distribution in
respect of the capital stock or other equity interest of any of the foregoing
of or any direct or indirect redemption, purchase or other acquisition by any
of the foregoing of its own capital stock or other equity interest except as
described in Section 2.9(g) of the Disclosure Schedule;
(h) Any labor trouble or claim of unfair labor practices
involving the Monarch Dental Centers business;
(i) Except as set forth in Section 2.9(i) of the Disclosure
Schedule, any change in the compensation (in the form of salaries, wages,
incentive arrangements or otherwise) payable or to become payable by the
Monarch Dental Centers business 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 entity; or any entering into any
employment, deferred compensation or other similar agreement (or any amendment
to any such existing agreement) with any such person or entity;
(j) Any change, or the obtaining of information concerning a
prospective change, with respect to any officers, management employees or
dentists (including dental professional corporations) involved in the Monarch
Dental Centers business, any grant of any severance or termination pay to any
officer, employee, agent, independent contractor, dentist or dental
professional corporation involved in the Monarch Dental Centers business or any
increase in benefits payable under any existing severance or termination pay
policies or employment agreement or relationship;
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(k) Any payment or discharge of a material lien or liability
relating to the Monarch Dental Centers business which was not shown on the Base
Balance Sheet or incurred in the ordinary course of business thereafter;
(l) Any payment made or obligation or liability incurred by
the Company or any Entity to, or any other transaction by the Company or any
Entity with, any of its officers, directors, partners, stockholders, employees
or independent contractors (including dentists and dental professional
corporations), or any loans or advances made by the Company or any Entity to
any of its officers, directors, partners, stockholders, employees or
independent contractors (including dentists and dental professional
corporations), except normal compensation and expense allowances consistent
with past practice;
(m) Any change in accounting methods or practices, credit
practices, collection policies or payment policies used by the Company or any
Entity including without limitation any change in the discharge or recording of
payables relative to past practices;
(n) Any cancellation or loss of any material right or asset,
or waiver of any right, of the Monarch Dental Centers business;
(o) Any change in the relationships with suppliers,
distributors, licensees, licensors, customers or others with whom the Monarch
Dental Centers business has business relationships which would have a material
adverse effect on the Monarch Dental Centers business taken as a whole, and
Melamed does not have knowledge of any fact or contemplated event which may
cause any such material adverse change;
(p) Any alteration or change in the methods of operation
employed by the Monarch Dental Centers business other than in the ordinary
course of business;
(q) Any other transaction relating to the Monarch Dental
Centers business other than transactions in the ordinary course of business; or
(r) Any agreement or understanding whether in writing or
otherwise, by the Company, any Entity or any other person that would result in
any of the transactions or events or require the Company or any Entity to take
any of the actions specified in paragraphs (a) through (q) above.
2.10 Ordinary Course. Since the date of the Base Balance Sheet, the
Monarch Dental Centers business has conducted its business only in the ordinary
course and in a manner consistent with prior practices.
2.11 Banking Relations. All of the accounts with any banking
institution relating to the Monarch Dental Centers business are accurately and
in all material respects described in Section 2.11 of the Disclosure Schedule,
indicating with respect to each of such accounts the type of arrangement
maintained (such as checking account, borrowing, etc.) and the person or
persons authorized in respect thereof.
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2.12 Intellectual Property.
(a) Except and as described in Section 2.12(a) of the
Disclosure Schedule, the Company or the relevant Entity has exclusive
ownership, or exclusive license to use, of all computer software, patent,
copyright, trade secret (including without limitation customer lists,
production processes and inventions), trademark, service mark or other
proprietary rights (collectively, "Intellectual Property") used in the Monarch
Dental Centers business as presently conducted. The Company's or the relevant
Entity's rights in all of such Intellectual Property are freely transferable,
provided that no representation or warranty is made as to licensed software
which is generally commercially available and used in the ordinary course of
business, and except as set forth in Section 2.12(a) of the Disclosure Schedule
with respect to Intellectual Property which is not freely assignable at the
date hereof. No proceedings have been instituted, or are pending or to the
best knowledge of Melamed threatened, which challenge the rights of the Company
or any Entity in respect of any Intellectual Property, and to the best
knowledge of Melamed, except as set forth in Section 2.12(a) of the Disclosure
Schedule, no other person has or alleges any rights in or to the Intellectual
Property. The Company or the relevant Entity has the right to use, free and
clear of claims or rights of other persons, all customer lists, designs,
manufacturing or other processes, computer software (subject to the first
sentence of this paragraph), systems, data compilations, research results and
other information required for or incident to the conduct of the Monarch Dental
Centers business as presently conducted or contemplated.
(b) All patents, patent applications, trademarks, service
marks, trademark and service mark applications and registrations and registered
copyrights which are material to the conduct of the Monarch Dental Center's
business as presently conducted or contemplated to be conducted, are listed in
Section 2.12(b) of the Disclosure Schedule. Such patents, patent applications,
trademark and service mark registrations, trademark and service mark
applications and registered copyrights have been duly registered in, filed in
or issued by the United States Patent and Trademark Office, the United States
Register of Copyrights, or the corresponding offices of other jurisdictions as
identified on said Schedule, and have been properly maintained and renewed in
accordance with all applicable provisions of law and administrative regulations
in the United States and each such jurisdiction, to the extent, if any, set
forth in Section 2.12(b) of the Disclosure Schedule.
(c) All licenses or other agreements under which the Monarch
Dental Centers business is granted rights in Intellectual Property are listed
in Section 2.12(c) of the Disclosure Schedule. All said licenses or other
agreements are in full force and effect, there is no material default by the
Company or any Entity, or to the best knowledge of Melamed, any other party
thereto, and, except as set forth in Section 2.12(c) of the Disclosure Schedule
and as provided in Section 2.12(a) above, all rights thereunder are freely
assignable. To the best knowledge of Melamed, the licensors under said
licenses and other agreements have and had all requisite power and authority to
grant the rights purported to be conferred thereby. True and complete copies
of all such licenses or other agreements, and any amendments thereto, have been
provided to Goodwin, Procter & Hoar.
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(d) All licenses or other agreements under which the Monarch
Dental Centers business has granted rights to others in Intellectual Property
are listed in Section 2.12(d) of the Disclosure Schedule. All of said licenses
or other agreements are in full force and effect, there is no material default
by the Company or any Entity, or to the best knowledge of Melamed, any other
party thereto, and, except as set forth in Section 2.12(d) of the Disclosure
Schedule, and as provided in Section 2.12(a) above, all of the Company's or the
relevant Entities' rights thereunder are freely assignable. True and complete
copies of all such licenses or other agreements, and any amendments thereto,
have been provided to Goodwin, Procter & Hoar.
(e) To the best knowledge of Melamed, the Monarch Dental
Centers business has taken all steps required in accordance with sound business
practice to establish and preserve its ownership of all material copyright,
trade secret and other proprietary rights. Neither Melamed, the Company nor
any Entity has any knowledge of any infringement by others of any of its
Intellectual Property rights. No employee or consultant of the Company or any
Entity owns any rights in any products, technology or Intellectual Property of
the Company or any Entity which ownership materially and adversely affects the
conduct of the Monarch Dental Centers business.
(f) To the best knowledge of Melamed, the conduct of the
Monarch Dental Centers business does not infringe any Intellectual Property of
any other person. No proceeding charging the Company or any Entity with
infringement of any adversely held Intellectual Property has been filed or to
the best knowledge of Melamed is threatened to be filed. To the best knowledge
of Melamed, 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 Monarch Dental Centers business. To
the best knowledge of Melamed, the conduct of the Monarch Dental Centers
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. Except as set forth in Section
2.12(f) of the Disclosure Schedule, to the best knowledge of Melamed, none of
the Company nor any Entity, nor any of their respective employees, has any
agreements or arrangements with any persons other than the Company or an Entity
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.
(g) To the best knowledge of Melamed, the computer software
included in the Intellectual Property performs in all material respects in
accordance with the documentation and other written material used in connection
with the Software and is free of material defects in programming. The Company
and the Entities have all the databases and computer software used or necessary
to conduct their businesses and the Monarch Dental Centers business, except as
set forth in Section 2.12(g) of the Disclosure Schedule.
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2.13 Contracts.
(a) Except for contracts, commitments, plans, agreements and
licenses described in Section 2.13(a) of the Disclosure Schedule (true and
complete copies of which have been delivered to the Goodwin, Procter & Hoar),
neither the Monarch Dental Centers business nor the Company or any Entity are 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 for less than $5,000 each, such orders not exceeding
$50,000 in the aggregate;
(iv) any other contracts or agreements creating an
obligation of $50,000 or more with respect to any such contract;
(v) any contract or agreement providing for the
purchase of all or substantially all of its requirements of a particular
product from a supplier;
(vi) any contract or agreement which by its terms does
not terminate or is not terminable without penalty within one year after
the date hereof;
(vii) any contract or agreement for the sale or lease of
its products not made in the ordinary course of business;
(viii) any contract with any sales agent or distributor;
(ix) any contract containing covenants limiting its
freedom to compete in any line of business or with any person or entity;
(x) 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;
(xi) any license agreement (as licensor or licensee)
other than routine software licenses to end users entered into in the
ordinary course of business for a total consideration not exceeding
$50,000 for any one such license);
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(xii) any agreement involving a lease or license of real
property or any "capitalized" or "financing" lease;
(xiii) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for the borrowing
of money and any related security agreement;
(xiv) any contract or agreement with any officer,
employee, director, or stockholder or with any persons or organizations
controlled by or affiliated with any of them;
(xv) 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
maintenance organization, preferred provider organization, self-insured
employer or other third-party payor of any kind or nature;
(xvi) any power of attorney; or
(xvii) any judgment, decree or order affecting the Monarch
Dental Centers business, the Company or any Entity.
(b) All contracts, agreements, leases and instruments to which
the Company or any Entity is a party and as are set forth in Section 2.13(a) of
the Disclosure Schedule are valid and are in full force and effect and
constitute legal, valid and binding obligations of the Company or the relevant
Entity, as the case may be and, to the best knowledge of Melamed, the other
parties thereto, enforceable in accordance with their respective terms.
Neither the Company nor any Entity or, to the best knowledge of Melamed, any
other party to any contract, agreement, lease or instrument to which the
Company or any Entity is a party or any judgment, decree or order applicable to
the Monarch Dental Centers business, the Company or any Entity is in default in
complying with any provisions thereof, and no condition or event or facts exist
which, with notice, lapse of time or both would constitute a default thereof on
the part of the Company or any Entity or, to the best knowledge of Melamed, 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 Monarch Dental Centers
business taken as a whole. Except as disclosed in Section 2.13(b) of the
Disclosure Schedule, neither the Company nor any Entity is subject to or bound
by any agreement, judgment, decree or order which materially and adversely
affects the business, operations, results of operations, assets, condition
(financial or other) or prospects of the Monarch Dental Centers business taken
as a whole.
(c) Except as disclosed in Section 2.13(c) of the Disclosure
Schedule, 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") in
connection with the Monarch Dental Centers business or pursuant
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to which Melamed, the Company or any Entity receives revenues regarding the
provision of dental services to patients in connection with such business.
2.14 Litigation. Section 2.14 of the Disclosure Schedule lists all
currently pending litigation and governmental or administrative proceedings or
investigations to which the Company or any Entity is a party. Except for
matters described in Section 2.14 of the Disclosure Schedule, there is no
litigation or governmental or administrative proceeding or investigation
pending or, to the best knowledge of Melamed, threatened relating to the
Monarch Dental Centers business which may have any material adverse effect on
the business, operations, results of operations, assets, condition (financial
or other) or prospects of the Monarch Dental Centers business taken as a whole
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
2.14 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.
Without limitation of the foregoing, except as set forth in Section 2.14
of the Disclosure Schedule, there are no pending or, to the best knowledge of
Melamed, threatened malpractice claims, Texas Regulatory Board investigations,
suits, notices of intent to institute, arbitrations or proceedings, either
administrative or judicial, involving the Monarch Dental Centers business
including, without limitation, any of the Health Care Providers.
2.15 Permits; Compliance with Laws; Licensing and Credentialing;
Health Care Providers.
(a) General Compliance. Except as set forth in Section
2.15(a) of the Disclosure Schedule, the Monarch Dental Centers business has all
franchises, authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations, qualifications or other rights and
privileges (collectively "Permits") necessary to permit the ownership of
respective properties involved therein and the conduct of such business as the
same is presently conducted, a listing of such Permits is set forth in Section
2.15(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 material adverse effect on the business, operations, results of
operations, assets, condition (financial or other) or prospects of the Monarch
Dental Centers business taken as a whole. Except as set forth in Section
2.15(a) of the Disclosure Schedule, 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. Except as set forth in Section
2.15(a) of the Disclosure Schedule, the Monarch Dental Centers business is now
and has heretofore been in compliance with all applicable statutes, ordinances,
orders, rules and regulations (including without limitation 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 its 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 Monarch Dental Centers
business taken as whole. Since January 1,
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1993, none of Melamed, the Company nor any Entity 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.
None of the Company or any Entity is required to be, and each Health
Care Provider is, duly licensed under the laws of the State of Texas and, to
the best knowledge of Melamed, 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 2.15(b) of the Disclosure Schedule, to the best knowledge of
Melamed, including knowledge obtained through the credentialing process used by
the business, no Health Care Provider since January 1, 1990: (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 of the Health Care Providers who provide services in connection with
the Monarch Dental Centers business have been previously disclosed to Goodwin,
Procter & Hoar. To the best of Melamed'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 the Company or any Entity, as applicable. Except as set
forth in Section 2.15(b) of the Disclosure Schedule to the best of Melamed's
knowledge, none of the employed and engaged Health Care Providers use or abuse
any controlled substances at any time or is under the influence of alcohol or
are 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 the Company or any Entity.
(c) Medicare/Medicaid. The Monarch Dental Centers business
does not involve and has never involved patients covered by or arrangements
with Medicare or Medicaid.
(d) Other. To the best knowledge of Melamed, (i) none of the
Company or any Entity is required to make filings under any insurance holding
company or similar state statute, or is required to be licensed or authorized
as an insurance holding company in any jurisdiction in order to conduct their
respective businesses as presently conducted, (ii) the dental plan services and
related products offered and provided by the Monarch Dental Centers business
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
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aggregate, as would not have a material adverse effect on the business,
operations, assets, condition (financial or other) or prospects of such
business; and (iii) none of the Company nor any Entity has 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 conducts its business.
Except as set forth in Section 2.15(d) of the Disclosure Schedule, to
the best knowledge of Melamed, there exists no legislation, rule or regulation
which shall either (i) have been proposed and be in their reasonable judgment
reasonably likely to be adopted in Texas in the foreseeable future, or (ii)
have been adopted in Texas 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 Monarch Dental
Centers business taken as a whole.
2.16 Insurance. The physical properties and assets of the Monarch
Dental Centers business are insured to the extent disclosed in Section 2.16 of
the Disclosure Schedule and all insurance policies and arrangements relating to
the Monarch Dental Centers business are disclosed in said Schedule. To the
best knowledge of Melamed, said insurance policies and arrangements are in full
force and effect, all premiums with respect thereto are currently paid, and the
Company and each Entity are in compliance in all material respects with the
terms thereof. To the best knowledge of Melamed said insurance is adequate and
customary for the Monarch Dental Centers business and is sufficient for
compliance with all requirements of law and all agreements and leases to which
such business is subject. Except as disclosed in Section 2.16 of the
Disclosure Schedule, 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.
2.17 Finder's Fees. None of Melamed, the Company nor any Entity 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, except a
fee of $25,000 to Carl Ray.
2.18 Transactions with Interested Persons. Except as set forth in
Section 2.18 of the Disclosure Schedule, to the best knowledge of Melamed 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 7.10(a) of any such person), is currently a
party to any transaction with the Company or any Entity, 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 best knowledge of Melamed 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 Entity, or any organization which has a contract
or arrangement with the Company or any Entity, provided that no representation
shall be deemed made with respect to the provision of dental services by any
former employee or independent contractor. Except
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as set forth in Section 2.18 of the Disclosure Statement, there are no
commitments to, and no income reflected in the financial statements referred to
in Section 2.6 has been derived from, any affiliate of Melamed, the Company or
any Entity, and, following the Closing, neither the Company nor any Entity
shall have any obligation of any kind or description to any such affiliate.
2.19 Employee Benefit Programs.
(a) Section 2.19 of the Disclosure Schedule sets forth a list
of every Employee Program (as defined below) that has been maintained (as such
term is further defined below) in connection with the Monarch Dental Centers
business at any time during the three-year period ending on the Closing.
(b) Each Employee Program which has ever been maintained by
the Company or any Entity and which has at any time been intended to qualify
under Section 401(a) or 501(c)(9) of the Code has received a favorable
determination or approval letter from the Internal Revenue Service ("IRS")
regarding its qualification under such section and to the best knowledge of
Melamed has, in fact, been continuously qualified under the applicable section
of the Code since the effective date of such Employee Program. No event or
omission has occurred which would cause any such Employee Program to lose its
qualification under the applicable Code section.
(c) To the best knowledge of Melamed there is no, and Melamed
has no reason to know of, any material failure of any person laws applicable to
the Employee Programs that have been maintained in connection with the Monarch
Dental Centers business. With respect to any Employee Program ever maintained
in connection with the Monarch Dental Centers business, there has occurred no
"prohibited transaction," as defined in Section 406 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
(for which there exists neither a statutory nor regulatory exception), or
material breach of any duty under ERISA or other applicable law (including,
without limitation, any health care continuation requirements or any other tax
law requirements, or conditions to favorable tax treatment, applicable to such
plan or to any person in regard to such plan), which could result, directly or
indirectly (including, without limitation, through any obligation of
indemnification or contribution), in any taxes, penalties or other liability to
the Company, any Entity or any of their affiliates. No litigation,
arbitration, or governmental administrative proceeding (or investigation) or
other proceeding (other than those relating to routine claims for benefits) is
pending or, to the best knowledge of Melamed, threatened with respect to any
such Employee Program.
(d) None of the Company, any Entity nor any Affiliate (as
defined below) (i) has ever maintained any Employee Program which has been
subject to Title IV of ERISA or Section 412 of the Code (including, but not
limited to, any Multiemployer Plan (as defined below)) or (ii) has ever
provided health care or any other non-pension benefits to any employees after
their employment is terminated (other than as required by part 6 of subtitle B
of Title I of ERISA) or has ever promised to provide such post-termination
benefits.
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(e) With respect to each Employee Program maintained by or on
behalf of the Company or any Entity within the three years preceding the
Closing, complete and correct copies of the following documents (if applicable
to such Employee Program) have previously been delivered to Goodwin, Procter &
Hoar: (i) all documents embodying or governing such Employee Program, and any
funding medium for the Employee Program (including, without limitation, trust
agreements), as they may have been amended to the date hereof; (ii) the most
recent IRS determination or approval letter with respect to such Employee
Program under Code Section 401 or 501(c)(9), and any applications for
determination or approval subsequently filed with the IRS; (iii) the three most
recently filed IRS Forms 5500, with all applicable schedules and accountants'
opinions attached thereto; (iv) the summary plan description for such Employee
Program (or other descriptions of such Employee Program provided to employees)
and all modifications thereto; (v) any insurance policy (including any
fiduciary liability insurance policy and any excess loss policy) related to
such Employee Program; (vi) any documents evidencing any loan to an Employee
Program that is a leveraged employee stock ownership plan; and (vii) all other
materials reasonably necessary for the Company or any Entity to perform any of
its responsibilities with respect to any Employee Program subsequent to the
Closing (including, without limitation, health care continuation requirements).
(f) For purposes of this Section 2.19:
(i) "Employee Program" means (A) all employee benefit
plans within the meaning of ERISA Section 3(3), including, but not
limited to, multiple employer welfare arrangements (within the meaning
of ERISA Section 3(40)), plans to which more than one unaffiliated
employer contributes and employee benefit plans (such as foreign or
excess benefit plans) which are not subject to ERISA; and (B) all stock
or cash option plans, restricted stock plans, bonus or incentive award
plans, severance pay policies or agreements, deferred compensation
agreements, supplemental income arrangements, vacation plans, and all
other employee benefit plans, agreements, and arrangements not described
in (A) above. In the case of an Employee Program funded through an
organization described in Code Section 501(c)(9), each reference to such
Employee Program shall include a reference to such organization.
(ii) An entity "maintains" an Employee Program if such
entity sponsors, contributes to, or provides (or has promised to
provide) benefits under such Employee Program, or has any obligation (by
agreement or under applicable law) to contribute to or provide benefits
under such Employee Program, or if such Employee Program provides
benefits to or otherwise covers employees of such entity (or their
spouses, dependents, or beneficiaries).
(iii) An entity is an "Affiliate" of the Company or any
Entity if it would have ever been considered a single employer with the
Company or any Entity under ERISA Section 4001(b) or part of the same
"controlled group" as the Company or any Entity for purposes of ERISA
Section 302(d)(8)(C).
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(iv) "Multiemployer Plan" means a (pension or
non-pension) employee benefit plan to which more than one employer
contributes and which is maintained pursuant to one or more collective
bargaining agreements.
2.20 Environmental Matters.
(a) Except as set forth in Section 2.20 of the Disclosure
Schedule, (i) neither the Company nor any Entity has ever generated,
transported, used, stored, treated, disposed of, or managed any Hazardous Waste
(as defined below); (ii) no Hazardous Material (as defined below) has ever been
or, to the best knowledge of Melamed, is threatened to be spilled, released, or
disposed of by the Company or any Entity, at any site presently or formerly
owned, operated, leased, or used in connection with the Monarch Dental Centers
business, or has ever come to be located in the soil or groundwater at any such
site; (iii) no Hazardous Material of the Company has ever been transported from
any site presently or formerly owned, operated, leased, or used in connection
with the Monarch Dental Centers business for treatment, storage, or disposal at
any other place; (iv) to the best knowledge of Melamed, none of the Company nor
any Entity presently owns, operates, leases, or uses, nor has any of them
previously owned, operated, leased, or used any site on which underground
storage tanks are or were located; and (v) no lien has ever been imposed by any
governmental agency on any property, facility, machinery, or equipment owned,
operated, leased, or used in connection with the Monarch Dental Centers
business in connection with the presence of any Hazardous Material and based
upon any action or inaction of the Company or any Entity.
(b) Except as set forth in Section 2.20 of the Disclosure
Schedule, (i) none of the Company nor any Entity has any liability under, nor
has it ever violated in any material respect, any Environmental Law (as defined
below); (ii) the Company, each Entity, any property owned, operated, leased, or
used in connection with the Monarch Dental Centers business, and any facilities
and operations thereon are presently in compliance in all material respects
with all applicable Environmental Laws; (iii) none of the Company nor any
Entity 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) to the best knowledge of Melamed
none of the items enumerated in clause (iii) of this paragraph will be
forthcoming.
(c) Except as set forth in Section 2.20 of the Disclosure
Schedule, no site owned, operated, leased, or used in connection with the
Monarch Dental Centers business contains any asbestos or asbestos-containing
material, any polychlorinated biphenyls (PCBs) or equipment containing PCBs, or
any urea formaldehyde foam insulation, except, in each case, as either
individually, or in the aggregate, as would not have a material adverse effect
on the business, operations, assets, condition (financial or other ) or
prospects of the Monarch Dental Centers business taken as a whole.
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(d) Goodwin, Procter & Hoar has been provided with copies of
all documents, records, and information available concerning any environmental
or health and safety matter relevant to the Monarch Dental Centers business,
whether generated in connection with the Monarch Dental Centers business or
otherwise, including, without limitation, environmental audits, environmental
risk assessments, site assessments, documentation regarding off-site disposal
of Hazardous Materials, spill control plans, and reports, correspondence,
permits, licenses, approvals, consents, and other authorizations related to
environmental or health and safety matters issued by any governmental agency.
(e) For purposes of this Section 2.20, (i) "Hazardous
Material" shall mean and include any hazardous waste, hazardous material,
hazardous substance, petroleum product, oil, toxic substance, pollutant,
contaminant, or other substance which may pose a threat to the environment or
to human health or safety, as defined or regulated under any Environmental Law;
(ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or
regulated under any Environmental Law; (iii) "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, whether existing as of the date
hereof, or subsequently enacted; and (iv) "the Monarch Dental Centers business"
shall include the Company, any Entity and any predecessor to any of the
foregoing.
2.21 List of Certain Employees and Suppliers. Section 2.21 of the
Disclosure Schedule contains a list of all managers, employees and consultants
and independent contractors (including dentists and related professional
corporations) of the Monarch Dental Centers business who, individually, have
received or are scheduled to receive compensation or payments for the fiscal
year ended December 31, 1995 in excess of $100,000. In each case such Schedule
includes the current job title and aggregate annual compensation of each such
individual. Section 2.21 of the Disclosure Schedule sets forth a list of all
suppliers to whom the Monarch Dental Centers business made payments aggregating
$100,000 or more during the fiscal year ended December 31, 1995 showing, with
respect to each, the name, address and dollar volume involved. To the
knowledge of Melamed, no supplier has any plan or intention to terminate or
reduce its business with the Monarch Dental Centers business or to materially
and adversely modify its relationship therewith.
2.22 Employees; Labor Matters. The Monarch Dental Centers business
employs approximately 140 full-time employees and 5 part-time employees, has
contracts with approximately 34 dentists and to the best of Melamed's knowledge
generally enjoys a good employer-employee relationship. None of the Company or
any Entity is 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. 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. Except as set forth in Section 2.22 of the
Disclosure Schedule, the Monarch Dental Centers business 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
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Company and each Entity are 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. Except as
set forth in Section 2.22 of the Disclosure Schedule, there are no written, or
to the best knowledge of Melamed, otherwise alleged charges of employment
discrimination or unfair labor practices, nor are there any strikes, slowdowns,
stoppages of work, or any other concerted interference with normal operations
existing, pending or to the best knowledge of Melamed threatened against or
involving the Monarch Dental Centers business. No question concerning
representation exists respecting the employees of the Company or any Entity.
To the best knowledge of Melamed, there are no grievances, complaints or
charges that have been filed under any dispute resolution procedure (including,
but not limited to, any proceedings under any dispute resolution procedure
under any collective bargaining agreement) that might have an adverse effect on
the Monarch Dental Centers business. No arbitration or similar proceeding is
pending and no claim therefor has been asserted. To the best knowledge of
Melamed, no collective bargaining agreement is in effect or is currently being
or is about to be negotiated by the Company or any Entity. Each of the Company
and each Entity 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. Except as set forth in Section 2.22 of the
Disclosure Schedule, there are no changes pending, or of which Melamed has
knowledge threatened with respect to (including, without limitation,
resignation of) the senior management or key supervisory personnel or dentists
of the Monarch Dental Centers business nor has Melamed, the Company or any
Entity received any notice or information concerning any prospective change
with respect to such senior management or key supervisory personnel.
2.23 Material Relationships; Government Contracts.
(a) Except as set forth in Section 2.23(a) of the Disclosure
Schedule, to the best knowledge of Melamed, the relationships of the Monarch
Dental Centers business with its customers, Health Care Providers and the
parties to the contracts referred to in Section 2.13(a)(xv) are good commercial
working relationships. To the best knowledge of Melamed, no Health Care
Provider or DMO with which the Monarch Dental Centers business 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. Except as set forth in
Section 2.23(a) of the Disclosure Schedule, no DMO relationship or material
contract or other material business relationship of either the Company or any
Entity has been terminated in the past year.
(b) Neither the Company nor any Entity has any contracts or
subcontracts with any government (including any municipal government) or
governmental agency or activity, and none of the Company or any Entity is
ineligible to submit bids to any DMO.
2.24 Disclosure. To the best knowledge of Melamed, the
representations, warranties and statements contained in this Agreement and in
the certificates, exhibits and schedules delivered by Melamed, the Company and
any Entity pursuant to this Agreement, together with all materials provided by
Melamed, the Company and any Entity or their agents with respect
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to the Monarch Dental Centers business, 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. To the best knowledge of Melamed,
there are no facts known to Melamed 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 Monarch Dental
Centers business which has not been specifically disclosed herein or in a
Schedule furnished herewith.
2.25 Powers of Attorney. Neither the Company, nor any Entity has any
outstanding power of attorney.
2.26 Corporate Records. The corporate or, in the case of a
partnership, equivalent record books of the Company and of each Entity
accurately record all corporate or partnership action taken by their respective
stockholders, partners, board of directors, governing bodies and committees.
The copies of the corporate records of the Company and of each Entity provided
to Goodwin, Procter & Hoar for review, are true and complete copies of the
originals of such documents.
2.27 List of Directors and Officers. Section 2.27 of the Disclosure
Schedule hereto contains a true and complete list of all current directors and
officers of the Company and each Entity.
2.28 Transfer of Equity Interests. No holder of stock, partnership
interests, or other equity interest of the Company or any Entity has at any
time transferred any of such instruments to any employee or professional
independent contractor of the Company or any Entity, which transfer constituted
or could be viewed as compensation for services rendered to the Company or any
Entity by said employee or professional independent contractor.
2.29 Equity Interest Repurchase. Neither the Company nor any Entity
has redeemed or repurchased any of its capital stock, partnership interests or
any other equity interest, as applicable.
2.30 Additional Financial Representations.
(a) Cash on Hand. As of and immediately prior to the Closing,
the Company and the Entities have cash on hand of not less than $350,000 in the
aggregate.
(b) Bank Debt. As of and immediately prior to the Closing,
the aggregate outstanding bank debt and similar debt obligations of the Company
and the Entities together with the amount of any bank debt and similar debt
obligations the payment of which has been guaranteed by the Company or any of
the Entities is not in excess of $1,393,000 plus any additional amount
permitted by Section 2.30(c).
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(c) Additional Bank Debt. As of and immediately prior to the
Closing, the aggregate outstanding bank debt and similar debt obligations
incurred after November 2, 1995 solely for the purpose of funding new office
construction and/or expansion of the existing offices, in each case after such
date and incurred to relieve Melamed of personal guarantees, shall not exceed
$425,000.
2.31 Investment Representations. Melamed, in connection with his
acquisition of Common Stock, represents that he is an "accredited investor" as
such term is defined in Rule 501 under the Securities Act of 1933, as amended
(the "Securities Act"). Melamed represents to the Company that he is acquiring
such Common Stock for his 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. Melamed acknowledges that the Common Stock of the
Company 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. Melamed represents that he
has such knowledge and experience in financial and business matters that he is
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.
Melamed acknowledges and agrees that the following legend shall be typed
on each certificate evidencing shares of 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 OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A
STOCKHOLDERS' AGREEMENT DATED AS OF FEBRUARY 5, 1996, INCLUDING THEREIN CERTAIN
RESTRICTIONS ON TRANSFER, AND VOTING REQUIREMENTS. A COMPLETE AND CORRECT COPY
OF THIS AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
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ARTICLE 3. COVENANTS OF MELAMED.
3.1 Making of Covenants and Agreements. Melamed hereby makes the
covenants and agreements as set forth in this Article 3 for the period from and
after the Closing.
3.2 Cooperation. Melamed shall cooperate with all reasonable
requests of the Company, the Entities or any of their representatives and
agents to more effectively consummate the transactions contemplated hereby and
the transactions referred to herein.
3.3 Consents. Melamed shall assist the Company and each Entity in
obtaining any and all consents, authorizations and approvals necessary in
connection with the consummation of the transactions contemplated hereby or
referred to herein.
3.4 Notice of Default. Promptly upon the occurrence of, or promptly
upon Melamed becoming aware of the impending or threatened occurrence of, any
event which would cause or constitute a breach or default, or would have caused
or constituted a breach or default had such event occurred or been known to
Melamed prior to the date hereof, of any of the representations, warranties or
covenants of Melamed contained in or referred to in this Agreement or in any
Schedule or Exhibit referred to in this Agreement, Melamed shall give detailed
written notice thereof to the Company and Melamed shall use his best efforts to
prevent or promptly remedy the same.
SECTION 4. COVENANTS OF THE COMPANY.
4.1 Making of Covenants and Agreements. The Company hereby makes the
covenants and agreements set forth in this Section 4.
4.2 Cooperation. The Company shall cooperate with all reasonable
requests of Melamed and his representations and agents to more effectively
consummate the transactions contemplated hereby or referred to herein.
4.3 Availability of Records. After the Closing, the Company shall
make available to Melamed as reasonably requested by him and at his expense or
any taxing authority all information, records or documents relating to the
Monarch Dental Centers business in respect of all periods prior to Closing and
shall preserve all such information, records and documents until the later of
six years after the Closing or the expiration of all statutes of limitations or
extensions thereof, provided that Melamed shall hold the same in confidence.
The Company shall also make available to Melamed, as reasonably requested by
him, personnel responsible for preparing or maintaining information, records
and documents, both in connection with tax matters as well as litigation.
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ARTICLE 5. 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 regardless of any investigation and shall not merge in the
performance of any obligation by either party hereto, subject to the provisions
of Article 6 hereof.
ARTICLE 6. INDEMNIFICATION.
6.1 Indemnification by Melamed. Melamed on behalf of himself and his
successors, executors, administrators, estate, heirs and assigns (collectively,
for the purposes of this Article 6, "Melamed") agrees to defend, indemnify and
hold the Company, each Entity, all subsidiaries and affiliates of any of the
foregoing (including without limitation stockholders of any of the foregoing
(other than Melamed) and persons serving as officers, directors, partners,
employees or agents of the Company, each Entity or such subsidiaries or
affiliates thereof (in each case, other than Melamed) (individually a "Company
Indemnified Party" and collectively the "Company 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 Company Indemnified Party (a "Loss" or "Losses"), 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 Melamed in this Agreement, by Melamed or Smith in the
Melamed/Smith Asset Contribution Agreement, or in any Schedule, exhibit or
certificate delivered by or on behalf of Melamed as part of or pursuant to this
Agreement, or any claim, action or proceeding asserted or instituted or arising
out of any matter or thing covered by such representations or warranties
(collectively, "Warranty Claims");
(b) any breach of any covenant or agreement made by or on
behalf of Melamed in this Agreement, by Melamed or Smith in the Melamed/Smith
Asset Contribution Agreement, or in any Schedule, exhibit or certificate
delivered by or on behalf of Melamed as part of or pursuant to this Agreement;
or
(c) any liability of the Company or any Entity for Taxes
arising from an event or transaction prior to the Closing or as a result of the
Closing which have not been paid by the Company or an Entity prior to the
Closing, including without limitation, any increase in Taxes due to the
unavailability of any loss or deduction claimed by the Company or an Entity.
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The rights of Company Indemnified Parties to recover indemnification in
respect of any occurrence referred to in either of clauses (b) and (c) of this
Section 6.1 shall not be limited by the fact that such occurrence may not
constitute an inaccuracy in or breach of any representation, warranty or
agreement referred to in clause (a) of this Section 6.1.
6.2 Limitations on Indemnification by Melamed.
(a) The right of Company Indemnified Parties to
indemnification under Section 6.1 shall be subject to the following provisions:
(i) Indemnification with respect to Warranty Claims
(other than any such claims arising under Section 2.30 hereof) shall
expire eighteen (18) months after the Closing; provided, however, that
the limitation of this clause (i) shall not apply to Warranty Claims
involving fraud, intentional misrepresentation, title to the Subject
Assets or Redeemed Shares or Taxes, for which the period for making such
claims shall expire on the date which is six (6) months after the
termination of the applicable statute of limitations relating thereto.
If prior to the relevant date of expiration a specific state of facts
shall have become known which may constitute or give rise to any
Warranty Claim as to which indemnity may be payable and a Company
Indemnified Party shall have given notice of such facts to Melamed, then
the right to indemnification with respect thereto shall remain in effect
without regard to when such matter shall have been finally determined
and disposed of, according to the date on which notice of the applicable
claim is given.
(ii) No indemnification shall be payable with respect to
Warranty Claims (not involving fraud, intentional misrepresentation,
title to the Subject Assets or Redeemed Shares, or Taxes or any other
Warranty Claim arising under Section 2.30 hereof) to Company Indemnified
Parties unless the total of all Warranty Claims shall exceed $250,000 in
the aggregate, whereupon the full amount of such claims shall be
recoverable in accordance with the terms hereof.
(iii) Melamed shall not be obligated to indemnity Company
Indemnified Parties for Warranty Claims (other than any such claims
arising under Section 2.30 hereof and other than any such claims
involving fraud, intentional misrepresentations, title to the Subject
Assets or Redeemed Shares, or Taxes) after the cumulative amount of all
amounts paid by Melamed to Company Indemnified Parties with respect
thereto exceeds TWO MILLION DOLLARS ($2,000,000).
(vi) The limitations herein with respect to certain
Warranty Claims shall not limit the rights of any Company Indemnified
Party with respect to any other claims arising under provisions of
Section 6.1.
(b) In the event any claim for indemnification hereunder
arises under more than one provision of Section 6.1 and as such may be subject
to limitations pursuant to this Section 6.2 if deemed to arise under a
particular provision but not if deemed to arise under a different
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<PAGE> 33
provision (e.g., a matter constituting both a breach of a representation and a
breach of a covenant), then the claim shall be deemed to arise under the
provision to which no restrictions or the least restrictive provisions apply.
(c) Indemnification pursuant to Section 6.1 is the exclusive
remedy of Company Indemnified Parties against Melamed for matters arising out
of the representations and warranties of Melamed set forth in this Agreement
and the Schedules hereto and certificates delivered in connection herewith
after the Closing.
(d) The amount of any Losses suffered, sustained or incurred by
Company Indemnified Parties or required to be paid by Melamed shall be reduced
by the amount of any insurance proceeds and other amounts paid to such Company
Indemnified Parties by any Person (other than any Entity) not a party to this
Agreement.
6.3 Indemnification by Company. The Company agrees to defend,
indemnify and hold Melamed and his heirs (individually a "Melamed Indemnified
Party" and collectively the "Melamed Indemnified Parties") harmless from and
against any and all Claims, whether or not arising out of third-party claims
and including all amounts paid in respect of Losses (as defined in Section 6.1
hereof) 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 the Company in this Agreement, in the Melamed/Smith Asset
Contribution Agreement, or in any Schedule, exhibit or certificate delivered by
the Company as part of or pursuant to this Agreement, or any claim, action or
proceeding asserted or instituted or arising out of any matter or thing covered
by such representations or warranties (collectively "Melamed Warranty Claims");
or (b) any breach of any covenant or agreement made by the Company in this
Agreement, in the Melamed/Smith Asset Contribution Agreement, or in any
Schedule, exhibit or certificate, delivered by the Company as part of or
pursuant to this Agreement (such claims under clauses (a) and (b) being
hereinafter collectively referred to as "Melamed Indemnifiable Claims"). The
rights of Melamed Indemnified Parties to recover indemnification in respect of
any occurrence referred to in clause (b) of this Section 6.3 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 6.3.
6.4 Limitations on Indemnification by the Company.
(a) The right of Melamed Indemnified Parties to
indemnification under Section 6.3 shall be subject to the following provisions:
(i) Indemnification with respect to Melamed Warranty
Claims shall expire eighteen (18) months after the Closing; provided,
however, that the limitation of this clause (i) shall not apply to
Melamed Warranty Claims involving fraud or intentional
misrepresentation, for which the period for making such claims shall
expire on the date which is six (6) months after the termination of the
applicable statute of limitations relating thereto. If prior to the
relevant date of expiration a specific state of facts shall have become
known which may constitute or give rise to any Melamed
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Warranty Claim as to which indemnity may be payable and a Melamed
Indemnified Party shall have given notice of such facts to the Company
then the right to indemnification with respect thereto shall remain in
effect without regard to when such matter shall have been finally
determined and disposed of, according to the date on which notice of the
applicable claim is given.
(ii) No indemnification shall be payable with respect to
Melamed Warranty Claims (not involving fraud or intentional
misrepresentation) to Melamed Indemnified Parties unless the total of
all Melamed Warranty Claims shall exceed $250,000 in the aggregate,
whereupon the full amount of such claims in excess of such amount shall
be recoverable in accordance with the terms hereof.
(iii) The Company shall not be obligated to indemnify
Melamed Indemnified Parties for Melamed Warranty claims (other than any
such claims involving fraud or intentional misrepresentation) after the
cumulative amount of all amounts paid by the Company to Melamed
Indemnified Parties with respect thereto exceeds TWO MILLION DOLLARS
($2,000,000).
(iv) The limitations herein with respect to certain
Melamed Warranty Claims shall not limit the rights of any Melamed
Indemnified Party with respect to any other claims arising under clause
(b) of Section 6.3.
(b) Indemnification pursuant to Section 6.3 is the sole and
exclusive remedy of Melamed Indemnified Parties against the Company for matters
arising out of the representations and warranties of the Company set forth in
this Agreement and the Schedules hereto and certificates delivered in
connection herewith after the Closing.
(c) The amount of any Losses suffered, sustained or incurred
by Melamed Indemnified Parties or required to be paid by the Company shall be
reduced by the amount of any insurance proceeds and other amounts paid to such
Melamed Indemnified Parties by any Person not a party to this Agreement.
6.5 Notice; Defense of Claims. 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.
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In the case of any third party claim, if within twenty (20) days after
receiving the notice described in the preceding paragraph 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 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 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.
The indemnifying party or parties shall keep the 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. Notwithstanding anything herein stated, such
indemnified party or parties shall at all times have the right to fully
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.
6.6 Satisfaction of Indemnification Obligations. Any indemnity
payable pursuant to this Section 6 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.
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ARTICLE 7. MISCELLANEOUS.
7.1 Fees, Expenses and Certain Taxes.
(a) The Company will pay its fees and expenses in connection
with this Agreement and the Melamed/Smith Asset Contribution Agreement and the
transactions contemplated hereby and thereby. The Company will also pay the
legal, accounting and, subject to the representation and warranty in Section
2.17 hereof being true and correct, investment banking fees and expenses of
Melamed in connection with this Agreement and the Melamed/Smith Asset
Contribution Agreement and the transactions contemplated hereby and thereby not
to exceed $1,050,000, with Melamed agreeing to pay any such fees and expenses
in excess of such amount, provided that all fees and expenses of Coopers &
Lybrand will be paid by the Company.
(b) Melamed will pay all costs (i) incurred, whether at or
subsequent to the Closing, in connection with the transfer of the Redeemed
Shares, and the Subject Assets to the Company as contemplated by this Agreement
and the Melamed/Smith Asset Contribution 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 Company or any Entity in
connection with or as a result of transactions contemplated by this Agreement
and the Melamed/Smith Asset Contribution Agreement and the transactions
referred to herein.
7.2 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.
7.3 Notices. Any notice, request, demand 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:
TO THE COMPANY
OR ANY ENTITY: Monarch Dental Corporation
6757 Arapaho Road, Suite 779
Dallas, TX 75248
Attn: President
Fax: (214) 458-0934
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With a copy to: Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Attn: John R. LeClaire, P.C.
Fax: (617) 570-1234
TO MELAMED: Warren F. Melamed, D.D.S.
c/o Monarch Dental Corporation
6757 Arapaho Road, Suite 779
Dallas, TX 75248
Attn: President
Fax: (214) 458-0934
With a copy to: Haynes and Boone, L.L.P.
3100 NationsBank Plaza
Dallas, TX 75202
Attn: Kenneth K. Bezozo
Fax: (214) 651-5940
Any notice given hereunder may be given on behalf of any party by his counsel
or other authorized representatives.
7.4 Entire Agreement. This Agreement (together with the
Melamed/Smith Asset Contribution Agreement), including the Schedules 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 letter dated
November 2, 1995.
7.5 Assignability; Binding Effect. This Agreement and any rights
hereunder shall be assignable by the Company to one or more corporations or
partnerships controlling, controlled by or under common control with the
Company, directly or indirectly, provided the Company shall remain liable for
its obligations hereunder in connection with any such assignment, or to any
successor or acquiror of the Company or its affiliates provided such entity
assumes or agrees to be bound by the Company's obligations hereunder, or to any
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 financing), upon written notice to Melamed. This
Agreement may not be assigned by Melamed without the prior written consent of
the Company. 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 Melamed in the event of his death).
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7.6 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.
7.7 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.
7.8 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.
7.9 Consent to Jurisdiction; Certain Remedies. Solely for the
purpose of allowing a party to enforce its indemnification and other rights
hereunder, each of the parties hereby consents to personal jurisdiction,
service of process and venue in the federal or state courts of Texas or in the
court in which any claim for which indemnification may be sought hereunder is
brought against an indemnified party. 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 the remedy of specific performance, and
each of the parties hereto expressly waives the defense that a remedy in
damages will be adequate.
7.10 Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliate" of a person shall (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 an
entity, any officer, director, stockholder, partner or investor in such entity
or of or in any affiliate of such entity; and (iii) with respect to a person or
entity, any person or entity which directly or indirectly controls, is
controlled by, or is under common control with such person or entity.
(b) "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;
(c) "person" means an individual, corporation, partnership,
association, trust or any unincorporated organization; and
(d) "subsidiary" of a person means any corporation more than
50 percent of whose outstanding voting securities, or any partnership, joint
venture or other entity more than 50 percent of whose total equity interest, is
directly or indirectly owned by such person.
35
<PAGE> 39
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.
THE COMPANY:
ATTEST MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
- -------------------------------------- -----------------------------------
Secretary Name: Warren F. Melamed, D.D.S.
[Corporate Seal] Title: President
SPOUSE'S CONSENT MELAMED:
- ----------------
I acknowledge that I have read the
foregoing Stock Redemption Agreement
and that I understand the contents
thereof.
/s/ JANET L. MELAMED /s/ WARREN F. MELAMED
- -------------------------------------- --------------------------------------
Janet L. Melamed Warren F. Melamed, D.D.S.
36
<PAGE> 1
EXHIBIT 10.5
MONARCH DENTAL CORPORATION
------------------------------
STOCK PURCHASE AGREEMENT
------------------------------
Dated as of FEBRUARY 5, 1996
<PAGE> 2
MONARCH DENTAL CORPORATION
Stock Purchase Agreement
Dated as of FEBRUARY 5, 1996
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. PURCHASE AND SALE OF SHARES . . . . . . . . . . . . . . . . . . 1
1.1 Description of Securities . . . . . . . . . . . . . . . . . . . 1
1.2 Sale and Purchase . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . 2
SECTION 2B. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS . . . . . . . . 2
SECTION 3. CONDITIONS OF PURCHASE . . . . . . . . . . . . . . . . . . . . . 2
3.1 Closing of Asset Contribution . . . . . . . . . . . . . . . . . 2
3.2 Director Election . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 All Proceedings Satisfactory . . . . . . . . . . . . . . . . . . 3
3.5 Senior Credit Facilities . . . . . . . . . . . . . . . . . . . . 3
3.6 Investors' Fees . . . . . . . . . . . . . . . . . . . . . . . . 3
3.7 No Violation or Injunction . . . . . . . . . . . . . . . . . . . 4
3.8 Consents and Waivers . . . . . . . . . . . . . . . . . . . . . . 4
3.9 Stockholders' Agreement . . . . . . . . . . . . . . . . . . . . 4
3.10 Material Adverse Change . . . . . . . . . . . . . . . . . . . . 4
SECTION 4. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Financial Statements and Budgetary Information; Inspection . . . 5
4.2 Board Meetings; Indemnification . . . . . . . . . . . . . . . . 5
4.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.4 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . 6
4.5 Payment of Taxes, Compliance with Laws, etc. . . . . . . . . . . 6
4.6 Material Adverse Changes . . . . . . . . . . . . . . . . . . . . 6
4.7 Management Compensation . . . . . . . . . . . . . . . . . . . . 6
4.8 Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.9 Affiliated Transactions . . . . . . . . . . . . . . . . . . . . 7
4.10 Managing Underwriter . . . . . . . . . . . . . . . . . . . . . . 7
4.11 Material Transactions . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.1 Amendments, Waivers and Consents . . . . . . . . . . . . . . . . 8
5.2 Actions or Consents of Investors . . . . . . . . . . . . . . . . 8
5.3 Indemnification from the Company; Expenses . . . . . . . . . . . 8
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C>
5.4 Survival of Representations; Assignability of Rights . . . . . . 11
5.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.6 Section Headings and Gender . . . . . . . . . . . . . . . . . . 11
5.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.8 Notices and Demands . . . . . . . . . . . . . . . . . . . . . . 11
5.9 Remedies; Severability . . . . . . . . . . . . . . . . . . . . . 11
5.10 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SCHEDULES:
Schedule 4.9 - Affiliated Transactions
EXHIBITS:
Exhibit A - Investors
Exhibit B - Amended and Restated Certificate of Incorporation
Exhibit C - Director Indemnification Agreement
Exhibit D - Form of Stockholders' Agreement
Exhibit E - Company's 1996 Stock and Incentive Plan
</TABLE>
(ii)
<PAGE> 4
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT made as of this 5th day of February, 1996, by
and among MONARCH DENTAL CORPORATION, a Delaware corporation (the "Company"),
and each of the investment partnerships and individuals named in Exhibit A
hereto (including their assignees as provided in Section 5.4, collectively the
"Investors," and each individually an "Investor").
SECTION 1. PURCHASE AND SALE OF SHARES
1.1 Description of Securities. The Company has authorized the
issuance and sale to the Investors of 4,800,000 shares (the "Preferred Shares")
of its authorized but unissued Convertible Participating Preferred Stock, par
value $.01 per share (the "Preferred Stock"), having the rights, preferences
and other terms set forth on Exhibit B hereto (the "Preferred Stock Terms").
The Company has authorized and has reserved, and covenants to continue to
reserve, a sufficient number of shares of its Common Stock, par value $.01 per
share (the "Common Stock"), and its Redeemable Preferred Stock, par value $.01
per share (the "Redeemable Preferred Stock"), to satisfy the rights of
conversion of the holders of the Preferred Shares. Any shares of Common Stock
or Redeemable Preferred Stock or any successor class of capital stock of the
Company hereafter issued or issuable upon conversion of the Preferred Shares
are herein referred to as "Conversion Shares," and the Preferred Shares and the
Conversion Shares are herein collectively referred to as the "Securities."
1.2 Sale and Purchase. Subject to the terms and conditions herein,
at the Closing (as hereinafter defined), the Company shall issue and sell to
each of the Investors, and each Investor shall purchase from the Company, the
number of Preferred Shares set forth opposite the name of such Investor in
Exhibit A hereto for the purchase price of $2.0834 for each Preferred Share.
1.3 Closing. A closing (the "Closing") shall take place at the
offices of Goodwin, Procter & Hoar, Boston, Massachusetts, together with the
closing of the transactions contemplated by each of the MacGregor Asset
Contribution Agreement, the Melamed Stock Redemption Agreement, the
Melamed/Smith Asset Contribution Agreement and the Bank Financing Agreements
(each as hereinafter defined), subject to satisfaction or waiver of all of the
conditions set forth herein and therein. At the Closing, the Company shall
deliver to each Investor a certificate or certificates representing the
Preferred Shares being acquired by such Investor in such Investor's name or in
the name of its nominee, against payment of the full purchase price therefor by
or on behalf of each Investor to the Company by wire transfer of same day
available funds. The day on which the Closing occurs is referred to herein as
the Closing Date.
<PAGE> 5
SECTION 2A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants that immediately after the
Closing, and after giving effect to each of the transactions contemplated by
(i) this Agreement, (ii) the MacGregor Asset Contribution Agreement, (iii) the
Melamed Stock Redemption Agreement, (iv) the Bank Financing Agreements and (v)
the Melamed/Smith Asset Contribution Agreement, all of the issued and
outstanding capital stock, partnership interests or other equity interests of
the Company and each Entity (as defined in the Melamed Stock Redemption
Agreement) will be owned beneficially and of record as set forth in Section
2.2(iv) of the Disclosure Schedule in the Melamed Stock Redemption Agreement,
will be free and clear of any lien, restrictions or encumbrances (other than
those, if any, required by the Bank Financing) and there will be 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, partnership interests or
any other equity interest of the Company or any Entity, except in each case, to
the extent applicable, as provided by the terms of the Preferred Shares.
SECTION 2B. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
Each Investor represents that it is an "accredited investor" as such
term is defined in Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"). Each Investor represents to the Company that it is
purchasing the Securities for its 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. Each such Investor acknowledges that
its respective Securities have not been registered under the Securities Act or
the securities laws of any state or other jurisdiction and cannot be disposed
of unless they are subsequently registered under the Securities Act and any
applicable state laws or an exemption from such registration is available.
SECTION 3. CONDITIONS OF PURCHASE
Each of the Investors' obligation to purchase and pay for their
respective Preferred Shares shall be subject to compliance by the Company with
its agreements herein contained and to the fulfillment to the Investors'
satisfaction, or the waiver by the Investors, on or before and at the Closing
Date of the following conditions:
3.1 Closing of Asset Contribution. Each of the transactions
contemplated by (i) the Asset Contribution Agreement by and between the
Company, Shears Vanguard, Inc., Shears Vanguard General, Inc., Shears Vanguard
SMI, Inc., MDC Dental, Inc. and Dr. Charles G. Shears (the "MacGregor Asset
Contribution Agreement"), (ii) the Stock Redemption Agreement dated as of
February 5, 1996 by and between the Company and Warren F. Melamed, D.D.S. (the
"Melamed Stock Redemption Agreement"), (iii) the Asset Contribution Agreement
dated as of February 5, 1996 by and among the Company, Warren F. Melamed,
D.D.S. and Roy D. Smith, III, D.D.S. (the "Melamed/Smith Asset Contribution
Agreement") and (iv) the Loan Agreement dated as of February 5, 1996 among
Monarch Dental Associates,
2
<PAGE> 6
L.P., MacGregor Dental Associates, L.P., NationsBank of Texas, N.A., as Agent,
NationsBank of Texas, N.A. and the other entities designated therein as Lenders
and related documents entered in connection therewith (the "Bank Financing
Agreements") shall have closed together with the transactions contemplated by
this Agreement, without waiver of any of the material conditions contained
therein.
3.2 Director Election. Roger B. Kafker as the nominee of the
Investors, shall have been elected as a director of the Company (together with
any subsequent nominees of the Investors, the "Investors' Nominees") and the
Company shall have entered into an Indemnification Agreement with the
Investors' Nominee in the form attached hereto as Exhibit C.
3.3 Authorization. The Board of Directors and stockholders of the
Company shall have duly adopted resolutions in the form reasonably satisfactory
to the Investors and shall have taken all action necessary for the purpose of
authorizing the Company to consummate the transactions contemplated hereby in
accordance with the terms hereof and to cause the Amended and Restated
Certificate of Incorporation substantially in the form attached hereto as
Exhibit B to become effective; and the Investors shall have received a
certificate of the Secretary of the Company setting forth a copy of the
resolutions and the Amended and Restated Certificate of Incorporation and
by-laws of the Company and such other matters as may be reasonably requested by
the Investors.
3.4 All Proceedings Satisfactory. All corporate and other
proceedings taken prior to or at the Closing in connection with the
transactions contemplated by this Agreement and by each of the Asset
Contribution Agreement and all documents and evidences incident hereto and
thereto, shall be reasonably satisfactory in form and substance to the
Investors. The issuance and sale of the Preferred Shares shall be made in
compliance in all material respects with all applicable federal and state laws
and evidence thereof shall have been provided to the Investors.
3.5 Senior Credit Facilities. Subject to the simultaneous closing of
the transactions contemplated by this Agreement, the Company shall have
executed and delivered definitive agreements with one or more banks or other
financial institutions with respect to a senior credit facility of not less
than $16.5 million to partially finance the transactions contemplated by each
of the MacGregor Asset Contribution Agreement, the Melamed Stock Redemption
Agreement, the Melamed/Smith Asset Contribution Agreement and the Bank
Financing Agreements and related transactions upon terms and conditions
reasonably satisfactory to the Investors, and such financing shall have been
consummated on the terms set forth therein and otherwise on terms reasonably
satisfactory to the Investors.
3.6 Investors' Fees. The Company shall have paid all legal and
accounting fees and related expenses incurred by it and the Investors in
connection with the transactions contemplated by this Agreement, the MacGregor
Asset Contribution Agreement, the Melamed Stock Redemption Agreement, the
Melamed/Smith Asset Contribution Agreement and the Bank Financing Agreements
and concurrent or related transactions.
3
<PAGE> 7
3.7 No Violation or Injunction. The consummation of the transactions
contemplated by this Agreement, the MacGregor Asset Contribution Agreement, the
Melamed Stock Redemption Agreement, the Melamed/Smith Asset Contribution
Agreement or the Bank Financing Agreements or the transactions contemplated
hereby or thereby shall not be in violation of any law or regulation, and shall
not be subject to any injunction, stay or restraining order.
3.8 Consents and Waivers. The Company and each party to each of the
MacGregor Asset Contribution Agreement, the Melamed Stock Redemption Agreement,
the Melamed/Smith Asset Contribution Agreement and the Bank Financing
Agreements shall have obtained all consents or waivers necessary to execute
this Agreement, each of the MacGregor Asset Contribution Agreement, the Melamed
Stock Redemption Agreement, the Melamed/Smith Asset Contribution Agreement and
the Bank Financing Agreements and the other agreements and documents
contemplated herein, to issue the Securities and to carry out the transactions
contemplated hereby and thereby and shall have delivered satisfactory evidence
thereof to the Investors. All corporate and other action and governmental
filings necessary to effectuate the terms of this Agreement, the Securities,
each of the MacGregor Asset Contribution Agreement, the Melamed Stock
Redemption Agreement, the Melamed/Smith Asset Contribution Agreement and the
Bank Financing Agreements, and other agreements and instruments executed and
delivered by the Company in connection herewith and therewith shall have been
made or taken.
3.9 Stockholders' Agreement. The Company, the Investors and each
other stockholder of the Company, after giving effect to the transactions
contemplated by this Agreement and each of the MacGregor Asset Contribution
Agreement, the Melamed Stock Redemption Agreement, the Melamed/Smith Asset
Contribution Agreement and the Bank Financing Agreements, shall have entered
into a Stockholders' Agreement in substantially the form attached hereto as
Exhibit D.
3.10 Material Adverse Change. There shall not have occurred any event
or series of related events which, individually or in the aggregate, have
materially and adversely affected or could reasonably be anticipated to
materially and adversely affect the assets, liabilities, properties, business
or prospects of any of the business that is the subject matter of each of the
MacGregor Asset Contribution Agreement, the Melamed Stock Redemption Agreement,
the Melamed/Smith Asset Contribution Agreement and the Bank Financing
Agreements.
SECTION 4. COVENANTS
Except as provided in the immediately succeeding sentence, the Company
agrees for the benefit of the Investors that until the closing of the Company's
first Qualified Public Offering it shall comply with the following covenants.
Notwithstanding the foregoing, (i) a majority in interest of the Investors may
agree in writing to waive any of the following covenants and (ii) the covenants
contained in Section 4.2 shall survive any Qualified Public Offering. A
"Qualified Public Offering" shall mean the first underwritten public offering
4
<PAGE> 8
pursuant to an effective registration statement under the Securities Act,
covering the offer and sale by the Company of Common Stock to the public in
which (i) the proceeds received by the Company, net of expenses and
underwriting discounts and commissions, equal or exceed $20 million at a price
per share indicating a valuation of the Company of at least $50 million and
(ii) all or a portion of such proceeds are used to redeem all of the shares of
Redeemable Preferred Stock then outstanding.
4.1 Financial Statements and Budgetary Information; Inspection. The
Company will deliver to the Investors internally prepared unaudited monthly and
quarterly consolidated and consolidating financial statements and audited
annual consolidated and consolidating financial statements, as well as annual
budgetary information. The monthly and quarterly consolidated and
consolidating financial information will be provided to the Investors within 35
days after the end of each month and quarter. The annual budgetary information
will be presented at a Board of Directors' meeting at least one month prior to
each fiscal year-end of the Company. An annual audit by a so-called "Big Six"
accounting firm selected by the Board of Directors will be provided within 90
days after each fiscal year-end of the Company.
The Company will, upon reasonable prior notice to the Company, permit
authorized representatives of the Investors to visit and inspect any of the
properties of the Company and its subsidiaries, including its books of account
(and to make copies thereof and take extracts therefrom), and to discuss its
affairs, finances and accounts with its officers, administrative employees and
independent accountants, all at such reasonable times and as often as may be
reasonably requested.
4.2 Board Meetings; Indemnification. The Company will ensure that
meetings of its Board of Directors are held at least four times each year and
at intervals of not more than three months and will reimburse Directors for
their reasonable travel expenses incurred in connection with attending meetings
of the Board of Directors. The Amended and Restated Certificate of
Incorporation and By-laws of the Company will in respect of all times during
which any nominee of any of the Investors serves as director of the Company
provide for exculpation and indemnification of the directors and limitations on
the liability of the directors to the fullest extent permitted under applicable
state law. Upon the reasonable request of any Investors' Nominee, the Company
will use its best efforts to obtain and maintain on reasonable business terms
directors and officers' liability insurance coverage of at least $1,000,000 per
occurrence, including knowing violations under federal and state securities
laws.
4.3 Insurance. The Company will keep its and its subsidiaries'
insurable properties insured, upon reasonable business terms, by financially
sound and reputable insurers against liability, and the perils of casualty,
fire and extended coverage in amounts of coverage at least equal to those
customarily maintained by companies in the same or similar business as the
Company. The Company will also maintain with such insurers insurance against
other hazards and risks and liability to persons and property to the extent and
in the manner customary for companies engaged in the same or similar business.
5
<PAGE> 9
4.4 Conduct of Business. The Company will engage principally in the
ownership and management of group dental practices and facilities or a business
or businesses similar thereto or reasonably compatible therewith. The Company
will keep in full force and effect its corporate existence and all intellectual
property rights that the Company reasonably deems useful in its business. The
Company and its subsidiaries will maintain all properties used or useful in the
conduct of their businesses in good repair, working order and condition,
ordinary wear and tear excepted, as necessary to permit such businesses to be
properly and advantageously conducted.
4.5 Payment of Taxes, Compliance with Laws, etc. The Company and its
subsidiaries will pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon them or upon their income or
property before the same shall become in default, as well as all lawful claims
for labor, materials and supplies which, if not paid when due, might become a
lien or charge upon their property or any part thereof; provided, however, that
neither the Company nor any of its subsidiaries shall be required to pay and
discharge any such tax, assessment, charge, levy or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established on its books.
The Company and its subsidiaries will comply in all material respects with all
applicable laws and regulations in the conduct of their businesses, including,
without limitation, all applicable federal and state securities laws in
connection with the issuance of any securities.
4.6 Material Adverse Changes. The Company will promptly advise the
Investors of any event which represents a material adverse change in the
condition or business, financial or otherwise, of the Company and its
subsidiaries, and of each suit or proceeding commenced or threatened against
the Company or any of its subsidiaries which, if adversely determined, in the
reasonable judgment of the Company, could have a material adverse effect on the
Company and its subsidiaries or their financial condition, business or
prospects.
4.7 Management Compensation. Compensation paid by the Company and
its subsidiaries to their management will be comparable to compensation paid to
management in companies in the same or similar businesses of similar size and
maturity and with comparable financial performance. In furtherance of the
foregoing, the Company hereby agrees that no compensation plans for employees
or management of the Company or its subsidiaries shall be adopted or
implemented without the prior written consent of the Investors.
4.8 Stock Options. The Company and its subsidiaries will not issue
stock or grant stock options, warrants, other rights to purchase stock or
phantom stock rights in the Company or its subsidiaries to their employees,
officers, directors, consultants, advisers or independent contractors except
for the issuance of up to 1,100,000 shares or options on shares of non-voting
or voting (as determined by the Board of Directors) Common Stock (subject to
adjustments for stock splits, stock dividends and the like), pursuant to and in
accordance with the terms of the Company's 1996 Stock Plan (the "Plan") as in
effect on the Closing Date, a copy of which is attached hereto as Exhibit E
hereto. Options may be granted to employees, officers, directors, consultants,
advisors or independent contractors at prices not less than fair
6
<PAGE> 10
market value at the time of grant as determined in good faith by the Board of
Directors or a committee thereof, as applicable, and otherwise on such terms as
the Board of Directors or committee thereof, as applicable, shall determine.
The Plan may not be amended, revised or waived after the Closing Date without
the consent of the Investors' Nominee. All options granted under the Plan
shall be subject to vesting in equal installments over a period of not less
than four years after the date of the grant.
4.9 Affiliated Transactions. The Company and its subsidiaries shall
not enter into any transactions, agreements or arrangements with, or make any
payments to, any director, officer, independent contractor or key employee of
the Company or any subsidiary of the Company or any such subsidiary or any
persons or entities who are relatives of, controlled by or otherwise affiliated
with any of the foregoing persons or entities; provided, however, that the
payments and transactions set forth in Schedule 4.9 hereto shall be deemed
exempt from the provisions of this Section 4.9.
4.10 Managing Underwriter. Selection of the managing or lead
underwriter for the Company's initial public offering shall be approved by the
Investors which approval shall not be unreasonably withheld.
4.11 Material Transactions. The Company will not:
(a) sell, lease or otherwise dispose of (whether in one
transaction or a series of related transactions) all or substantially all of
its assets or business or any material business unit,
(b) merge with or into or consolidate with another entity
(other than any reincorporation merger not involving any change in the rights
and obligations of the parties hereto) or engage in any consolidation
transaction,
(c) liquidate or wind up its operations,
(d) acquire any other corporation or business concern, whether
by acquisition of assets, capital stock or otherwise, and whether in
consideration of the payment of cash, the issuance of capital stock or
otherwise, or make any material investment in another business entity,
(e) directly or indirectly redeem, purchase, or otherwise
acquire for consideration any shares of its Common Stock or any other class of
its capital stock, except for (i) repurchases of shares granted under the Plan
in accordance with the terms thereof and (ii) as required by the terms of the
Preferred Shares,
(f) adopt any amendment to its Amended and Restated
Certificate of Incorporation, or adopt any amendment to its By-Laws,
7
<PAGE> 11
(g) create, or obligate itself to create, any class or series
of shares having preference over or being on a parity with the Preferred Shares
or the Redeemable Preferred Stock, or
(h) enter into any agreement or arrangement or take any other
action that eliminates, amends, restricts or adversely affects the rights of
the Investors hereunder or as holders of Securities of the relevant class or
its ability to perform its obligations hereunder.
SECTION 5. GENERAL
5.1 Amendments, Waivers and Consents. For the purposes of this
Agreement and all agreements executed pursuant hereto, no course of dealing
between or among any of the parties hereto and no delay on the part of any
party hereto in exercising any rights hereunder or thereunder shall operate as
a waiver of the rights hereof and thereof. No provision hereof may be waived
otherwise than by a written instrument signed by the parties so waiving such
covenant or other provision; provided, however, in the case of the Investors,
changes in or additions to, and any consents required by, this Agreement may be
made, and compliance with any term, covenant, condition or provision set forth
herein may be omitted or waived (either generally or in a particular instance
and either retroactively or prospectively) by a consent of the Investors in
accordance with Section 5.2. Any amendment or waiver effected in accordance
with this Section 5.1 shall be binding upon each party to this Agreement and
each assignee of such a party.
5.2 Actions or Consents of Investors. Any actions required to be
taken or consents, approvals, votes or waivers required or contemplated to be
given by the Investors shall require a vote of a majority in interest of the
Investors based on their relative holdings of capital stock of the Company at
the relevant time.
5.3 Indemnification from the Company; Expenses.
(a) Without limitation of any other provision of this
Agreement, the Company agrees to defend, indemnify and hold the Investors and
their affiliates and their respective direct and indirect partners, members,
stockholders, directors, officers, employees and agents and each person who
controls any of them within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act of 1934, as amended (the "Exchange Act")
(parties receiving the benefit of the indemnification agreement herein shall be
referred to collectively as "Indemnified Parties" and individually as an
"Indemnified Party") harmless from and against any and all losses, claims,
damages, obligations, liens, assessments, judgments, fines, liabilities, and
other costs and expenses (including without limitation interest, penalties and
any investigation, reasonable, legal and accountant fees and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, as the same are incurred) of any kind
or nature whatsoever which may be sustained or suffered by any such Indemnified
Party, without regard to any investigation by any of the Indemnified Parties,
based upon, arising out of, by reason of or
8
<PAGE> 12
otherwise in respect of or in connection with (i) any breach of any covenant
or agreement made by the Company in this Agreement or in any agreement or
instrument delivered pursuant to or in connection with this Agreement, or (ii)
any third party or governmental action or claim relating to any action taken or
omitted to be taken or alleged to have been taken or omitted to have been taken
by any Indemnified Party as shareholder, director, agent, representative or
controlling person of the Company, including, without limitation, any and all
losses, claims, damages, expenses and liabilities, joint or several (including
any investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted, as the same may be incurred) arising or alleged to arise under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise, including without limitation any such
claim alleging so-called control person liability or securities law liability;
provided, however, that the Company will not be liable to the extent that such
loss, claim, damage, expense or liability arises from and is based on (A) an
untrue statement or omission or alleged untrue statement or omission in a
registration statement or prospectus which is made in reliance on and in
conformity with written information furnished to the Company in an instrument
duly executed by or on behalf of such Indemnified Party specifically stating
that it is for use in the preparation thereof or (B) a knowing and willful
violation of the federal securities laws by an Indemnified Party, as finally
determined by a court of competent jurisdiction.
(b) If the indemnification provided for in Section 5.3(a)
above for any reason is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party in respect of any losses, claims, damages,
expenses or liabilities referred to therein, then the Company, in lieu of
indemnifying such Indemnified Party thereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such losses, claims,
damages, expenses or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Investors, or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company and the Investors in connection with the action or inaction
which resulted in such losses, claims, damages, expenses or liabilities, as
well as any other relevant equitable considerations. In connection with any
registration of the Company's securities, the relative benefits received by the
Company and the Investors shall be deemed to be in the same respective
proportions that the net proceeds from the offering (before deducting expenses)
received by the Company and the Investors, in each case as set forth in the
table on the cover page of the applicable prospectus, bear to the aggregate
public offering price of the securities so offered. The relative fault of the
Company and the Investors shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Investors and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to this Section 5.3(b) were determined by
pro rata or per capita allocation or by any other method of allocation which
does not take account of the equitable
9
<PAGE> 13
considerations referred to in the immediately preceding paragraph. In
connection with the registration of the Company's securities, in no event shall
an Investor be required to contribute any amount under this Section 5.3(b) in
excess of the lesser of (i) that proportion of the total of such losses,
claims, damages or liabilities indemnified against equal to the proportion of
the total securities sold under such registration statement which is being sold
by such Investor or (ii) the proceeds received by such Investor from its sale
of securities under such registration statement. No person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
found guilty of such fraudulent misrepresentation.
(c) The indemnification and contribution provided for in this
Section 5.3 will remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Parties or any officer,
director, partner, employee, agent or controlling person of the Indemnified
Parties.
(d) The provisions of this Section 5.3 are in addition to and
shall supplement those set forth in the Stockholders' Agreement which shall
apply in the case of the registration and sale of Registrable Securities held
by any of the Investors registered as provided in the Stockholders' Agreement.
(e) The Company agrees to pay and hold the Investors harmless
against liability for payment of all reasonable out-of-pocket costs and
expenses incurred in connection with (i) the investigation (including due
diligence), preparation, execution and delivery of this Agreement, each of the
MacGregor Asset Contribution Agreement, the Melamed Stock Redemption Agreement,
the Melamed/Smith Asset Contribution Agreement and the Bank Financing
Agreements, the other agreements, instruments and documents to be delivered
hereunder or thereunder and the transactions contemplated hereby and thereby or
in connection with such transactions (including any contemporaneous or
reasonably contemporaneous acquisition) in an amount not to exceed $1,050,000
(exclusive of any fees, costs, points or expenses in connection with or
pursuant to the Bank Financing Agreements and the financing contemplated
thereby) and (ii) their ongoing investment in the Company, including the fees
and disbursements of counsel and other professionals. In addition, the Company
agrees to pay any and all stamp, transfer and other similar taxes (together in
each case with interest and penalties, if any) payable or determined to be
payable in connection with the execution and delivery of this Agreement and the
issuance of securities hereunder.
5.4 Survival of Representations; Assignability of Rights. All
covenants and agreements of the Company made herein and in the certificates,
exhibits and schedules delivered to any Investor in connection herewith (a) are
material and shall be deemed to have been relied upon by such Investor, and
shall survive the delivery of the Securities and (b) shall bind the Company's
successors and assigns, whether so expressed or not, and, except as otherwise
provided in this Agreement, all such covenants, agreements, representations and
warranties shall inure to the benefit of the Investors' successors and assigns
and to transferees of the Securities, whether so expressed or not, with any
such assignee (and any successive assignee thereof) being deemed an "Investor"
for purposes hereof.
10
<PAGE> 14
5.5 Governing Law. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of Delaware,
without giving effect to conflict of laws principles thereof.
5.6 Section Headings and Gender. The descriptive headings in this
Agreement have been inserted for convenience only and shall not be deemed to
limit or otherwise affect the construction of any provision thereof or hereof.
The use in this Agreement of the masculine pronoun in reference to a party
hereto shall be deemed to include the feminine or neuter, and vice versa, as
the context may require.
5.7 Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which when so executed and delivered shall
be taken to be an original; but such counterparts shall together constitute but
one and the same document.
5.8 Notices and Demands. Any notice or demand which is required or
provided to be given under this Agreement shall be deemed to have been
sufficiently given and received for all purposes when delivered by hand,
telecopy, telex or other method of facsimile, or five (5) days after being sent
by certified or registered mail, postage and charges prepaid, return receipt
requested, or two (2) days after being sent by overnight delivery providing
receipt of delivery, to the following addresses: if to the Company 6757
Arapaho Road, Suite 779, Dallas, Texas 75248, or at any other address
designated by the Company to the Investors in writing; if to an Investor, at
its mailing address as shown on Exhibit A or at any other address designated by
such Investor to the Company.
5.9 Remedies; Severability. It is specifically understood and agreed
that any breach of the provisions of this Agreement by any person subject
hereto will result in irreparable injury to the other parties hereto, that the
remedy at law alone will be an inadequate remedy for such breach, and that, in
addition to any other legal or equitable remedies which they may have, such
other parties may enforce their respective rights by actions for specific
performance (to the extent permitted by law). Whenever possible, each
provision of this Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this
Agreement shall be deemed prohibited or invalid under such applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
and such prohibition or invalidity shall not invalidate the remainder of such
provision or the other provisions of this Agreement.
5.10 Integration. This Agreement, including the exhibits, documents
and instruments referred to herein or therein, constitutes the entire
agreement, and supersedes all other prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
11
<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year first above written.
COMPANY:
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
------------------------------------
Title: President
12
<PAGE> 16
INVESTORS:
ADVENT VII L.P.
By: TA Associates VI L.P.,
its General Partner
By: TA Associates, Inc.,
its General Partner
By: *
------------------------------------
ADVENT ATLANTIC AND
PACIFIC II L.P.
By: TA Associates AAP II Partners,
its General Partner
By: *
------------------------------------
ADVENT NEW YORK L.P.
By: TA Associates VI L.P.,
its General Partner
By: *
------------------------------------
TA VENTURE INVESTORS L.P.
By: *
------------------------------------
* /s/ ROGER B. KAFKER
-----------------------------------
By Roger B. Kafker
13
<PAGE> 17
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
/s/ DONNA K. WELLINGTON /s/ ROBERT H. WELLINGTON
- ------------------------------------ -------------------------------------
Mrs. Wellington Robert H. Wellington III
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
/s/ JANET S. SHUMAKE /s/ STEVEN W. SHUMAKE
- ------------------------------------ -------------------------------------
Mrs. Shumake Steven W. Shumake
SPOUSE'S CONSENT
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
/s/ STEPHANIE J. BROUN /s/ ROBERT C. BROUN
- ------------------------------------ -------------------------------------
Mrs. Broun Robert C. Broun
/s/ JOHN R. LECLAIRE
-------------------------------------
John R. LeClaire
/s/ H. DAVID HENKEN
-------------------------------------
H. David Henken
/s/ HOWARD A. CUBELL
-------------------------------------
Howard A. Cubell
/s/ MAURA L. CONNOLLY
-------------------------------------
Maura L. Connolly
/s/ KENNETH K. BEZOZO
-------------------------------------
Kenneth K. Bezozo
14
<PAGE> 18
Exhibit A
List of Investors
<TABLE>
<CAPTION>
Number of Aggregate
Preferred Purchase Price
Name and Address Shares ($2.0834 per Share)
- ---------------- ----------- -------------------
<S> <C> <C>
Advent VII L.P.* 3,155,300 $ 6,573,752.02
Advent Atlantic and Pacific II L.P.* 1,089,300 2,269,447.62
Advent New York L.P.* 315,500 657,312.70
TA Venture Investors L.P.* 51,500 107,295.10
Robert H. Wellington, III** 48,000 100,003.20
Steven W. Shumake ** 48,000 100,003.20
Robert C. Broun** 48,000 100,003.20
John R. LeClaire*** 7,200 15,000.48
H. David Henken*** 9,600 20,000.64
Howard A. Cubell*** 12,000 25,000.80
Maura L. Connolly*** 3,600 7,500.24
Kenneth K. Bezozo**** 12,000 25,000.80
--------- --------------
Totals 4,800,000 $10,000,320.00
========= ==============
</TABLE>
*Address for each of these Investors is as follows:
c/o TA Associates, Inc.
125 High Street, Suite 2500
Boston, MA 02110
**Address for each of these Investors is as follows:
c/o Wellington Associates, Inc.
1700 Pacific Avenue, Suite 2720
Dallas, TX 75201
***Address for each of these Investors is as follows:
c/o Goodwin, Procter & Hoar
53 State Street, Exchange Place
Boston, MA 02109
****Address for this Investor is as follows:
4819 Sandestin Drive
Dallas, TX 75287
15
<PAGE> 1
EXHIBIT 10.7
ASSET CONTRIBUTION AGREEMENT
by and between
Monarch Dental Corporation
as Buyer
and
Shears Vanguard, Ltd.
as Seller
and
Shears Vanguard Inc., Shears Vanguard General, Inc.,
Shears Vanguard SMI Inc., MDC Dental, Inc.
and
Dr. Charles G. Shears
<PAGE> 2
ASSET CONTRIBUTION AGREEMENT
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1. CONTRIBUTION OF ASSETS AND LIABILITIES . . . . . . . . . . . . 2
1.1 Contribution of Assets . . . . . . . . . . . . . . . . . . . . 2
1.2 Assumption of Liabilities . . . . . . . . . . . . . . . . . . 5
1.3 Purchase Price and Payment; Adjustment . . . . . . . . . . . . 7
1.4 Time and Place of Closing . . . . . . . . . . . . . . . . . . 7
1.5 Certain Closing Deliveries . . . . . . . . . . . . . . . . . . 8
1.6 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 9
1.7 Allocation of Purchase Price . . . . . . . . . . . . . . . . . 9
1.8 Procedures for Assets not Transferable . . . . . . . . . . . . 9
1.9 Non-Competition Agreement . . . . . . . . . . . . . . . . . . 9
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENTS. . . . . 10
2.1 Making of Representations and Warranties . . . . . . . . . . . 10
2.2 Organization and Qualification; Capital Stock . . . . . . . . 10
2.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.4 Authority; Noncontravention . . . . . . . . . . . . . . . . . 10
2.5 Status of Property . . . . . . . . . . . . . . . . . . . . . . 11
2.6 Financial Statements; Undisclosed Liabilities . . . . . . . . 14
2.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.8 Collectibility of Accounts Receivable . . . . . . . . . . . . 16
2.9 Absence of Certain Changes . . . . . . . . . . . . . . . . . . 17
2.10 Ordinary Course . . . . . . . . . . . . . . . . . . . . . . . 19
2.11 Banking Relations . . . . . . . . . . . . . . . . . . . . . . 19
2.12 Intellectual Property . . . . . . . . . . . . . . . . . . . . 19
2.13 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.14 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.15 Permits; Compliance with Laws; Licensing and Credentialing;
Health Care Providers . . . . . . . . . . . . . . . . . . . . 24
2.16 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.17 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . 26
2.18 Transactions with Interested Persons . . . . . . . . . . . . . 26
2.19 Employee Benefit Programs . . . . . . . . . . . . . . . . . . 26
2.20 Environmental Matters . . . . . . . . . . . . . . . . . . . . 28
2.21 List of Certain Employees and Suppliers . . . . . . . . . . . 30
2.22 Employees; Labor Matters . . . . . . . . . . . . . . . . . . . 30
2.23 Material Relationships; Government Contracts . . . . . . . . . 31
2.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.25 Investment Representations . . . . . . . . . . . . . . . . . . 31
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 3. COVENANTS OF SELLER AND PARENTS . . . . . . . . . . . . . . . 32
3.1 Making of Covenants and Agreements . . . . . . . . . . . . . . 32
3.2 Payment of Obligations . . . . . . . . . . . . . . . . . . . . 32
3.3 Collection of Assets . . . . . . . . . . . . . . . . . . . . . 32
3.4 Availability of Records . . . . . . . . . . . . . . . . . . . 33
3.5 Use of Name . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.6 Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.7 Real Estate Lease Matters . . . . . . . . . . . . . . . . . . 33
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . 34
4.1 Making of Representations and Warranties . . . . . . . . . . . 34
4.2 Organization of Buyer . . . . . . . . . . . . . . . . . . . . 34
4.3 Authority of Buyer . . . . . . . . . . . . . . . . . . . . . . 34
4.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.5 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . 35
4.6 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 5. COVENANTS OF BUYER . . . . . . . . . . . . . . . . . . . . . . 35
5.1 Making of Covenants and Agreements . . . . . . . . . . . . . . 35
5.2 Availability of Records . . . . . . . . . . . . . . . . . . . 36
ARTICLE 6. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ARRANGEMENTS,
COVENANTS AND OBLIGATIONS . . . . . . . . . . . . . . . . . . 36
ARTICLE 7. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . 36
7.1 Indemnification by Seller and Parents . . . . . . . . . . . . 36
7.2 Limitations on Indemnification by Seller and Parents . . . . . 38
7.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . . 40
7.4 Limitations on Indemnification by Buyer . . . . . . . . . . . 40
7.5 Notice; Defense of Claims . . . . . . . . . . . . . . . . . . 41
7.6 Satisfaction of Indemnification Obligations . . . . . . . . . 43
ARTICLE 8. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 43
8.1 Bulk Sales Law . . . . . . . . . . . . . . . . . . . . . . . . 43
8.2 Fees, Expenses and Certain Taxes . . . . . . . . . . . . . . . 43
8.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 44
8.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
8.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 45
8.6 Assignability; Binding Effect . . . . . . . . . . . . . . . . 45
8.7 Captions and Gender . . . . . . . . . . . . . . . . . . . . . 45
8.8 Execution in Counterparts . . . . . . . . . . . . . . . . . . 45
8.9 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.10 Consent to Jurisdiction; Certain Remedies . . . . . . . . . . 46
8.11 Certain Definitions . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
(iii)
<PAGE> 5
ASSET CONTRIBUTION AGREEMENT
ASSET CONTRIBUTION AGREEMENT entered into as of this 5th day of February
effective as of January 31, 1996 by and between Monarch Dental Corporation, a
Delaware corporation ("Buyer"), on the one hand, and Shears Vanguard Ltd., a
Texas limited partnership, as Seller (the "Seller"), and Shears Vanguard Inc.,
a Delaware corporation ("MDCI"), MDC Dental, Inc., a Texas corporation ("MDC"),
Shears Vanguard SMI Inc., a Delaware corporation ("SMI"), Shears Vanguard
General, Inc., a Texas corporation ("Shears General"), and Dr. Charles G.
Shears ("Dr. Shears"), direct or indirect owners of all of the outstanding
equity interest in Seller (individually a "Parent" and collectively the
"Parents"), on the other.
W I T N E S S E T H
WHEREAS, Seller is the owner of all of the assets comprising, and
presently conducts, the MacGregor Dental Centers business including the assets
and businesses heretofore owned and conducted by MacGregor Dental Centers, Inc.
(predecessor to MDCI), MDC and Shears Management, Inc. (predecessor to SMI)
(the "MacGregor Dental Centers business"); and
WHEREAS, Buyer wishes to acquire substantially all of the properties and
assets of Seller, and to assume specified liabilities and obligations of
Seller, subject to the terms and conditions hereof; and
WHEREAS, subject to the terms and conditions hereof, Seller desires to
contribute to Buyer substantially all of its properties and assets, consisting
of all of the assets used in connection of the MacGregor Dental Centers
business, and to transfer to Buyer certain specified liabilities and
obligations;
WHEREAS, the parties intend that the contribution of assets and
liabilities pursuant to this Agreement shall qualify as an exchange under
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, Parents own beneficially and of record, directly or indirectly,
all of the outstanding equity interest in Seller;
WHEREAS, Buyer has heretofore completed a redemption of a substantial
amount of its common stock from its stockholder.
NOW, THEREFORE, in order to consummate said contribution and transfer of
assets and liabilities and in consideration of the mutual agreements set forth
herein, the parties hereto agree as follows:
<PAGE> 6
ARTICLE 1. CONTRIBUTION OF ASSETS AND LIABILITIES.
1.1 Contribution of Assets.
(a) Assets to be Contributed. Subject to and in reliance upon
the terms, provisions and conditions of this Agreement, Seller shall contribute
and Buyer and Buyer shall acquire, as of the Closing (as defined in Section 1.4
hereof), all of the properties and assets comprising the MacGregor Dental
Centers business of every kind and description, tangible and intangible, real,
personal or mixed, and wherever located, including, without limitation:
(i) all tangible personal property, furniture,
fixtures, equipment, machines, examining tools and supplies used in the
MacGregor Dental Centers business, as described on Schedule 1.1(a)(i)
attached to this Agreement and including those vehicles listed thereon;
(ii) all contracts, agreements and understandings
(collectively, the "Provider Agreements") with any party regarding the
provision of dental services to patients in connection with the
MacGregor Dental Centers business, including, without limitation, all
Provider Agreements with DMOs, HMOs, PPOs, third party payors,
employers, labor unions, hospitals, clinics and dental centers, a list
of which is attached hereto in Schedule 1.1(a)(ii) and copies of which
have been previously provided to Buyer;
(iii) all patient lists, copies of which have been
provided to Buyer, and all records, including all patient records,
documents, written information, computer tapes, programs and files
concerning past, present and potential patients relating to the
MacGregor Dental Centers business (the "Patient Records"), provided that
Buyer and its subsidiaries and affiliates shall maintain the
confidentiality of the same to the extent required by applicable law;
(iv) all supplier and vendor lists, copies of which are
attached to this Agreement as Schedule 1.1(a)(iv), and all records,
including all records, documents, written information, computer tapes,
programs and files concerning past, present and future dealings and
arrangements with suppliers and vendors relating to the MacGregor Dental
Centers business;
(v) all computer hardware, cabling and peripherals,
tools and supplies relating to the MacGregor Dental Centers business to
the extent of Seller's interest therein;
(vi) all of Seller's rights to use all of the
trademarks, service marks, trade names, copyrights, patents and patent
applications and interests thereunder, inventions, processes and
know-how, restrictive covenants, licenses and all other intangible
rights relating to the MacGregor Dental Centers business;
2
<PAGE> 7
(vii) copies of the books, records and other data
relating to the assets, business, employees and operations of the
MacGregor Dental Centers business, provided that Seller or Parents shall
retain originals of the tax and accounting records of such business as
heretofore conducted and Seller, Parents and their predecessors and
shall provide true and accurate copies of the same to Buyer at the
Closing;
(viii) all rights of Seller under the contracts,
agreements and powers of attorney relating to the MacGregor Dental
Centers business including without limitation those referred to in this
Section 1.1(a) and those referred to in Section 2.13 and the Schedules
thereto, except as set forth in Schedule 1.1(a)(viii), and including
without limitation all rights to payments from Prudential;
(ix) all permits, privileges, grants, franchises,
licenses and consents used in the MacGregor Dental Centers business,
except as set forth in Schedule 1.1(a)(ix);
(x) all of Seller's title and interest in and to any
and all of the databases used in the MacGregor Dental Centers business
and all software, source code, documentation, manual and computer
processes (collectively, the "Software"), whether owned or licensed,
including without limitation, all proprietary software used in the
MacGregor Dental Centers business;
(xi) all right, title and interest in accounts
receivable and payments for services rendered prior to the Closing
relating to the MacGregor Dental Centers business (collectively, the
"Accounts Receivable"), Schedule 1.1(a)(xi) hereto setting forth the
aggregate amount thereof for each of MDCI and SMI together with aging
data, and including any and all trade installment notes;
(xii) all right, title and interest in and to the real
property leases listed in Schedule 1.1(a)(xii) attached hereto relating
to the MacGregor Dental Centers business together with all leasehold
improvements;
(xiii) all right, title and interest to the leased
personal property as described in Schedule 1.1(a)(xiii) (including
without limitation all right, title and interest under capital leases),
and including all options to purchase leased personal property relating
to the MacGregor Dental Centers business, a list of which is attached
hereto as Schedule 1.1(a)(xiii);
(xiv) all contracts, agreements and understandings with
all dentists (including specialists), dental assistants, technicians and
allied health care professionals relating to the MacGregor Dental
Centers business (those individuals shall be collectively referred to as
the "Health Care Providers"), a list of whom is attached hereto as
Schedule 1.1(a)(xiv);
3
<PAGE> 8
(xv) all goodwill related to the MacGregor Dental
Centers business and the exclusive right to use the names or acronyms
"MacGregor," "MacGregor Dental Centers" and "MDC"and all associated
logos as all or part of a trade or corporate name or otherwise and any
other intangible assets including without limitation all prepaid
expenses;
(xvi) cash and cash equivalents in the aggregate amount
of $125,000 (the "Required Cash Amount") currently held in an account of
Seller at First Interstate Bank plus cash in an amount equal to all
payments received by the MacGregor Dental Centers business on or after
February 1, 1996, such cash to be held in a segregated account of Seller
at First Interstate Bank (the "Monarch Collections"); and
(xvii) all other property rights of every kind and nature,
tangible or intangible, owned or leased, relating to the MacGregor
Dental Centers business, including without limitation all assets shown
on the Base Balance Sheet (as defined in Section 2.6(a)(ii)), other than
any such assets disposed of in the ordinary course of business and in a
manner consistent with the terms of this Agreement since the date of the
Base Balance Sheet and also not including the Excluded Assets (as
defined below).
The assets, property and business to be contributed to and acquired by
Buyer under this Agreement, subject to Section 1.1(b), are hereinafter
sometimes referred to as the "Subject Assets." Seller and each Parent hereby
represent and warrant that the assets of Seller being conveyed hereunder
comprise all of the assets, including all personal property, used in the
conduct of the MacGregor Dental Centers business as heretofore conducted by
MDCI, MDC and SMI and their predecessors except as contemplated by Section
1.1(b), such assets having been contributed to Seller by MDCI, MDC, SMI and
Shears General, respectively, and as of the date hereof MDCI, MDC, SMI and
Shears General have no assets other than their partnership interests in Seller.
Seller and Parents have provided to Buyer true and accurate copies of the
agreements and instruments pursuant to which MDCI, MDC, SMI and Shears General
conveyed the MacGregor Dental Centers business to Seller. Buyer hereby directs
Seller to transfer those assets described in Sections 1.1(a)(ii), (iii) and
(xiv) to its affiliate Warren F. Melamed, D.D.S., P.C. at the Closing and
Seller hereby agrees to make such transfer.
(b) Excluded Assets. Notwithstanding anything herein to the
contrary, there shall be excluded from such purchase and sale and from the
definition of "Subject Assets" the following property.
(i) Assets and property disposed of by Seller or MDCI,
MDC or SMI (or their predecessors) since the date of the Base Balance
Sheet (as defined in Section 2.6(a)(ii)) provided such disposition was
in the ordinary course of business and consistent with the terms hereof;
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(ii) Seller's limited partnership franchise, record
books containing minutes of meetings and such other records as have to
do exclusively with Seller's organization or capitalization
(collectively, the "Corporate Records");
(iii) cash and cash equivalents of Seller in excess of
the Required Cash Amount and Monarch Collections; and
(iv) those assets of Seller listed on Schedule 1.1(b).
The assets, property and business of Seller which are excluded from the
Subject Assets are hereinafter sometimes referred to as the "Excluded Assets."
1.2 Assumption of Liabilities. Upon the sale and purchase of the
Subject Assets, Buyer (subject to the last sentence of Section 1.1(a)) shall
assume and agree to pay or discharge when due in accordance with their
respective terms (a) those liabilities shown or reflected on the Base Balance
Sheet and thereafter assumed by Seller which are outstanding at the time of the
Closing and those liabilities and obligations incurred by MDCI, MDC, SMI or
Seller in connection with the MacGregor Dental Centers business since the date
of the Base Balance Sheet in the ordinary course of business consistent with
past practice and otherwise in a manner consistent with the terms of this
Agreement which are outstanding at the time of the Closing (in each case,
except as provided in clauses (i) through (vii) below), subject to Section 1.6
in the case of accounts payable-trade, (b) obligations for performance from
after the date hereof of those agreements listed on Schedule 1.2(b) (the
"Assumed Contracts"), (c) fees of attorneys, investment bankers and accountants
for Seller and Parents as described in clause (i) below and Section 8.2(a) in
an amount not to exceed $1,050,000, and (d) those obligations listed in
Schedule 1.2(d) up to the amounts specified (the "Disclosed Matters"). The
liabilities to be assumed by Buyer under this Agreement are hereinafter
sometimes referred to as the "Liabilities." Except as specifically provided in
the first sentence of this Section 1.2, Buyer shall not assume or be bound by
any obligations or liabilities of Seller, any Parent or any of their affiliates
or predecessors of any kind or nature, known, unknown, accrued, absolute,
contingent or otherwise, whatsoever, and without limiting the generality of the
foregoing, Buyer shall not assume and shall not pay any of the following
liabilities:
(i) liabilities incurred by Seller, any Parent or any
of their affiliates or predecessors in connection with this Agreement
and the transactions provided for herein, except as contemplated by the
preceding paragraph and Section 8.2(a);
(ii) Taxes (as defined in Section 2.7(a) hereof) due or
to become due from Seller, any Parent or any affiliate (as defined in
Section 8.11(a)) thereof (whether relating to periods before or after
the transactions contemplated in this Agreement) including without
limitation any such Taxes incurred in connection with this Agreement or
the transactions contemplated hereby, franchise or sales taxes shown on
the Base Balance Sheet or otherwise due, and property or unemployment
Taxes (subject to Section 8.2(b));
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(iii) liabilities, if any, of Seller to any of its direct
or indirect equity owners or other affiliates;
(iv) liabilities for workers compensation insurance
relating to the MacGregor Dental Centers business in respect of periods
ending on or prior to January 31, 1996 as contemplated by Section
8.2(b);
(v) liabilities for pension and benefit arrangements of
any type involving employees of Seller or any Parent, including without
limitation those described in Section 2.19 of the Disclosure Schedule
(other than accrued vacation shown thereon), it being understood that
Buyer or one of its subsidiaries or affiliates will offer employment to
the employees of Seller at the date hereof but that benefit arrangements
for employees of Buyer and its subsidiaries and affiliates shall be in
their sole discretion;
(vi) liabilities in connection with any Disclosed Matter
in excess of the respective amount specified on Schedule 1.2(d); and
(vii) liabilities in connection with or relating to
actions, suits, claims, proceedings, demands, assessments, judgments,
costs, losses, liabilities, damages, deficiencies, disposal costs,
obligations, liens, fines and expenses (whether or not arising out of
third-party claims), including, without limitation, interest, penalties,
attorneys', accountants', engineers' and experts' fees, as the same are
incurred, of every kind or nature whatsoever, and all amounts paid in
investigation, defense or settlement of any of the foregoing
(collectively, "Claims"), of Seller or any Parent, including those
relating to the operation of the Subject Assets on or prior to the date
of the Closing, or events, acts, omissions, conditions or any other
state of facts occurring or existing in connection with the MacGregor
Dental Centers business on or prior to the date of the Closing, which do
not constitute Liabilities of Seller expressly assumed by Buyer
hereunder (including any Claim relating to or associated with any of the
matters referred to in Section 7.1(f)).
The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities." The
assumption of the Liabilities by Buyer hereunder shall not enlarge any rights
of third parties and nothing herein shall prevent Buyer from contesting in good
faith with any third party any of such Liabilities.
Consistent with the foregoing, Seller agrees that it shall be
responsible for and shall pay any and all Claims made by or owed to any person
to the extent any such Claim constitutes an Excluded Liability.
Seller or its predecessors have paid payroll associated with the
MacGregor Dental Centers business due on February 1, 1996. Buyer or its
subsidiaries shall not be obligated to
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reimburse Seller or Parents for such payment but shall assume responsibility
for such payroll subsequent to such date.
1.3 Purchase Price and Payment; Adjustment.
(a) In consideration of the sale by Seller to Buyer of the
Subject Assets, subject to the assumption by Buyer and its affiliate of the
Liabilities, Buyer agrees that at the Closing it will (a) pay Seller cash in
the aggregate amount of $14,886,053, with such amount to be paid by wire
transfer in immediately available funds to such account as Seller shall have
indicated in writing to Buyer not less than three (3) business days prior to
the date of the Closing and (b) issue and deliver to Seller 1,400,000 shares of
Common Stock, par value $.01 per share, of Buyer ("Common Stock"). The parties
hereto intend that the transaction covered by this Agreement shall not be
taxable under Section 351 of the Code with respect to stock received and taxed
as cash "boot" with respect to cash received. The transaction is to be
considered part of a single integrated plan to acquire the Subject Assets and
other assets from other parties as a part of a single Section 351 transaction.
Both Buyer and Seller will file federal income tax and other tax returns
consistent with the intent set forth above and will adhere to the reporting
requirements under regulations promulgated under Section 351 of the Code.
(b) Buyer and Seller and Parents have agreed that the
difference between the receivables and pro forma payables shown on the Base
Balance Sheet (as defined in Section 2.6(a)(ii)) at September 30, 1995 is
$226,748 ("Sept. 1995 Net Receivables"), as indicated on Schedule 1.3(b), and
that the difference between the estimated receivables and estimated payables of
the MacGregor Dental Centers business at January 31, 1996 is greater than
$226,748 ("Jan. 1996 Estimated Net Receivables"). Within 60 days after the
date hereof Buyer and its accountants shall deliver to Seller and Parents a
statement of the difference between the actual receivables and payables of the
MacGregor Dental Centers business at January 31 1996 (the "Jan. 1996 Actual Net
Receivables"). Seller and Parents shall have 30 days to object in writing to
the amount shown thereon. If they do so, the parties shall endeavor to resolve
the disputed item or items in good faith for an additional period of 20 days.
If the dispute cannot be so resolved, it shall be referred for resolution to
KPMG Peat Marwick or another "big six" accounting firm acceptable to the
parties. Upon resolution, if the Jan. 1996 Actual Net Receivables are less
than 95% of the September 1995 Net Receivables, then an amount equal to the
difference between the Sept. 1995 Net Receivables and the Jan. 1996 Actual Net
Receivables shall be paid promptly by Seller to Buyer. The determination of
receivables and payables as set forth above shall be made in accordance with
generally accepted accounting principles and consistent with the computed
balances as of September 30, 1995 as to class, net realizable value,
collectibility and aging methodology allowance. There shall be no adjustment
in respect of any maintenance or positive change in the relationship of
payables and receivables.
1.4 Time and Place of Closing. The closing of the purchase and sale
provided for in this Agreement shall be held at the offices of Goodwin, Procter
& Hoar at Exchange Place,
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Boston, Massachusetts. For all purposes the closing of such transaction shall
be deemed to have occurred on and to be effective as of the close of business
on January 31, 1996 (herein the "Closing" and the "Closing Date").
1.5 Certain Closing Deliveries.
(a) Consideration Price. At the Closing, Buyer shall deliver
the consideration specified in Section 1.3(a) hereof to Seller.
(b) Transfer of Subject Assets. At the Closing, Seller shall
deliver or cause to be delivered to Buyer good and sufficient instruments of
transfer transferring to Buyer good and valid title to all the Subject Assets
free and clear of all liens, restrictions, encumbrances and other claims not
shown or reflected on the Base Balance Sheet, except as provided in Schedule
1.5(b), and shall cause the Required Cash Amount and all Monarch Collections to
be transferred to the account of Buyer or a subsidiary of Buyer, as designated
by Buyer, promptly following the Closing, and promptly as received from time to
time thereafter, Seller and Parents shall transfer to such account any
additional Monarch Collections.
(c) Delivery of Records and Contracts. At the Closing, Seller
shall deliver or cause to be delivered to Buyer all the leases, contracts,
commitments, agreements and rights constituting Subject Assets, with such
assignments thereof and consents to assignments as are necessary to assure
Buyer of the full benefit of the same, subject to Section 2.4 with respect to
agreements not freely assignable at the date hereof. Seller shall also deliver
to Buyer at the Closing all business records, tax returns, books and other data
relating to the MacGregor Dental Centers business (or true and complete copies
in the case of tax and accounting records), except the Corporate Records and
other Excluded Assets, and Seller shall take all requisite steps to put Buyer
in actual possession and operating control of the Subject Assets as of the
Closing. After the Closing, Buyer shall afford to Seller and Parents and their
accountants and attorneys, for the purpose of preparing such tax returns of
Seller or any Parent as may be required after the Closing, reasonable access to
the books and records of Seller delivered to Buyer under this Section and shall
permit Seller and each Parent, at Seller's and each Parent's expense, to make
extracts and copies therefrom, provided that all such information shall be held
in confidence.
(d) Delivery of Agreement of Assumption of Liabilities. At
the Closing, Buyer shall deliver or cause to be delivered to Seller an
Agreement of Assumption of Liabilities in the form attached hereto as Schedule
1.5(d) relating to the Liabilities to be assumed by Buyer from Seller.
(e) Other Deliveries. Buyer and Seller and each Parent shall
also deliver at the Closing such other documents and instruments as are
customary for transactions of the type contemplated hereby and as shall be
reasonably requested in advance of the Closing by any of them, including any
documents required to change the names of Seller and Parents to
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corporate names which do not include "MacGregor," "MacGregor Dental Centers" or
"MDC" as provided in Section 3.5.
1.6 Further Assurances. Seller and Parents from time to time after
the Closing at the request of Buyer and without further consideration shall
execute and deliver such further instruments of transfer and assignment and
take such other action as Buyer may reasonably require to more effectively
transfer and assign to, and vest in, Buyer of the Subject Assets. Seller and
Parents shall cooperate with Buyer to assist Buyer in obtaining Seller's and
Parents' rating and benefits under the workman's compensation laws and
unemployment compensation laws of applicable jurisdictions, to the extent
permitted by such laws. Nothing herein shall be deemed a waiver by Buyer of
its right to receive at the Closing an effective assignment of each of the
leases, contracts, commitments or rights of Seller as otherwise set forth in
this Agreement, except to the extent contemplated by Section 2.4 of the
Disclosure Schedule, if applicable. Without limitation of the foregoing, not
later than February 20, 1996, Buyer or a subsidiary of Buyer shall transfer to
the account of Seller funds representing reimbursement for payables assumed by
Buyer and discharged by Seller provided that such payables are due on or after
February 1, 1996 and not prior thereto.
1.7 Allocation of Purchase Price. Within a reasonable period of time
following the Closing, Buyer and Seller shall agree upon the allocation of the
consideration paid by the Buyer to Seller (including the assumption of the
Liabilities) among the Subject Assets and shall set forth the allocation of
such consideration and the tax basis of the Subject Assets for federal income
tax purposes in writing. Such allocation will be made in accordance with the
applicable rules under Section 351 of the Code as interpreted by Revenue Ruling
68-55 and when completed shall be binding upon Buyer and Seller and Parents for
all purposes (including financial accounting purposes, financial and regulatory
reporting purposes and tax purposes). Buyer and Seller also each agree to file
appropriate documents with the IRS under Treasury Regulation Section 1.351-3
reflecting the foregoing.
1.8 Procedures for Assets not Transferable. Without limitation of
Sections 3.7 and 7.1(e), if any of the contracts or agreements or any other
property or rights included in the Subject Assets are not assignable or
transferable either by virtue of the provisions thereof or under applicable law
without the consent of some party or parties and any such consent cannot be
obtained prior to the Closing, Seller and Parents shall use all commercially
reasonable efforts to obtain any such consent as soon as possible after the
Closing or otherwise obtain for Buyer and its assignees the practical benefit
of such property or rights and Buyer shall use all commercially reasonable
efforts to assist in that endeavor.
1.9 Non-Competition Agreement. As a material inducement to and a
condition precedent of Buyer's acquisition of the Subject Assets and assumption
of the Liabilities, Seller and each Parent are executing and delivering at the
Closing a Non-Competition Agreement in the form of Schedule 1.9 attached hereto
(the "Non-Competition Agreement").
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ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENTS.
2.1 Making of Representations and Warranties. As a material
inducement to Buyer to enter into this Agreement and to consummate the
transactions contemplated hereby, Seller and Parents, jointly and severally,
but subject to Section 7.2 including Section 7.2(d), hereby make to Buyer the
representations and warranties contained in this Section 2. For the purposes
of this Agreement, references to "knowledge" or "best knowledge" of Seller or a
Parent shall be deemed to include such knowledge as any executive officer or
manager of Seller or any Parent listed in Section 2.1 of the Disclosure
Schedule (as hereinafter defined) actually has after reasonable inquiry. For
purposes of this Agreement, references to the "Disclosure Schedule" shall mean
the Disclosure Schedule delivered by Seller and Parents to Buyer on the date
hereof.
2.2 Organization and Qualification; Capital Stock. Each of Seller
and each Parent which is not an individual is a limited partnership or
corporation duly organized, validly existing and in good standing under the
laws of the state of its organization as listed in Section 2.2 of the
Disclosure Schedule with full partnership or 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 or proposed to be conducted. The copies of the charter
document of Seller and each such Parent as amended to date and certified by the
Secretary of State of each relevant jurisdiction, and of the partnership
agreement or by-laws of Seller and each such Parent, as amended to date,
certified by its Secretary, and heretofore delivered to Buyer's counsel, are
complete and correct, no amendments thereto are pending, and none of Seller or
any Parent is in violation thereof. Each of Seller and each such Parent is not
required to be licensed or qualified to conduct its businesses or own its
properties in any jurisdiction in which the failure to be so qualified would
have a material adverse effect on the business, operations, results of
operations, assets, condition (financial or other) or prospects of the
MacGregor Dental Centers business taken as a whole. All of the issued and
outstanding capital stock or other equity interest of Seller and each such
Parent is owned beneficially and of record as set forth in Section 2.2 of the
Disclosure Schedule, 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 of Seller or any Parent.
2.3 Subsidiaries. None of Seller or any Parent has any subsidiaries
(as defined in Section 8.11(d)) or owns any securities issued by any other
business organization or governmental authority or has any direct or indirect
interest in or control over any corporation, partnership, joint venture or
entity of any kind relating to the MacGregor Dental Centers business, except as
listed in Section 2.3 of the Disclosure Schedule.
2.4 Authority; Noncontravention. Each of Seller and each Parent has
full partnership or corporate power and authority or capacity, as applicable,
to enter into this Agreement, each agreement, document and instrument to be
executed and delivered by it or
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them pursuant to or contemplated by this Agreement, the Stockholders' Agreement
dated as of February 5, 1996 (the "Stockholders Agreement"), the Employment
Agreement dated as of February 5, 1996 (the "Employment Agreement") and the
Non-Competition Agreement dated as of February 5, 1996 (the "Non-Competition
Agreement") executed in connection herewith by Seller and/or Parents, as
applicable, and to carry out the transactions contemplated hereby and thereby.
The execution, delivery and performance by Seller and each Parent of this
Agreement and each such other agreement, document and instrument have been duly
authorized by all necessary action of Seller and each Parent including any
required action of their respective owners and no other action on the part of
Seller or any such Parent or its owners is required in connection therewith.
This Agreement and each such agreement, document and instrument executed and
delivered by Seller or any Parent pursuant to this Agreement constitute valid
and binding obligations of Seller and/or such Parent enforceable in accordance
with their respective terms.
The execution, delivery and performance by Seller and each Parent of
this Agreement and each such agreement, document and instrument contemplated by
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 Seller or any
Parent;
(ii) do not and will not violate any laws of the United
States or any state or other jurisdiction applicable to Seller or any
Parent or require Seller, any Parent or any other direct or indirect
owner of Seller 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) except as set forth in Section 2.4 of the
Disclosure Schedule, do not and will not result in a breach of,
constitute a default under, accelerate any obligation under, or give
rise to a right of termination of any indenture or loan or credit
agreement or any other agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award, whether written or oral, to which
Seller, any Parent or any other direct or indirect owner of Seller is a
party or by which the property of Seller, any Parent or any other direct
or indirect owner of Seller is bound or affected, or result in the
creation or imposition of any mortgage, pledge, lien, security interest
or other charge or encumbrance on any of the Subject Assets, 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 the MacGregor Dental
Centers business taken as a whole.
2.5 Status of Property.
(a) Real Property. The Subject Assets do not include any
owned real estate.
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(b) Leased Real Property. All of the leased real property
used in connection with the MacGregor Dental Centers business is identified in
Section 2.5(b) of the Disclosure Schedule (collectively referred to herein as
the "Leased Real Property"). Further:
(i) Leases. All of the leases of any of the Leased
Real Property (collectively, the "Leases") are listed in Section
2.5(b)(i) of the Disclosure Schedule. The copies of the Leases
heretofore delivered or furnished by Seller and Parents to Buyer are
complete, accurate, true and correct copies of each of the Leases,
except as set forth in Section 2.5(b)(i) of the Disclosure Schedule.
With respect to each of the Leases, except as set forth in Section
2.5(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 the best of
the knowledge of Seller and Parents, 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 a material adverse effect on the business,
operations, results of operations, assets, condition (financial
or other) or prospects of the MacGregor Dental Centers business
taken as a whole;
(C) all obligations of the tenant or lessee under the
Leases which have accrued have been performed, and none of Seller
or any Parent 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 Seller or any Parent; and
(D) Seller and Parents have obtained the consent of
each landlord or lessor under any Leases whose consent is
required to the assignment of any Lease to Buyer and its
assignees or the collateral assignment of any Lease by Buyer or
its assignees, except as set forth in Section 2.5(b)(i) of the
Disclosure Schedule.
(ii) Title and Description. Seller holds good, clear,
valid and enforceable leasehold interests 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 and landlord's
liens created under the Leases or existing under applicable law (which
liens have been released or subordinated as set forth in Schedule
2.5(b)(i)), in all cases free and clear of all other prior or
subordinate interests encumbering the
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leasehold estate, including, without limitation, mortgages, deeds of
trust, ground leases, leases, subleases, security interests or similar
encumbrances, liens, assessments, tenancies, licenses, claims, rights of
first refusal, options, covenants, conditions, restrictions, rights of
way, easements, judgments or other encumbrances upon the leasehold
estate, except for encumbrances which may exist on the fee simple
estates in the Leased Real Property which is not owned by any Parent or
any affiliate thereof (it being understood that the representations
contained in this subparagraph (ii) are not representations regarding
the status of title to such fee simple estates except as to those owned
by any Parent or any affiliate thereof), and except for those other
matters set forth in Section 2.5(b)(ii) of the Disclosure Schedule
(collectively, the "Title Exceptions").
(iii) Compliance with Law; Government Approvals. Neither
Seller nor any Parent has 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 that has not been heretofore corrected, and to
the best knowledge of Seller and Parents, no such violation or
violations now exist which would have a material adverse effect on the
conduct of the MacGregor Dental Centers business taken as a whole.
Improvements located on or constituting a part of the Leased Real
Property and the construction, installation, use and operation thereof
(including, without limitation, the construction, installation, use and
operation of any signs located thereon) were completed and installed and
to the best knowledge of Seller and Parents are now in compliance, in
each case in all material respects, 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 except as set forth in Section 2.5(b)(iii) of the
Disclosure Schedule, 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 MacGregor Dental Centers
business, except as set forth in Section 2.5(b)(iii) of the Disclosure
Schedule. All Governmental Approvals currently in effect and required
by law, ordinance, code, regulation or otherwise to be held by the owner
of any of the Leased Real Property shall be transferred to Buyer and its
assignees at Closing, except as set forth in Section 2.5(b)(iii) of the
Disclosure Schedule with respect to negation of waivers or
grandfathering of particular matters as described therein. To the best
knowledge of Seller and Parents, the Leased Real Property has at least
the minimum access required by applicable subdivision or similar law.
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(iv) Real Property Taxes. None of Seller nor any Parent
has received notice of any pending or threatened reassessment of all or
any portion of any of the Leased Real Property, and, to the best
knowledge of Seller and Parents, the transfer of the Leased Real
Property to Buyer and its assignees will not result in any such
reassessment.
(c) Personal Property. Except as specifically disclosed in
said Section 2.5(c) of the Disclosure Schedule or in the Base Balance Sheet (as
defined in Section 2.6(a)(ii)) Seller has good and valid title to all of the
personal property used in connection with the conduct of the MacGregor Dental
Centers business and none of such personal property or assets is subject to any
mortgage, pledge, lien, conditional sale agreement, restriction on transfer,
stockholder or similar agreement, security title, encumbrance or other charge
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 MacGregor Dental Centers business, subject to dispositions
and additions in the ordinary course of business and consistent with this
Agreement. The Subject Assets are owned by Seller and include all of the
assets which are used in, or which are necessary to permit Buyer and its
subsidiaries to continue and carry on, the MacGregor Dental Centers business.
Except as otherwise specified in Section 2.5(c) of the Disclosure Schedule, the
Subject Assets consisting of tangible personal property are in generally good
operating condition and repair, normal wear and tear excepted, have been well
maintained, and conform in all material respects with all applicable
ordinances, regulations and other laws. None of Seller, MDCI, SMI, Shears
General or MDC has disposed of any tangible personal property constituting
operating assets used in its business within the past year except in the
ordinary course of business, except for "occasional sales" as defined in
Section 151.304(b)(2) of the Texas Tax Code and except as set forth in Schedule
1.1(b) hereto.
(d) Transfer of Title. Upon delivery to Buyer of the bill of
sale and assignments referred to in Section 1.5, Buyer will receive good, valid
and (if applicable) marketable title to all of the Subject Assets, free and
clear of all liens, encumbrances, charges, restrictions on transfer,
stockholder or similar agreements, equities and other Claims of every kind,
including the right and ability to transfer such Subject Assets to its
subsidiaries, except as disclosed in Section 2.5(d) of the Disclosure Schedule.
2.6 Financial Statements; Undisclosed Liabilities.
(a) Seller and Parents have delivered to Buyer the following
financial statements, copies of which are attached hereto as Schedule 2.6:
(i) Unaudited pro forma combined balance sheets for the
MacGregor Dental Centers business (including Professional Service
Bureau) for the fiscal years ended September 30, 1994 and 1993 and
related statements of income, retained earnings and cash flows for the
years then ended, certified by the chief financial officers of Seller;
and
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(ii) Audited balance sheets as of September 30, 1995 for
the predecessors of each of MDCI and SMI (herein the "Base Balance
Sheet") and audited statements of income, retained earnings and cash
flows for the year then ended for such entities.
Said financial statements have been prepared from the books and records of the
MacGregor Dental Centers business, present fairly in all material respects the
financial condition of the predecessors of MDCI and SMI, as applicable, at the
dates of said statements and the results of their operations for the periods
covered thereby, and, in the case of the audited statements referred to in
Section 2.6(a)(ii), have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis.
(b) As of the date hereof, there are no liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
asserted or unasserted, known or unknown, relating to the MacGregor Dental
Centers business, of a type required to be reflected on a balance sheet
prepared in accordance with generally accepted accounting principles, except
liabilities (i) stated or adequately reserved against on the Base Balance Sheet
or the notes thereto, (ii) specifically disclosed in Schedules furnished to
Buyer 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.
2.7 Taxes.
(a) Seller, Parents (for purposes of this Section 2.7 other
than Section 2.7(c), not including Dr. Shears) and their 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 and property taxes, whether or not measured
in whole or in part by net income, and all deficiencies, or other additions to
tax, interest, fines and penalties owed by it (collectively, "Taxes"), shown to
be due on all tax returns required to be filed through the date hereof, whether
disputed or not.
(b) Seller, Parents and their predecessors have in accordance
with applicable law filed all federal, state, local and foreign tax returns
required to be filed through the date hereof. Complete and correct copies of
all federal, state, local and foreign income tax returns filed with respect to
Seller, Parents and their predecessors for taxable periods ended on or after
December 31, 1989 have been previously provided to Buyer, together with any
examination reports and statements of deficiencies assessed against or agreed
to with respect to said returns.
(c) Neither the Internal Revenue Service nor any other
governmental authority is now asserting or, to the best knowledge of the Seller
and Parents, threatening to
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assert against Seller, any Parent or any predecessors any deficiency or claim
for additional Taxes. No claim has ever been made by an authority in a
jurisdiction where Seller, Parents and their predecessors do not file reports
and returns that Seller, any Parent or any predecessor is or may be subject to
taxation by that jurisdiction. There are no security interests on any of the
Subject Assets that arose in connection with any failure (or alleged failure)
to pay any Tax. None of Seller, any Parent or any predecessor has entered into
a closing agreement pursuant to Section 7121 of the Code.
(d) Except as set forth in Section 2.7 of the Disclosure
Schedule, there has not been during the past five years any audit of any tax
return filed by Seller, any Parent or any predecessor, no audit of any tax
return of Seller, any Parent or any predecessor is in progress, and none of
Seller, any Parent or any predecessor has been notified by any tax authority
that any such audit is contemplated or pending. Except as set forth in Section
2.7 of the Disclosure Schedule, no extension of time with respect to any date
on which a tax return was or is to be filed by Seller, any Parent or any
predecessor is in force, and no waiver or agreement by Seller, any Parent or
any predecessor is in force for the extension of time for the assessment or
payment of any Taxes.
(e) None of Seller, any Parent or any predecessor has ever
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).
None of Seller, any Parent or any predecessor has ever filed, or has ever been
required to file, a consolidated, combined or unitary tax return with any other
entity. None of Seller, any Parent or any predecessor owns or has ever owned a
direct or indirect interest in any trust, partnership, corporation or other
entity except as set forth in Section 2.7(e) of the Disclosure Schedule and the
Subject Assets do not include an interest in any such entity. None of Seller,
any Parent or any predecessor is a party to any tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of
Section 1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) Each of MDCI and SMI is (and each of their predecessors
was) a "small business corporation" within the meaning of Section
280G(b)(5)(A)(i) of the Code.
(h) Each of MDCI and SMI is (and each of their predecessors
was) a "S corporation" within the meaning of Section 1361(a)(1) of the Code,
and Seller qualifies as a partnership for federal income tax purposes.
(i) 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.
2.8 Collectibility of Accounts Receivable. All of the accounts
receivable constituting Subject Assets (less the reserve for bad debts set
forth on the Base Balance Sheet
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and subject to contractual allowances consistent with the past practices of the
MacGregor Dental Centers business as described in Section 2.8 of the Disclosure
Schedule) are valid and enforceable claims, and to the best knowledge of Seller
and Parents are not subject to setoff or counterclaim, provided that the
foregoing representation is not a guarantee of collectibility. The Subject
Assets do not include any accounts or loans receivable from any person, firm or
corporation which is affiliated with Seller or any Parent or from any
stockholder, director, officer or employee of Seller or any Parent or any
affiliate thereof. No MacGregor Dental Centers receivables have been factored
except through Professional Service Bureau.
2.9 Absence of Certain Changes. Except as disclosed in Section 2.9
of the Disclosure Schedule, since the date of the Base Balance Sheet there has
not been:
(a) Any change in the properties, assets, liabilities,
business, operations, condition (financial or other) or prospects of the
MacGregor Dental Centers business taken as a whole 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 MacGregor Dental
Centers business 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 MacGregor Dental Centers business;
(c) Any mortgage, encumbrance or lien placed on any of the
properties used in the MacGregor Dental Centers business which remains in
existence on the date hereof;
(d) Any obligation or liability of any nature, whether
accrued, absolute, contingent or otherwise, asserted or unasserted, known or
unknown, incurred in connection with the MacGregor Dental Centers business
other than obligations and liabilities incurred in the ordinary course of
business consistent with the terms of this Agreement;
(e) Any purchase, sale or other disposition, or any agreement
or other arrangement for the purchase, sale or other disposition, of any of the
properties or assets relating to the MacGregor Dental Centers business 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 relating to the MacGregor Dental Centers business;
(g) Any declaration, setting aside or payment of any dividend
or distribution by any Parent (or their predecessors) or Seller, or the making
of any other distribution in respect of the capital stock or other equity
interest of any Parent (or their predecessors) or Seller, or any direct or
indirect redemption, purchase or other acquisition by any Parent (or
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their predecessors) or Seller of its own capital stock or other equity interest
except as described in Section 2.9(g) of the Disclosure Schedule;
(h) Any labor trouble or claim of unfair labor practices
involving the MacGregor Dental Centers business;
(i) Except as set forth in Section 2.9(i) of the Disclosure
Schedule, any change in the compensation (in the form of salaries, wages,
incentive arrangements or otherwise) payable or to become payable by the
MacGregor Dental Centers business 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 entity; or any
entering into any employment, deferred compensation or other similar agreement
(or any amendment to any such existing agreement) with any such person or
entity;
(j) Any change, or the obtaining of information concerning a
prospective change, with respect to any officers, management employees or
dentists (including dental professional corporations) involved in the MacGregor
Dental Centers business, any grant of any severance or termination pay to any
officer, employee, agent, independent contractor, dentist or dental
professional corporation involved in the MacGregor Dental Centers business or
any increase in benefits payable under any existing severance or termination
pay policies or employment agreement or relationship;
(k) Any payment or discharge of a material lien or liability
relating to the MacGregor Dental Centers business which was not shown on the
Base Balance Sheet or incurred in the ordinary course of business thereafter;
(l) Any payment made or obligation or liability incurred by
Seller or any Parent (or its predecessor) to, or any other transaction by
Seller or any Parent (or its predecessor) with, any of its officers, directors,
partners, stockholders, employees or independent contractors (including
dentists and dental professional corporations), or any loans or advances made
by Seller or any Parent (or its predecessor) to any of its officers, directors,
partners, stockholders, employees or independent contractors (including
dentists and dental professional corporations), except as disclosed in Section
9.2(i) of the Disclosure Schedule and normal compensation and expense
allowances consistent with past practice;
(m) Any change in accounting methods or practices, credit
practices, collection policies or payment policies used by Seller or any Parent
(or its predecessor) including without limitation any change in the discharge
or recording of payables relative to past practices;
(n) Any cancellation or loss of any material right or asset,
or waiver of any right, of the MacGregor Dental Centers business;
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(o) Any change in the relationships with suppliers,
distributors, licensees, licensors, customers or others with whom the MacGregor
Dental Centers business it has business relationships which would have a
material adverse effect on the MacGregor Dental Centers business taken as a
whole, and Seller and Parents do not have knowledge of any fact or contemplated
event which may cause any such material adverse change;
(p) Any alteration or change in the methods of operation
employed by the MacGregor Dental Centers business;
(q) Any other transaction relating to the MacGregor Dental
Centers business other than transactions in the ordinary course of business; or
(r) Any agreement or understanding whether in writing or
otherwise, that would result in any of the transactions or events or require
Seller or any Parent to take any of the actions specified in paragraphs (a)
through (q) above.
2.10 Ordinary Course. Since the date of the Base Balance Sheet, the
MacGregor Dental Centers business has conducted its business only in the
ordinary course and in a manner consistent with prior practices.
2.11 Banking Relations. All of the arrangements with any banking
institution relating to the MacGregor Dental Centers business are completely
and accurately described in Section 2.11 of the Disclosure Schedule, indicating
with respect to each of such arrangements the type of arrangement maintained
(such as checking account, borrowing arrangements, safe deposit box, etc.) and
the person or persons authorized in respect thereof.
2.12 Intellectual Property.
(a) Except and as described in Section 2.12 of the Disclosure
Schedule, Seller has exclusive ownership, or exclusive license to use, of all
computer software, patent, copyright, trade secret (including without
limitation customer lists, production processes and inventions), trademark,
service mark or other proprietary rights (collectively, "Intellectual
Property") used in the MacGregor Dental Centers business as presently conducted
or as contemplated to be conducted. Seller's rights in all of such
Intellectual Property are freely transferable, provided that no representation
or warranty is made as to licensed software which is generally commercially
available and used in the ordinary course of business, and except as set forth
in Section 2.12(a) of the Disclosure Schedule with respect to Intellectual
Property which is not freely assignable at the date hereof. No proceedings
have been instituted, or are pending or to the best knowledge of Seller and
Parents threatened, which challenge the rights of Seller or any Parent in
respect of any Intellectual Property, and to the best knowledge of Seller and
Parents, except as set forth in Section 2.12(a) of the Disclosure Schedule, no
other person has or alleges any rights in or to the Intellectual Property.
Seller has the right to use, free and clear of claims or rights of other
persons, all customer lists, designs, manufacturing or other processes,
computer software (subject to the second sentence of this paragraph),
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systems, data compilations, research results and other information required for
or incident to the conduct of the MacGregor Dental Centers business as
presently conducted or contemplated.
(b) All patents, patent applications, trademarks, service
marks, trademark and service mark applications and registrations and registered
copyrights which are material to the conduct of the MacGregor Dental Centers
business as presently conducted or contemplated to be conducted, are listed in
Section 2.12 of the Disclosure Schedule. Such patents, patent applications,
trademark and service mark registrations, trademark and service mark
applications and registered copyrights have been duly registered in, filed in
or issued by the United States Patent and Trademark Office, the United States
Register of Copyrights, or the corresponding offices of other jurisdictions as
identified on said Schedule, and have been properly maintained and renewed in
accordance with all applicable provisions of law and administrative regulations
in the United States and each such jurisdiction, to the extent, if any, set
forth in Section 2.12(b) of the Disclosure Schedule.
(c) All licenses or other agreements under which the MacGregor
Dental Centers business is granted rights in Intellectual Property are listed
in Section 2.12 of the Disclosure Schedule. All said licenses or other
agreements are in full force and effect, there is no material default by Seller
or any Parent, or to the best knowledge of Seller and Parents, any other party
thereto, and, except as set forth in Section 2.12 of the Disclosure Schedule
and as provided in Section 2.12(a) above, all rights thereunder are freely
assignable. To the best knowledge of Seller and Parents, the licensors under
said licenses and other agreements have and had all requisite power and
authority to grant the rights purported to be conferred thereby. True and
complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to Buyer.
(d) All licenses or other agreements under which the MacGregor
Dental Centers business has granted rights to others in Intellectual Property
are listed in Section 2.12 of the Disclosure Schedule. All of said licenses or
other agreements are in full force and effect, there is no material default by
Seller or any Parent, or to the best knowledge of Seller and Parents, any other
party thereto, and, except as set forth in Section 2.12 of the Disclosure
Schedule, and as provided in Section 2.12(a) above, all of Seller's rights
thereunder are freely assignable. True and complete copies of all such
licenses or other agreements, and any amendments thereto, have been provided to
Buyer.
(e) To the best knowledge of Seller and Parents, the MacGregor
Dental Centers business has taken all steps required in accordance with sound
business practice to establish and preserve its ownership of all material
copyright, trade secret and other proprietary rights. None of Seller or any
Parent has any knowledge of any infringement by others of any of its
Intellectual Property rights. No employee or consultant of Seller or any
Parent owns any rights in any products, technology or Intellectual Property of
Seller or any Parent which ownership materially and adversely affects the
conduct of the MacGregor Dental Centers business, other than as disclosed in
Section 2.12(a) of the Disclosure Schedule.
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(f) To the best knowledge of Seller and Parents, the conduct
of the MacGregor Dental Centers business does not infringe any Intellectual
Property of any other person. No proceeding charging Seller or any Parent with
infringement of any adversely held Intellectual Property has been filed or to
the best knowledge of Seller and Parents is threatened to be filed. To the
best knowledge of Seller and Parents, there exists no unexpired patent or
patent application which includes claims that would be infringed by or
otherwise adversely affect the MacGregor Dental Centers business. To the best
knowledge of Seller and Parents, the conduct of the MacGregor Dental Centers
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. Except as set forth in Section 2.12
of the Disclosure Schedule, none of Seller or any Parent, nor, to the best
knowledge of Seller and Parents, any of their respective employees, has any
agreements or arrangements with any persons other than Seller 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.
(g) To the best knowledge of Seller and Parents, the computer
software included in the Intellectual Property performs in all material
respects in accordance with the documentation and other written material used
in connection with the Software and is free of material defects in programming.
Seller has and will assign to Buyer and its assigns as part of the Subject
Assets all the databases and computer software used or necessary to conduct
their businesses, except as set forth in Section 2.12(g) of the Disclosure
Schedule.
2.13 Contracts.
(a) Except for contracts, commitments, plans, agreements and
licenses described in Section 2.13 of the Disclosure Schedule (true and
complete copies of which have been delivered to the Buyer), the MacGregor
Dental Centers business and the entities that conduct or have conducted the
same are not a party to or subject to (in each case relating to such business):
(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 for less than $5,000 each, such orders not exceeding
$50,000 in the aggregate;
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(iv) any other contracts or agreements creating an
obligation of $50,000 or more with respect to any such contract;
(v) any contract or agreement providing for the
purchase of all or substantially all of its requirements of a particular
product from a supplier;
(vi) any contract or agreement which by its terms does
not terminate or is not terminable without penalty within one year after
the date hereof;
(vii) any contract or agreement for the sale or lease of
its products not made in the ordinary course of business;
(viii) any contract with any sales agent or distributor;
(ix) any contract containing covenants limiting its
freedom to compete in any line of business or with any person or entity;
(x) 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;
(xi) any license agreement (as licensor or licensee)
other than routine software licenses to end users entered into in the
ordinary course of business for a total consideration not exceeding
$50,000 for any one such license);
(xii) any agreement involving a lease or license of real
property or any "capitalized" or "financing" lease;
(xiii) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for the borrowing
of money and any related security agreement;
(xiv) any contract or agreement with any officer,
employee, director, or stockholder or with any persons or organizations
controlled by or affiliated with any of them;
(xv) 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
maintenance organization, preferred provider organization, self-insured
employer or other third-party payor of any kind or nature;
(xvi) any power of attorney; or
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(xvii) any judgment, decree or order affecting the
MacGregor Dental Centers business.
(b) All contracts, agreements, leases and instruments
constituting Subject Assets are valid and are in full force and effect and
constitute legal, valid and binding obligations of Seller and, to the best
knowledge of Seller and Parents, the other parties thereto, enforceable in
accordance with their respective terms. Neither Seller nor, to the best
knowledge of Seller and Parents, any other party to any contract, agreement,
lease or instrument constituting Subject Assets or any judgment, decree or
order applicable to the MacGregor Dental Centers business is in default in
complying with any provisions thereof, and no condition or event or facts exist
which, with notice, lapse of time or both would constitute a default thereof on
the part of Seller or, to the best knowledge of Seller and Parents, 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 MacGregor Dental Centers business
taken as a whole. Except as disclosed in Section 2.13 of the Disclosure
Schedule, Seller is not subject to or bound by any agreement, judgment, decree
or order which materially and adversely affects the business, operations,
results of operations, assets, condition (financial or other) or prospects of
the MacGregor Dental Centers business taken as a whole.
(c) Except as disclosed in Section 2.13(c) of the Disclosure
Schedule, 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") in
connection with the MacGregor Dental Centers business or pursuant to which
Seller or any Parent receives revenues regarding the provision of dental
services to patients in connection with such business.
2.14 Litigation. Section 2.14 of the Disclosure Schedule lists all
currently pending litigation and governmental or administrative proceedings or
investigations to which Seller or any Parent is a party. Except for matters
described in Section 2.14 of the Disclosure Schedule, there is no litigation or
governmental or administrative proceeding or investigation pending or, to the
best knowledge of Seller and Parents, threatened relating to the MacGregor
Dental Centers business which may have any material adverse effect on the
business, operations, results of operations, assets, condition (financial or
other) or prospects of the MacGregor Dental Centers business taken as a whole
or which could prevent or hinder the consummation of the transactions
contemplated by this Agreement. Each of the matters disclosed in Schedule 2.14
is covered by insurance of Seller as in effect on the date hereof and Seller
has obtained endorsements under such policies covering Buyer and its
affiliates.
Without limitation of the foregoing, except as set forth on Schedule
2.14, there are no pending or, to the best knowledge of Seller and Parents,
threatened malpractice claims, Texas Regulatory Board investigations, suits,
notices of intent to institute, arbitrations or proceedings, either
administrative or judicial, involving the MacGregor Dental Centers business
including any of the Health Care Providers.
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2.15 Permits; Compliance with Laws; Licensing and Credentialing;
Health Care Providers.
(a) General Compliance. Except as set forth in Section
2.15(a) of the Disclosure Schedule, the MacGregor Dental Centers business has
all material franchises, authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations, qualifications or other rights and
privileges (collectively "Permits") in connection with the ownership of
respective properties involved therein and the conduct of such business as the
same is presently conducted, a listing of such Permits is set forth in Section
2.15(a) of the Disclosure Schedule, and all such Permits are valid and in full
force and effect except to the extent the absence or potential invalidation or
effect of any such Permit would not have material adverse effect on the
business, operations, results of operations, assets, condition (financial or
other) or prospects of the MacGregor Dental Centers business taken as a whole.
Except as set forth in Section 2.15(a) of the Disclosure Schedule, no Permit is
subject to termination as a result of the performance of the Agreement or
consummation of the transactions contemplated hereby, provided that no
representation is made concerning Buyer's right to obtain Permits for the
conduct of its business subsequent to Closing. Except as set forth in Section
2.15(a) of the Disclosure Schedule, the MacGregor Dental Centers business is
now and has heretofore been in compliance with all applicable statutes,
ordinances, orders, rules and regulations (including without limitation 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 its 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
MacGregor Dental Centers business taken as whole. Since January 1, 1993,
neither Seller nor any Parent 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 directed to Seller or any
Parent with respect to any environmental or health and safety matter or the
enforcement of any such law.
(b) Licensing and Credential Information.
Neither Seller nor any Parent (other than Dr. Shears) is required to be,
and each Health Care Provider is, duly licensed under the laws of the State of
Texas 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. To the best knowledge of Seller and Parents,
including knowledge obtained through the credentialing process used by the
business, except as previously disclosed to Buyer in writing, no Health Care
Provider since January 1, 1990: (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
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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 of the Health Care
Providers who provide services in connection with the MacGregor Dental Centers
business have been previously disclosed to Buyer. To the best of Seller's and
Parents' 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 Seller or any relevant Parent. To the best of Seller's and Parents'
knowledge, none of the employed and engaged Health Care Providers use or abuse
any controlled substances at any time or is under the influence of alcohol or
are 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 Seller or any relevant Parent.
(c) Medicare/Medicaid. The MacGregor Dental Centers business
does not involve and has never involved patients covered by or arrangements
with Medicare or Medicaid.
(d) Other. To the best knowledge of Seller and Parents, (i)
neither Seller nor any Parent is required to make filings under any insurance
holding company or similar state statute, or is required to be licensed or
authorized as an insurance holding company in any jurisdiction in order to
conduct their respective businesses as presently conducted, (ii) the dental
plan services and related products offered and provided by the MacGregor Dental
Centers business 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 a material
adverse effect on the business, operations, assets, condition (financial or
other) or prospects of such business; and (iii) neither Seller nor any Parent
has 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 conducts its business.
Seller and Parents are not aware of any legislation, rule
or regulation which shall either (i) have been proposed and be in their
reasonable judgment reasonably likely to be adopted in Texas in the foreseeable
future, or (ii) have been adopted in Texas 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
MacGregor Dental Centers business taken as a whole.
2.16 Insurance. The physical properties and assets constituting
Subject Assets are insured to the extent disclosed in Section 2.16 of the
Disclosure Schedule and all insurance policies and arrangements relating to the
MacGregor Dental Centers business are disclosed in said Schedule. To the best
knowledge of Seller and Parents, said insurance policies and arrangements are
in full force and effect, all premiums with respect thereto are currently paid,
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and Seller and any relevant Parent are in compliance in all material respects
with the terms thereof. Seller and Parents believe that said insurance is
adequate and customary for the MacGregor Dental Centers business and is
sufficient for compliance with all requirements of law and all agreements and
leases to which such business is subject.
2.17 Finder's Fees. Neither Seller nor any Parent has incurred or
become liable for any broker's commission or finder's fee relating to or in
connection with the transactions contemplated by this Agreement, except a fee
to Wellington Associates, Inc. as previously disclosed.
2.18 Transactions with Interested Persons. Except as set forth in
Section 2.18 of the Disclosure Schedule, no present or to the best knowledge of
Seller and Parents former supervisory employee, officer, director, stockholder
or independent contractor (including any dentist or professional corporation)
and no affiliate (as defined in Section 8.11(a) of any such person), is
currently a party to any transaction with Seller or any Parent, 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 best knowledge of Seller and Parents 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 Seller or any Parent, or any organization which
has a contract or arrangement with Seller or any Parent, provided that no
representation shall be deemed made with respect to the provision of dental
services by any former employee or independent contractor. Except as set forth
in Section 2.18 of the Disclosure Statement, there are no commitments to, and
no income reflected in the financial statements referred to in Section 2.6 has
been derived from, any affiliate of Seller or any Parent, and following the
Closing Buyer shall not have any obligation of any kind or description to any
such affiliate.
2.19 Employee Benefit Programs.
(a) Section 2.19 of the Disclosure Schedule sets forth a list
of every Employee Program (as defined below) that has been maintained (as such
term is further defined below) in connection with the MacGregor Dental Centers
business at any time during the three-year period ending on the Closing.
(b) Each Employee Program which has ever been maintained by
Seller or any Parent (or predecessor) and which has at any time been intended
to qualify under Section 401(a) or 501(c)(9) of the Code has received a
favorable determination or approval letter from the Internal Revenue Service
("IRS") regarding its qualification under such section and to the best
knowledge of Seller and Parents has, in fact, been continuously qualified under
the applicable section of the Code since the effective date of such Employee
Program. No event or omission has occurred which would cause any such Employee
Program to lose its qualification under the applicable Code section.
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(c) Seller and Parents do not know, and none has any reason to
know, of any failure of any party to comply with any laws applicable to the
Employee Programs that have been maintained in connection with the MacGregor
Dental Centers business. With respect to any Employee Program ever maintained
in connection with the MacGregor Dental Centers business, there has occurred no
"prohibited transaction," as defined in Section 406 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code,
or breach of any duty under ERISA or other applicable law (including, without
limitation, any health care continuation requirements or any other tax law
requirements, or conditions to favorable tax treatment, applicable to such
plan), which could result, directly or indirectly (including, without
limitation, through any obligation of indemnification or contribution), in any
taxes, penalties or other liability to Buyer or any of its affiliates. No
litigation, arbitration, or governmental administrative proceeding (or
investigation) or other proceeding (other than those relating to routine claims
for benefits) is pending or, to the best knowledge of Seller and Parents,
threatened with respect to any such Employee Program.
(d) None of Seller nor any Parent or any Affiliate (as defined
below) (i) has ever maintained any Employee Program which has been subject to
Title IV of ERISA or Section 412 of the Code (including, but not limited to,
any Multiemployer Plan (as defined below)) or (ii) has ever provided health
care or any other non-pension benefits to any employees after their employment
is terminated (other than as required by part 6 of subtitle B of title I of
ERISA) or has ever promised to provide such post-termination benefits.
(e) With respect to each Employee Program maintained by or on
behalf of a Seller or any Parent within the three years preceding the Closing,
complete and correct copies of the following documents (if applicable to such
Employee Program) have previously been delivered to Buyer: (i) all documents
embodying or governing such Employee Program, and any funding medium for the
Employee Program (including, without limitation, trust agreements) as they may
have been amended to the date hereof; (ii) the most recent IRS determination or
approval letter with respect to such Employee Program under Code Section 401 or
501(c)(9), and any applications for determination or approval subsequently
filed with the IRS; (iii) the three most recently filed IRS Forms 5500, with
all applicable schedules and accountants' opinions attached thereto; (iv) the
summary plan description for such Employee Program (or other descriptions of
such Employee Program provided to employees) and all modifications thereto; (v)
any insurance policy (including any fiduciary liability insurance policy)
related to such Employee Program; (vi) any documents evidencing any loan to an
Employee Program that is a leveraged employee stock ownership plan; and (vii)
all other materials reasonably necessary for Buyer to perform any of its
responsibilities with respect to any Employee Program subsequent to the Closing
(including, without limitation, health care continuation requirements).
(f) Each Employee Program maintained in connection with the
MacGregor Dental Centers business of the date hereof is subject to termination
by the Board of Directors or general partner of the relevant entities without
any further liability or obligation on the part
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of such entity to make further contributions or payments in connection
therewith following such termination.
(g) For purposes of this Section 2.19:
(i) "Employee Program" means (A) all employee benefit
plans within the meaning of ERISA Section 3(3), including, but not
limited to, multiple employer welfare arrangements (within the meaning
of ERISA Section 3(40)), plans to which more than one unaffiliated
employer contributes and employee benefit plans (such as foreign or
excess benefit plans) which are not subject to ERISA; and (B) all stock
or cash option plans, restricted stock plans, bonus or incentive award
plans, severance pay policies or agreements, deferred compensation
agreements, supplemental income arrangements, vacation plans, and all
other employee benefit plans, agreements, and arrangements not described
in (A) above. In the case of an Employee Program funded through an
organization described in Code Section 501(c)(9), each reference to such
Employee Program shall include a reference to such organization.
(ii) An entity "maintains" an Employee Program if such
entity sponsors, contributes to, or provides (or has promised to
provide) benefits under such Employee Program, or has any obligation (by
agreement or under applicable law) to contribute to or provide benefits
under such Employee Program, or if such Employee Program provides
benefits to or otherwise covers employees of such entity (or their
spouses, dependents, or beneficiaries).
(iii) An entity is an "Affiliate" of Seller or any Parent
if it would have ever been considered a single employer with Seller or
such Parent under ERISA Section 4001(b) or part of the same "controlled
group" as Seller or any Parent for purposes of ERISA Section
302(d)(8)(C).
(iv) "Multiemployer Plan" means a (pension or
non-pension) employee benefit plan to which more than one employer
contributes and which is maintained pursuant to one or more collective
bargaining agreements.
2.20 Environmental Matters.
(a) Except as set forth in Section 2.20 of the Disclosure
Schedule and except to the extent that they do not have a material adverse
effect on the business, operations, results of operations, assets, conditions
(financial or other) or prospects of the MacGregor Dental Centers business
taken as a whole, (i) Seller and Parents have never generated, transported,
used, stored, treated, disposed of, or managed any Hazardous Waste (as defined
below) in violation in any material respect of any applicable Environmental
Law; (ii) to the best knowledge of Seller and Parents no Hazardous Material (as
defined below) has ever been or is threatened to be spilled, released, or
disposed of at any site presently or formerly owned, operated, leased, or used
in connection with the MacGregor Dental Centers business, or has
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ever come to be located in the soil or groundwater at any such site in
violation in any material respect of any applicable Environmental Law; (iii) to
the best knowledge of Seller and Parents no Hazardous Material has ever been
transported from any site presently or formerly owned, operated, leased, or
used in connection with the MacGregor Dental Centers business for treatment,
storage, or disposal at any other place in violation in any material respect of
any applicable Environmental Law; (iv) neither Seller nor any Parent presently
owns, operates, leases, or uses, nor has any of them previously owned,
operated, leased, or used any site on which underground storage tanks are or
were located in violation in any material respect of any applicable
Environmental Law; and (v) no lien has ever been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased, or used in connection with the MacGregor Dental Centers business in
connection with the presence of any Hazardous Material.
(b) Except as set forth in Section 2.20 of the Disclosure
Schedule and except to the extent that they do not have a material adverse
effect on the business, operations, results of operations, assets, conditions
(financial or other) or prospects of the MacGregor Dental Centers business
taken as a whole, (i) neither Seller nor any Parent has any liability under,
nor has it ever violated in any material respect, any Environmental Law (as
defined below); (ii) Seller and Parents and each property owned, operated,
leased, or used in connection with the MacGregor Dental Centers business, and
any facilities and operations thereon are presently in compliance in all
material respects with all applicable Environmental Laws; (iii) neither Seller
nor any Parent 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 within the last five years
received any request for information, notice, demand letter, administrative
inquiry, or formal or informal complaint or claim directed to Seller or any
Parent with respect to any environmental or health and safety matter or the
enforcement of any Environmental Law; and (iv) neither Seller nor any Parent
has any knowledge or reason to know that any of the items enumerated in clause
(iii) of this paragraph will be forthcoming.
(c) Except as set forth in Section 2.20 of the Disclosure
Schedule, and except to the extent that they do not have a material adverse
effect on the business, operations, results of operations, assets, conditions
(financial or other) or prospects of the MacGregor Dental Centers business
taken as a whole, to the best knowledge of Seller and Parents, no site owned,
operated, leased, or used in connection with the MacGregor Dental Centers
business contains any asbestos or asbestos-containing material, any
polychlorinated biphenyls (PCBs) or equipment containing PCBs, or any urea
formaldehyde foam insulation.
(d) Seller and Parents have provided to Buyer copies of all
documents, records, and information available to them concerning any
environmental or health and safety matter relevant to the Subject Assets,
whether generated in connection with the MacGregor Dental Centers business or
otherwise, including, without limitation, environmental audits, environmental
risk assessments, site assessments, documentation regarding off-site disposal
of Hazardous Materials, spill control plans, and reports, correspondence,
permits, licenses,
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approvals, consents, and other authorizations related to environmental or
health and safety matters issued by any governmental agency.
(e) For purposes of this Section 2.20, (i) "Hazardous
Material" shall mean and include any hazardous waste, hazardous material,
hazardous substance, petroleum product, oil, toxic substance, pollutant,
contaminant, or other substance which may pose a threat to the environment or
to human health or safety, as defined or regulated under any Environmental Law;
(ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or
regulated under any Environmental Law; and (iii) "Environmental Law" shall mean
any environmental or Hazardous Material-related law, regulation, rule or
ordinance, at the foreign, federal, state, or local level.
2.21 List of Certain Employees and Suppliers. Section 2.21 of the
Disclosure Schedule contains a list of all managers, employees and consultants
and independent contractors (including dentists and related professional
corporations) of the MacGregor Dental Centers business who, individually, have
received or are scheduled to receive compensation or payments for the fiscal
year ended and ending December 31, 1995 in excess of $100,000. In each case
such Schedule includes the current job title and aggregate annual compensation
of each such individual. Section 2.21 of the Disclosure Schedule sets forth a
list of all suppliers to whom the MacGregor Dental Centers business made
payments aggregating $100,000 or more during the fiscal year ended December 31,
1995 showing, with respect to each, the name, address and dollar volume
involved. To the knowledge of Seller and Parents, no supplier has any plan or
intention to terminate or reduce its business with the MacGregor Dental Centers
business or to materially and adversely modify its relationship therewith.
2.22 Employees; Labor Matters. The MacGregor Dental Centers business
employs approximately 120 full-time employees and fewer than three part-time
employees, has contracts with approximately 71 dentists and generally enjoys a
good employer-employee relationship. Neither Seller nor any Parent is
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. 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, Detraining, and Notification Act) will
become due. The MacGregor Dental Centers business 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. Seller and each
Parent are 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 charges of
employment discrimination or unfair labor practices, nor are there any strikes,
slowdowns, stoppages of work, or any other concerted interference with normal
operations existing, pending or to the best knowledge of Seller and Parents
threatened against or involving the MacGregor Dental Centers business. No
question concerning representation exists respecting the employees of Seller or
any Parent. To the best knowledge of Seller and Parents, there are no
grievances, complaints or charges
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that have been filed under any dispute resolution procedure (including, but not
limited to, any proceedings under any dispute resolution procedure under any
collective bargaining agreement) that might have an adverse effect on the
MacGregor Dental Centers business. No arbitration or similar proceeding is
pending and no claim therefor has been asserted. To the best knowledge of
Seller and Parents, no collective bargaining agreement is in effect or is
currently being or is about to be negotiated by Seller or any Parent. Seller
and Parents are, and at all times since November 6, 1986 have been, in
compliance in all material respects with the requirements of the Immigration
Reform Control Act of 1986. There are no changes of which Seller or any Parent
has knowledge pending or threatened with respect to (including, without
limitation, resignation of) the senior management or key supervisory personnel
or dentists of the MacGregor Dental Centers business nor has Seller or any
Parent received any notice or information concerning any prospective change
with respect to such senior management or key supervisory personnel.
2.23 Material Relationships; Government Contracts.
(a) To the best knowledge of Seller and Parents, the
relationships with the customers, Health Care Providers and the parties to the
contracts referred to in Section 2.13(a)(xvi) of the MacGregor Dental Centers
business are good commercial working relationships. To the best knowledge of
Seller and Parents, no Health Care Provider or DMO with which the MacGregor
Dental Centers business 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. Except as set forth in Section 2.23(a) of the Disclosure
Schedule, no DMO relationship or material contract or other material business
relationship of either Seller has been terminated in the past year.
(b) The Subject Assets do not include any contracts or
subcontracts which any government (including any municipal government) or
governmental agency or activity, and none of Seller or any Parent is ineligible
to submit bids to any DMO.
2.24 Disclosure. Except as set forth in Section 2.24 of the
Disclosure Schedule, to the best knowledge of Seller and Parents, the
representations, warranties and statements contained in this Agreement and in
the certificates, exhibits and schedules delivered by Seller and Parents to
Buyer pursuant to this Agreement 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.
2.25 Investment Representations. Seller, in connection with its
acquisition of Common Stock, represents that it 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 Buyer that it is acquiring such
Common Stock for its own account, for investment only and not with a view to,
or any present intention of, effecting a distribution of such securities or any
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part thereof except pursuant to a registration or an available exemption under
applicable law. Seller acknowledges that the Common Stock of Buyer 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 it has such
knowledge and experience in financial and business matters that it is capable
of evaluating the merits and risks of the investment contemplated by this
Agreement and making an informed investment decision with respect thereto.
Seller and Parents acknowledge and agree that the following legend shall
be typed on each certificate evidencing shares of 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 OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A
STOCKHOLDERS' AGREEMENT DATED AS OF FEBRUARY 5, 1996, INCLUDING THEREIN CERTAIN
RESTRICTIONS ON TRANSFER, AND VOTING REQUIREMENTS. A COMPLETE AND CORRECT COPY
OF THIS AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
ARTICLE 3. COVENANTS OF SELLER AND PARENTS.
3.1 Making of Covenants and Agreements. Seller and Parents jointly
and severally make the covenants and agreements as set forth in this Section 3,
which shall apply with respect to the period from the date hereof to the
Closing and, to the extent contemplated herein, thereafter.
3.2 Payment of Obligations. Both prior to and subsequent to the
Closing, Seller and its affiliates shall pay all of the Excluded Liabilities in
the ordinary course of business as they become due.
3.3 Collection of Assets. Subsequent to the Closing, Buyer and its
assignees shall have the right and authority to collect all receivables and
other items transferred and assigned
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by Seller hereunder and to endorse with the name of Seller or any of its
affiliates any checks received on account of such receivables or other items,
and Seller and each Parent agree that it will promptly transfer or deliver to
Buyer and its assignees from time to time, any cash or other property that it
may receive on or after February 1, 1996 with respect to any claims, contracts,
licenses, leases, commitments, sales orders, purchase orders, receivables of
any character or any other items included in the assets transferred to Buyer
pursuant to this Agreement.
3.4 Availability of Records. After the Closing, Seller and each
Parent shall make available to Buyer as reasonably requested by Buyer in
connection with its business purposes or by any taxing authority, and at
Buyer's expense, any and all information, records or documents relating to the
MacGregor Dental Centers business conducted prior to the Closing Date and
related personnel retained by it, in respect of periods prior to Closing and
shall also make available to Buyer and its assignees, as reasonably requested
by Buyer, personnel responsible for preparing or maintaining information,
records and documents, both in connection with tax matters as well as
litigation. Seller and each Parent shall preserve all such information,
records and documents until the later of six years after the Closing or the
expiration of all statutes of limitations or extensions thereof. Prior to
destroying any records related to the MacGregor Dental Centers business
conducted prior to the Closing Date, Seller and Parents shall notify Buyer of
their intent to destroy such records and will permit the Buyer to retain any
such records if it wishes to do so. Seller and each Parent agrees to hold all
information relating to the MacGregor Dental Centers business in strict
confidence from and after the Closing.
3.5 Use of Name. On or promptly following the date of the Closing,
MDC shall file duly approved amendments to its charter or equivalent documents
changing its corporate or partnership names so as to delete reference to
"MacGregor," "MacGregor Dental Centers," "MacGregor Dental" or any variant
thereof or related acronym and thereafter Seller and Parents shall refrain from
any use of such trade names or any associated logos.
3.6 Net Worth. Seller and Parents agree that Seller, MDCI, SMI, MDC
and Shears General shall maintain a consolidated net worth of not less than
$2.75 million through August 1, 1997; provided, however, that in the event any
claim for indemnification is held over thereafter in accordance with Section
7.2(c), then such net worth shall be maintained after such date in an amount
equal to the lesser of $2.75 or the amount of such claim.
3.7 Real Estate Lease Matters. Seller and Parents hereby jointly and
severally agree that they will guarantee the full and prompt performance by
Buyer or its subsidiary of those real estate leases for which the prior written
consent of the relevant landlord to assignment has not been obtained as of the
date hereof as identified in Section 2.5(b)(i) of the Disclosure Schedule
(excluding the Prudential leases identified thereon) if and to the extent
required to obtain a consent to such assignment and a release or subordination
of the related landlord's lien to liens in favor of NationsBank of Texas, N.A.,
as agent (the "Agent") for the lenders identified in the Loan Agreement dated
as of February 5, 1996 (the "Senior Lien"),
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such guarantee being for the benefit of Buyer and the landlords thereunder.
Seller and Parents hereby further agree to use their best efforts to obtain any
required consents to lease assignments promptly. Any guarantee delivered
pursuant to this Section 3.7 with respect to a lease shall terminate at such
time as the relevant landlord shall have granted an unconditional consent in
writing, including a subordination to the Senior Lien or release of the related
landlord's lien, unless and to the extent that a continuation of such guarantee
is required to obtain such a consent. Buyer in turn agrees for the benefit of
Seller and Parents to perform its obligations under all leases for which Seller
and/or any Parent executes a guarantee in accordance with their terms.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER.
4.1 Making of Representations and Warranties. As a material
inducement to Seller and Parents to enter into this Agreement and to consummate
the transactions contemplated hereby, Buyer hereby makes the representations
and warranties to Seller and Parents contained in this Section 4.
4.2 Organization of Buyer. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Delaware 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 conducted by it.
4.3 Authority of Buyer. Buyer has full corporate power and authority
to enter into this Agreement, each agreement, document and instrument to be
executed and delivered by Buyer pursuant to this Agreement, the Stock Purchase
Agreement dated as of February 5, 1996, executed in connection herewith, the
Stockholders' Agreement, the Employment Agreement and the Non-Competition
Agreement, and to carry out the transactions contemplated hereby and thereby.
The execution, delivery and performance by Buyer of this Agreement and each
such agreement, document and instrument have been duly authorized by all
necessary action of Buyer or such subsidiary and no other action on the part of
Buyer or such subsidiary is required in connection therewith. This Agreement
and each such agreement, document and instrument executed and delivered by
Buyer pursuant to this Agreement constitute valid and binding obligations of
Buyer or such subsidiary enforceable in accordance with their terms.
The execution, delivery and performance by Buyer of this Agreement and
each such agreement, document and instrument:
(i) do not and will not violate any provision of the
Amended and Restated Certificate of Incorporation
or by-laws (or the equivalent) of Buyer;
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(ii) do not and will not violate any laws of the United
States or any state or any other jurisdiction
applicable to Buyer or require Buyer 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, and
(iii) do not and will not result in a breach of,
constitute a default under, accelerate any
obligation under, or give rise to a right of
termination of any indenture, loan or credit
agreement, or other agreement mortgage, lease,
permit, order, judgment or decree to which Buyer is
a party or by which the property of Buyer is bound
or affected, except to the same will not have a
material adverse effect of the business of Buyer
and its subsidiaries taken as a whole.
4.4 Litigation. There is no litigation pending or, to the best
knowledge of Buyer, threatened against Buyer which would prevent or hinder the
consummation of the transactions contemplated by this Agreement.
4.5 Finder's Fees. Buyer has not incurred or become liable for any
broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
4.6 Common Stock. Upon consummation of the transactions contemplated
hereby, the shares of Common Stock issued to Seller pursuant to Section 1.3
shall be duly authorized, validly issued, fully paid and non-assessable. As of
the date hereof and after giving effect to the transactions contemplated hereby
and certain related transactions, including the filing of a Certificate of
Amendment to Buyer's Amended and Restated Certificate of Incorporation, the
authorized capital stock of Buyer consists of 15,000,000 shares of Common
Stock, 1,000,000 shares of Class A Common Stock, 4,800,000 shares of
Convertible Participating Preferred Stock and 3,840,000 shares of Redeemable
Preferred Stock, of which 5,500,000, zero, 4,800,000 and zero shares,
respectively, are issued and outstanding. In addition, Buyer has authorized
and reserved for issuance upon conversion of the Convertible Participating
Preferred Stock 4,800,000 shares of Common Stock and 3,840,000 shares of
Redeemable Preferred Stock, and has reserved an additional 800,000 shares of
Class A Common Stock for issuance as options or restricted stock awards under
Buyer's 1996 Stock Option and Incentive Plan.
SECTION 5. COVENANTS OF BUYER.
5.1 Making of Covenants and Agreements. Buyer hereby makes the
covenants and agreements set forth in this Section 5.
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5.2 Availability of Records. After the Closing, Buyer shall make
available to Seller and Parents as reasonably requested by them and at their
expense or any taxing authority all information, records or documents relating
to the Subject Assets and related personnel in respect of all periods prior to
Closing and shall preserve all such information, records and documents until
the later of six years after the Closing or the expiration of all statutes of
limitations or extensions thereof, provided that Seller and Parents shall hold
the same in confidence. Buyer shall also make available to Seller and Parents,
as reasonably requested by them and at their expense, personnel responsible for
preparing or maintaining information, records and documents, both in connection
with tax matters as well as litigation. Prior to destroying any records
related to the Subject Assets prior to the Closing, Buyer shall notify Seller
and Parents of its intent to destroy such records, and Buyer will permit Seller
and Parents to retain any such records and at their expense if they wish to do
so.
ARTICLE 6. 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 regardless of any investigation and shall not merge in the
performance of any obligation by either party hereto, subject to the provisions
of Article 7 hereof. Anything contained herein to the contrary
notwithstanding, no party hereto may rely on any representation or warranty
made by another party herein or in any Schedule, exhibit or certificate
delivered pursuant to this Agreement if the party or parties which made the
relevant representation or warranty sustains the burden of demonstrating that
the party seeking recovery had actual knowledge at the date hereof that such
representation or warranty was not true, complete and accurate in all material
respects on and as of the date hereof, and provided such burden is sustained,
no Buyer Indemnified Party or Seller Indemnified Party (as hereinafter defined)
shall have any right to indemnification pursuant to this Article or otherwise
with respect to any such representation or warranty; provided, however, that
nothing in this Article 6 shall limit or in any way affect the rights of Buyer
Indemnified Parties to indemnification or reimbursement provided in Section
7.1(b), (c), (d), (e) or (f) (subject to Section 7.2), and nothing in this
Article 6 shall limit or in any way affect the rights of Seller Indemnified
Parties to indemnification or reimbursement provided in Sections 7.3(b) or (c)
(subject to Section 7.4), which shall be available in accordance with the terms
thereof regardless of any knowledge or investigation of any party hereto.
ARTICLE 7. INDEMNIFICATION.
7.1 Indemnification by Seller and Parents. Each Seller, MDCI, MDC,
SMI and Shears General and, subject to Section 7.2(d), Dr. Shears, jointly and
severally, agrees to defend, indemnify and hold Buyer, all subsidiaries and
affiliates of Buyer (including without
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limitation stockholders of any of the foregoing other than themselves as to any
matter for which they are responsible hereunder) and persons serving as
officers, directors, partners, employees or agents of Buyer or such
subsidiaries or affiliates thereof other than themselves as to any matter for
which they are responsible hereunder (individually a "Buyer Indemnified Party"
and collectively the "Buyer Indemnified Parties") harmless from and against any
and all Claims (as defined in Section 1.2(vii)), whether or not arising out of
third-party claims and including any liability under any theory of successor
liability, as the same are incurred, and including all amounts paid in
investigation, defense or settlement of the foregoing, of any kind or nature
whatsoever which may be sustained or suffered by any such Buyer Indemnified
Party (a "Loss" or "Losses"), 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 or any Parent in this Agreement or in any Schedule,
exhibit or certificate delivered by Seller or any Parent as part of or pursuant
to this Agreement;
(b) any breach of any covenant or agreement made by Seller or
any Parent in this Agreement or in any Schedule, exhibit or certificate
delivered by Seller or any Parent as part of or pursuant to this Agreement,
including without limitation any failure of a Seller to perform and discharge
any of the Excluded Liabilities as set forth herein or to convey to Buyer all
of the assets used in the MacGregor Dental Centers business, and any breach of
Section 3.6 or 3.7;
(c) any fees or expenses of Seller or Parents (including legal
fees, accounting fees and investment banking fees) relative to this Agreement
and the transactions contemplated hereto in excess of the amount contemplated
by Section 8.2(a); and
(d) the Disclosed Matters, but only for amounts in excess of
the amounts specified on Schedule 1.2(d);
(e) any failure to obtain the consent of the relevant landlord
to the assignment to Buyer and its subsidiaries by Seller pursuant to this
Agreement of any of the real estate leases identified in Section 2.5(b)(i) of
the Disclosure Schedule (excluding leases with Prudential), including without
limitation any costs associated with moving the related office and any
increased rent;
(f) any matter, liability, obligation or alleged liability or
obligation of any Seller or Parent, or relating to the MacGregor Dental Centers
business as conducted on or prior to the Closing (including without limitation
any unknown or unasserted liability, any and all claims for injury (including
death), claims for damage, direct or consequential, relating to malpractice or
otherwise (including warranty claims) resulting from or connected with products
or services made or provided by or through Seller, any Parent or Health Care
Provider on or prior to the Closing, other personal injury or property damage
claims relating to events occurring on or prior to the Closing, amounts due in
connection with any Employee
37
<PAGE> 42
Program maintained or contributed to by Seller or any Parent on or prior to the
Closing, Claims relating to the performance of the Assumed Contracts through
the Closing, any employment related Claim (including any Claim of any Health
Care Provider or related professional association) relating to the period
through the Closing, any Claim relating to or alleging any failure to comply
with applicable laws and/or permitting, licensing or other regulatory
requirements in connection with the MacGregor Dental Centers business through
the Closing, Claims relating to Taxes of Seller or any Parent, and amounts paid
or payable relating to environmental matters including Losses resulting from or
in connection with the use, storage or discharge in to the ground, water or
atmosphere of any Hazardous Waste or Hazardous Materials or any violation of an
Environmental Law which occurred on or prior to the Closing. The rights of
Buyer Indemnified Parties to recover indemnification in respect of any
occurrence referred to in any of clauses (b) through (f) of this Section 7.1
shall not be limited by the fact that such occurrence may not constitute an
inaccuracy in or breach of any representation, warranty or agreement referred
to in clause (a) of this Section 7.1); provided, however, that notwithstanding
anything herein to the contrary, neither Seller nor any Parent shall be
obligated to provide indemnification for, and Buyer shall indemnify Seller and
Parents against, any losses arising from, any of the Liabilities assumed
hereunder.
7.2 Limitations on Indemnification by Seller and Parents.
(a) General Threshold. None of Seller, MDCI, MDC, SMI, Shears
General or Dr. Shears shall be obligated to indemnify Buyer Indemnified Parties
except to the extent the cumulative amount of all Losses incurred by Buyer
Indemnified Parties exceeds Two Hundred Fifty Thousand Dollars ($250,000),
which excess cumulative amount shall be recoverable in accordance with the
terms hereof; provided, however, that the limitations set forth in this Section
7.2(a) shall not apply to the matters described in Section 7.2(e).
(b) Maximum Indemnification. None of Seller, MDCI, MDC, SMI,
Shears General or Dr. Shears shall be obligated to indemnify Buyer Indemnified
Parties after the cumulative amount of all Losses incurred by Buyer Indemnified
Parties (including the first $250,000 described in Section 7.2(a)) exceeds
Three Million ($3,000,000) Dollars; provided, however, that the foregoing
limitation shall not apply to the matters described in Section 7.2(e) except as
provided in clause (vi) thereof.
(c) Time Limits for Claims. No claim for indemnification may
be made by any Buyer Indemnified Party unless written notice thereof shall have
been received by Seller, MDCI, MDC, SMI, Shears General and Dr. Shears on or
prior to August 1, 1997; provided, however, that the limitation set forth in
this Section 7.2(c) shall not apply to the matters described to Section 7.2(e),
indemnification with respect to which shall expire six (6) months after the
termination of the applicable statute of limitations relating to the subject
matter covered by such provisions; and provided further, however, that in each
case if prior to the applicable date of expiration specific facts shall have
become known which are reasonably likely to constitute or give rise to any Loss
as to which indemnity may be payable and a Buyer Indemnified Party shall have
given written notice in good faith of such facts to Seller, MDCI,
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<PAGE> 43
MDC, SMI, Shears General and Dr. Shears in detail, with an explanation of how
and under which provisions of this Agreement such facts may give rise to a Loss
and providing named persons having knowledge of such facts, and filed suit for
indemnification based upon such facts within one year thereafter, then the
right to indemnification with respect thereto shall remain in effect until such
matter shall have been finally determined and disposed of and any
indemnification due in respect thereof shall have been paid.
(d) Provision of Indemnity. Any indemnification pursuant to
Section 7.1 shall be paid by Seller, MDCI, MDC, SMI and/or Shears General;
provided, however, that such indemnification shall be paid by Dr. Shears
directly only in the event and to the extent such entities for any reason fail
to pay it in full within 30 days after the same becomes due and demand has been
made in writing therefor.
(e) Dollar-for-Dollar Claims. Notwithstanding anything
contained herein to the contrary, but in all cases subject to Section 7.2(d),
Buyer Indemnified Parties shall not be subject to any limitation, whether
pursuant to this Section 7.2 hereof or otherwise, and shall be entitled to
dollar-for-dollar recovery, in seeking indemnification from any Seller or
Parent with respect to the following:
(i) Losses arising from fraud or an intentional
misrepresentation on the part of Seller or any Parent;
(ii) Losses arising from any breach of a covenant by
Seller or any Parent, provided that clause (vi) below shall govern with
respect to the covenant to pay any Excluded Liabilities described
therein with respect to unknown liabilities;
(iii) Losses involving a breach by Seller or any Parent
of the representations and warranties contained in any of Sections
1.1(a) (last paragraph, second sentence only), 2.4 (first paragraph
only), 2.7 or 2.25;
(iv) Any Loss relating to Taxes owed by Seller or any
Parent;
(v) Losses described in Section 7.1(c) or (e); and
(vi) Losses described in Section 7.1(d) or (f),
provided, however, that Claims relating to such Losses shall be subject
to Section 7.2(b) if they (or their possibility) were not disclosed
herein, in the Base Balance Sheet or on the Schedules hereto or known to
Seller or Parents at the date hereof or if they are recoverable under
Section 7.1(d), and in the case of Section 7.1(f) only, indemnification
in respect of such unknown liabilities shall be recoverable after and to
the extent that the amount thereof exceeds $20,000.
(f) Exclusive Remedy. Indemnification pursuant to Section 7.1
is the exclusive remedy of Buyer Indemnified Parties against Seller and Parents
for matters arising
39
<PAGE> 44
out of the representations, warranties, covenants and agreements of Seller and
Parents set forth in this Agreement and the Schedules hereto and certificates
delivered in connection herewith after the Closing (without limitation of the
rights of Buyer or any of its affiliates under any other agreement contemplated
hereby as provided in the terms thereof or by applicable law with respect to
any such other agreement, including without limitation the Non-Competition
Agreement).
(g) Insurance. The amount of any Losses suffered, sustained,
incurred or required to be paid by any Buyer Indemnified Party shall be reduced
by the amount of any insurance proceeds and other amounts paid to such Buyer
Indemnified Party by any person not a party to this Agreement.
7.3 Indemnification by Buyer. Buyer agrees to defend, indemnify and
hold Seller and Parents and the persons serving as officers, directors,
employees or agents of Seller and Parents (individually a "Seller Indemnified
Party" and collectively the "Seller Indemnified Parties") harmless from and
against any and all Claims, whether or not arising out of third-party claims
and including all amounts paid in respect of Losses (as defined in Section 7.1
hereof) 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 Buyer in this Agreement or in any Schedule, exhibit or
certificate delivered by Buyer as part of or pursuant to this Agreement; (b)
any breach of any covenant or agreement made by Buyer in this Agreement, or in
any Schedule, exhibit or certificate, delivered by Buyer as part of or pursuant
to this Agreement, or (c) any failure to discharge the Liabilities. The rights
of Seller Indemnified Parties to recover indemnification in respect of any
occurrence referred to in clause (b) or (c) of this Section 7.3 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 7.3.
7.4 Limitations on Indemnification by Buyer.
(a) General Threshold. Buyer shall not be obligated to
indemnify Seller Indemnified Parties except to the extent the cumulative amount
of all Losses incurred by Seller Indemnified Parties exceeds Two Hundred Fifty
Thousand Dollars ($250,000) (the "Threshold"), which excess cumulative amount
shall be recoverable in accordance with the terms hereof; provided, however,
that the limitations set forth in this Section 7.4(a) shall not apply to the
matters described in Section 7.4(d).
(b) Maximum Indemnification. Buyer shall not be obligated to
indemnify Seller Indemnified Parties after the cumulative amount of all Losses
incurred by Seller Indemnified Parties exceeds Three Million ($3,000,000)
Dollars; provided, however that the foregoing limitation shall not apply to the
matters described in Section 7.4(d).
(c) Time Limits for Claims. No claim for indemnification may
be made by any Seller Indemnified Party unless written notice thereof shall
have been received by Buyer
40
<PAGE> 45
on or prior to August 1, 1997; provided, however, that the limitation set forth
in this Section 7.4(c) shall not apply to the matters described to Section
7.4(d), indemnification with respect to which shall expire six (6) months after
the termination of the applicable statute of limitations relating to the
subject matter covered by such provisions; and provided further, however, that
in each case if prior to the applicable date of expiration specific facts shall
have become known which are reasonably likely to constitute or give rise to any
Loss as to which indemnity may be payable and a Seller Indemnified Party shall
have given written notice in good faith of such facts to Buyer in detail, with
an explanation of how and under which provisions of this Agreement such facts
may give rise to a Loss and providing named persons having knowledge of such
facts, and filed suit for indemnification based upon such facts within one year
thereafter, then the right to indemnification with respect thereto shall remain
in effect until such matter shall have been finally determined and disposed of
and any indemnification due in respect thereof shall have been paid.
(d) Dollar-for-Dollar Claims. Notwithstanding anything
contained herein to the contrary, Seller Indemnified Parties shall not be
subject to any limitation, whether pursuant to this Section 7.4 hereof or
otherwise, and shall be entitled to dollar-for-dollar recovery, in seeking
indemnification from Buyer with respect to the following:
(i) Losses arising from fraud or an intentional
misrepresentation on the part of Buyer;
(ii) Losses arising from any breach of a covenant by
Buyer including without limitation the covenants in Section 8.2(a) and
to assume and discharge the Liabilities; and
(iii) Losses involving a breach by Buyer of the
representations and warranties contained in any of Sections 4.3 (first
paragraph) or 4.6.
(e) Exclusive Remedy. Indemnification pursuant to Section 7.3
is the sole and exclusive remedy of Seller Indemnified Parties against Buyer
for matters arising out of the representations, warranties, covenants and
agreements of the Buyer set forth in this Agreement and the Schedules hereto
and certificates delivered in connection herewith after the Closing (without
limitation of the rights of Seller Indemnified Parties under any other
agreement contemplated hereby as provided in the terms thereof or by applicable
law with respect to any such other agreement).
(f) Insurance. The amount of any Losses suffered, sustained,
incurred or required to be paid by any Seller Indemnified Party shall be
reduced by the amount of any insurance proceeds and other amounts paid to such
Seller Indemnified Party by any person not a party to this Agreement.
7.5 Notice; Defense of Claims. Promptly after receipt by an
indemnified party of notice of any third party or other claim, liability or
expense to which the indemnification
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<PAGE> 46
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.
In the case of any third party claim, if within twenty (20) days after
receiving the notice described in the preceding paragraph, 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 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 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 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. The indemnifying party
or parties shall keep the 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.
Notwithstanding anything herein stated, such indemnified party or parties shall
at all times have the right to fully 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
42
<PAGE> 47
(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.
7.6 Satisfaction of Indemnification Obligations. Any indemnity
payable pursuant to this Section 7 shall be paid within the later of (a) thirty
(30) days after the indemnified party's request therefor or (b) thirty (30)
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 8. MISCELLANEOUS.
8.1 Bulk Sales Law. Buyer waives compliance by Seller and Parents
with the provisions of any applicable bulk sales, fraudulent conveyance or
other law for the protection of creditors, and Seller and Parents jointly and
severally agree to indemnify and hold Buyer and its affiliates harmless from,
and reimburse Buyer and its affiliates for, any loss, cost, expense, liability
or damage (including reasonable counsel fees and disbursements and expenses)
which Buyer or its affiliates may suffer or incur by virtue of the
non-compliance by Seller or any Parent with such laws.
8.2 Fees, Expenses and Certain Taxes.
(a) Buyer will pay its fees and expenses in connection with
this Agreement and the transactions contemplated hereby. Buyer will also pay
the legal, accounting and investment banking fees and expenses of Seller and
Parents in connection with this Agreement and the transactions contemplated
hereby in an amount not to exceed $1,050,000, with Seller and Parents agreeing
to pay any such fees and expenses incurred by them in excess of such amount,
provided that all fees and expenses of Coopers & Lybrand L.L.P. will be paid by
Buyer.
(b) (i) Any and all real property taxes of Seller and its
affiliates shall remain an obligation of and be paid by Seller. Personal
property ad valorem taxes relating to the MacGregor Dental Center business for
1996 (due in January 1997) and federal and state unemployment tax relating to
the MacGregor Dental Centers business due in April 1996 will be paid by Buyer
or its subsidiary, the cash payment under Section 1.3(a) having been reduced by
$8,706 in reflection of the portion of such taxes attributable to pre-Closing
periods.
(ii) Seller agrees that payments in respect of workers
compensation insurance for the periods March 1, 1994 to February 28, 1995 and
March 1, 1995 through February 29, 1996 in respect of the MacGregor Dental
Centers business will be paid promptly by it if and to the extent (and when
determined to be) due, provided that Buyer or a subsidiary
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<PAGE> 48
of Buyer will reimburse Seller for one-twelfth (not to exceed $1,667) of any
such payment due in respect of the year ending February 29, 1996, reflecting
February operations. Any such payments in respect of the MacGregor Dental
Centers business for the year beginning March 1, 1996 will be the
responsibility of Buyer.
(iii) Recording fees associated with Buyer's assumption
of leases of Seller and with any UCC filings in connection with the release or
guaranty of security interests shall be paid by Buyer.
8.3 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.
8.4 Notices. Any notice, request, demand 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 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:
TO BUYER: Monarch Dental Corporation
6757 Arapaho Road, Suite 779
Dallas, TX 75248
Attn: President
With copies to: Haynes and Boone, LLP
3100 Nationsbank Plaza
Dallas, TX 75202
Attn: Kenneth K. Bezozo, Esq.
and
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Attn: John R. LeClaire, P.C.
TO SELLER OR
PARENTS: Dr. Charles G. Shears
MacGregor Dental Centers
1325 LaConcha Lane
Suite 200
Houston, TX 77054
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<PAGE> 49
With a copy to: Thompson & Knight, P.C.
1700 Pacific Avenue
Suite 3300
Dallas, TX 75201
Attn: Steven K. Cochran, Esq.
Any notice given hereunder may be given on behalf of any party by his counsel
or other authorized representatives.
8.5 Entire Agreement. This Agreement, including the Schedules
referred to herein and the other writings specifically identified herein 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 letter dated October 2, 1995.
8.6 Assignability; Binding Effect. Provided the relevant assignee
assumes or agrees to be bound by Buyer's obligations hereunder, this Agreement
and any rights hereunder shall be assignable by Buyer to one or more
corporations or partnerships controlling, controlled by or under common control
with Buyer, directly or indirectly, provided Buyer shall remain liable for its
obligations hereunder in connection with any such assignment, or to any
successor or acquiror of Buyer or its affiliates or to any 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 financing), upon written notice to Seller. This Agreement may not be
assigned by Seller or any Parent without the prior written consent of Buyer.
This Agreement shall be binding upon and enforceable by, and shall inure to the
benefit of, the parties hereto and their respective successors, executors,
administrators, estates, heirs and permitted assigns (including without
limitation the executors, administrators, estates and heirs of an individual
Parent in the event of his or her death).
8.7 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.
8.8 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.
8.9 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 Buyer, and Seller and Parents,
or in the case of a waiver, the party or parties waiving compliance.
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<PAGE> 50
8.10 Consent to Jurisdiction; Certain Remedies. Solely for the
purpose of allowing a party to enforce its indemnification and other rights
hereunder, each of the parties hereby consents to personal jurisdiction,
service of process and venue in the federal or state courts of Texas or in the
court in which any claim for which indemnification may be sought hereunder is
brought against an indemnified party. 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 the remedy of specific performance, and
each of the parties hereto expressly waives the defense that a remedy in
damages will be adequate.
8.11 Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliate" of a person shall (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 an
entity, any officer, director, stockholder, partner or investor in such entity
or of or in any affiliate of such entity; and (iii) with respect to a person or
entity, any person or entity which directly or indirectly controls, is
controlled by, or is under common control with such person or entity.
(b) "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;
(c) "person" means an individual, corporation, partnership,
association, trust or any unincorporated organization; and
(d) "subsidiary" of a person means any corporation more than
50 percent of whose outstanding voting securities, or any partnership, joint
venture or other entity more than 50 percent of whose total equity interest, is
directly or indirectly owned by such person.
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<PAGE> 51
IN WITNESS WHEREOF the parties hereto have executed this Agreement or
caused this Agreement to be executed by their duly authorized representatives.
BUYER:
ATTEST MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
- ----------------------------------- ------------------------------------
Secretary Name: Warren F. Melamed
[Corporate Seal] Title: President
SELLER:
SHEARS VANGUARD LTD.
ATTEST By: Shears Vanguard General, Inc., its
General Partner
By: /s/ CHARLES G. SHEARS
- ----------------------------------- --------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
PARENTS:
ATTEST SHEARS VANGUARD INC.
By: /s/ CHARLES G. SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
ATTEST SHEARS VANGUARD SMI INC.
By: /s/ SOPHIA SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Sophia Shears
[Seal] Title: President
<PAGE> 52
ATTEST SHEARS VANGUARD GENERAL, INC.
By: /s/ CHARLES G. SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
ATTEST MDC DENTAL, INC.
By: /s/ CHARLES G. SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
---------------------------------------
SPOUSE'S CONSENT Dr. Charles G. Shears
I acknowledge that I have read the
foregoing Asset Contribution Agreement
and understand the contents thereof.
/s/ BARBARA W. SHEARS
- -----------------------------------
<PAGE> 1
EXHIBIT 10.8
================================================================================
ASSET CONTRIBUTION AGREEMENT
by and among
MONARCH DENTAL CORPORATION
Warren F. Melamed, D.D.S.
and
Roy D. Smith, III, D.D.S.
As of February 5, 1996
================================================================================
<PAGE> 2
ASSET CONTRIBUTION AGREEMENT
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. CONTRIBUTION OF ASSETS . . . . . . . . . . . . . . . . . . . . 2
1.1 Contribution of Assets . . . . . . . . . . . . . . . . . . . . 2
1.2 Time and Place of Closing . . . . . . . . . . . . . . . . . . 3
1.3 Certain Closing Deliveries . . . . . . . . . . . . . . . . . . 3
1.4 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 4
1.5 Allocation of Purchase Price . . . . . . . . . . . . . . . . . 4
1.6 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 2A. REPRESENTATIONS AND WARRANTIES OF MELAMED. . . . . . . . . . . 4
2A.1 Making of Representations and Warranties . . . . . . . . . . . 4
2A.2 Authority; Noncontravention . . . . . . . . . . . . . . . . . 4
2A.3 Transfer of Title . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 2B. REPRESENTATIONS AND WARRANTIES OF SMITH . . . . . . . . . . . 5
2B.1 Making of Representations and Warranties . . . . . . . . . . . 5
2B.2 Authority; Noncontravention . . . . . . . . . . . . . . . . . 6
2B.3 Transfer of Title . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 2C. REPRESENTATIONS AND WARRANTIES OF MELAMED AND SMITH. . . . . . 7
2C.1 Investment Representations . . . . . . . . . . . . . . . . . . 7
ARTICLE 3. COVENANTS OF MELAMED AND SMITH . . . . . . . . . . . . . . . . 8
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . 8
4.1 Making of Representations and Warranties . . . . . . . . . . . 8
4.2 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.3 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 5. SURVIVAL OF REPRESENTATIONS, WARRANTIES, ARRANGEMENTS,
COVENANTS AND OBLIGATIONS . . . . . . . . . . . . . . . . . . 9
ARTICLE 6. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 9
6.1 Fees, Expenses and Certain Taxes . . . . . . . . . . . . . . . 9
6.2 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 9
6.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 10
6.5 Assignability; Binding Effect . . . . . . . . . . . . . . . . 11
6.6 Captions and Gender . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.7 Execution in Counterparts . . . . . . . . . . . . . . . . . . 11
6.8 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.9 Consent to Jurisdiction; Certain Remedies . . . . . . . . . . 11
6.10 Certain Definitions . . . . . . . . . . . . . . . . . . . . . 11
Schedules
- ---------
Schedule 1.1(a)(v) - Trademarks
Schedule 1.5 - Allocation of Purchase Price
</TABLE>
(ii)
<PAGE> 4
ASSET CONTRIBUTION AGREEMENT
ASSET CONTRIBUTION AGREEMENT entered into as of February 5, 1996 by and
among Monarch Dental Corporation, a Delaware corporation ("Company"), Warren F.
Melamed, D.D.S. ("Melamed") and Roy D. Smith, III, D.D.S. ("Smith").
W I T N E S S E T H
WHEREAS, subject to the terms and conditions hereof, the Company wishes
to acquire certain assets owned by each of Melamed and Smith and Melamed and
Smith wish to contribute such assets to the Company in exchange for shares of
Common Stock and cash in a transaction that together with the transaction
contemplated by the MacGregor Asset Contribution Agreement and the TA Purchase
Agreement (each as defined below) is intended to qualify as an exchange under
Section 351 of the Code; and
WHEREAS, simultaneously herewith the Company has entered into (i) an
Asset Contribution Agreement (the "MacGregor Asset Contribution Agreement") by
and between the Company, Shears Vanguard, Ltd., Shears Vanguard, Inc., Shears
Vanguard General, Inc., Shears Vanguard SMI, Inc., MDC Dental, Inc. and Dr.
Charles G. Shears, pursuant to which in exchange for shares of Common Stock and
cash and the assumption of specified liabilities the Sellers thereunder will
contribute the assets comprising the MacGregor Dental Centers business in a
transaction that together with the transaction contemplated by this Agreement
and the TA Purchase Agreement is intended to qualify as an exchange under
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
the Stock Purchase Agreement dated as of February 5, 1996, by and between the
Company and the purchasers named therein (the "TA Purchase Agreement"); (iii)
the Loan Agreement dated as of February 5, 1996 among Monarch Dental
Associates, L.P., MacGregor Dental Associates, L.P., NationsBank of Texas,
N.A., as Agent, NationsBank of Texas, N.A. and other entities designated
therein as Lenders and related documents entered in connection therewith (the
"Bank Financing"); and (iv) a Stock Redemption Agreement (the "Redemption
Agreement") by and between the Company and Melamed dated as of February 5,
1996, the closing of which is to take place immediately prior to the closing of
the transactions contemplated by this Agreement and the MacGregor Asset
Contribution Agreement.
NOW, THEREFORE, in order to consummate said contribution and transfer of
assets and in consideration of the mutual agreements set forth herein, the
parties hereto agree as follows:
<PAGE> 5
ARTICLE 1. CONTRIBUTION OF ASSETS.
1.1 Contribution of Assets.
(a) Assets to be Contributed. Subject to and in reliance upon
the terms, provisions and conditions of this Agreement, each of Melamed and
Smith shall contribute to and the Company shall acquire, at the Closing (as
defined in Section 1.2 hereof) the following assets:
(i) Melamed shall contribute all of the issued and
outstanding shares of capital stock of Partners Dental Corporation, a
Delaware corporation, that are owned by Melamed, which consists of 500
shares of common stock, par value $.01 per share (all such shares shall
hereinafter be referred to collectively as the "Melamed Partners Dental
Stock") constituting fifty percent (50%) of all of the issued and
outstanding shares of capital stock of Partners Dental Corporation;
(ii) Smith shall contribute all of the issued and
outstanding shares of capital stock of Partners Dental Corporation, a
Delaware corporation, that are owned by Smith, which consists of 500
shares of common stock, par value $.01 per share (all such shares shall
hereinafter be referred to collectively as the "Smith Partners Dental
Stock") constituting fifty percent (50%) of all of the issued and
outstanding shares of capital stock of Partners Dental Corporation;
(iii) Melamed shall contribute one-hundred percent (100%)
of the issued and outstanding shares of capital stock of Oral Health
Concepts, Inc., a Texas corporation, which consists of 1,000 shares of
common stock, no par value per share (all such shares shall hereinafter
be referred to collectively as the "Oral Health Stock");
(iv) Smith shall contribute a one percent (1%) limited
partnership interest in Monarch Dental Associates-Mesquite, L.P., a
Texas limited partnership (the "Smith Mesquite L.P. Interest"); and
(v) Melamed shall contribute all of his interest in
certain trademarks set forth on Schedule 1.1(a)(v) (the "Trademarks").
The Melamed Partners Dental Stock, the Smith Partners Dental Stock, the
Oral Health Stock, the Smith Mesquite L.P. Interest and the Trademarks are
hereinafter sometimes referred to collectively as the "Subject Assets."
(b) Purchase Price of Subject Assets and Payment. In
consideration of the sale to the Company of the Subject Assets, the Company
agrees that at the Closing it will:
(i) in consideration of the contribution of the Melamed
Partners Dental Stock by Melamed (A) pay Melamed cash in the amount of
$425,320 and (B)
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issue and deliver to Melamed 74,480 shares of the Company's common
stock, par value $.01 per share ("Common Stock");
(ii) in consideration of the contribution of the Smith
Partners Dental Stock by Smith (A) pay Smith cash in the amount of
$425,320 and (B) issue and deliver to Smith 74,480 shares of the
Company's Common Stock;
(iii) in consideration of the contribution of the Oral
Health Stock by Melamed issue and deliver to Melamed 638,000 shares of
the Company's Common Stock;
(iv) in consideration of the contribution of the Smith
Mesquite L.P. Interest by Smith pay Smith (A) cash in the amount of
$8,680 and (B) issue and deliver to Smith 1,520 shares of the Company's
Common Stock; and
(v) in consideration of the contribution of the
Trademarks by Melamed pay Melamed cash in the amount of $10.00.
All cash amounts to be paid pursuant to this Section 1.1(b) shall be
paid by wire transfer in immediately available funds to such accounts as
Melamed and Smith, respectively, shall have indicated in writing to the
Company.
The parties hereto intend that the transfers of the Subject Assets
described in this Section 1.1 be considered part of a single integrated plan to
acquire the Subject Assets and other assets from other parties in a transaction
qualifying under Section 351 of the Code. Each of Melamed, Smith and the
Company will file federal income tax and other tax returns consistent with the
intent set forth above and will adhere to the reporting requirements under
regulations promulgated under Section 351 of the Code.
1.2 Time and Place of Closing. The closing of the transactions
provided for in this Agreement (herein called the "Closing") shall be held at
the offices of Goodwin, Procter & Hoar at Exchange Place, Boston, Massachusetts
as of the date hereof (such date being herein called the "Closing Date").
1.3 Certain Closing Deliveries.
(a) Consideration Price. At the Closing, the Company shall
pay to Melamed and Smith, respectively the cash consideration specified in
Section 1.1(b) and shall deliver to Melamed and Smith, respectively, the shares
of Common Stock specified in Section 1.1(b).
(b) Transfer of Subject Assets. At the Closing, (i) Melamed
shall deliver or cause to be delivered to the Company the Oral Health Stock and
the Melamed Partners Dental Stock, together, in each case, with stock transfer
powers duly endorsed in blank transferring to the Company good title thereto
free and clear of all liens, restrictions and encumbrances and
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Melamed shall execute and deliver such transfer and assignment instruments as
are necessary to transfer the Trademarks to the Company; and (ii) Smith shall
deliver or cause to be delivered to the Company the Smith Partners Dental Stock
and the Smith Mesquite L.P. Interest, together, in the case of the Smith
Partner Stock with stock transfer powers duly endorsed in blank, and in the
case of the Smith Mesquite L.P. Interest with an appropriate assignment
instrument, in each case transferring to the Company good title thereto free
and clear of all liens, restrictions and encumbrances.
(c) Release. Each of Melamed and Smith shall execute a
release in form and substance reasonably satisfactory to the Company.
1.4 Further Assurances. Each of Melamed and Smith, respectively,
from time to time after the Closing at the request of the Company and without
further consideration shall execute and deliver such further instruments of
transfer and assignment and take such other action as the Company may
reasonably require to more effectively transfer and assign to, and vest in, the
Company the Subject Assets.
1.5 Allocation of Purchase Price. Schedule 1.5 hereto sets forth the
allocation of the consideration paid by the Company to Melamed and Smith among
the Subject Assets. Such allocation has been made in accordance with the
applicable rules under Section 351 of the Code as interpreted by Revenue Ruling
68-55 and shall be binding upon the Company, Melamed and Smith for all purposes
(including financial accounting purposes, financial and regulatory reporting
purposes and tax purposes). The Company, Melamed and Smith also each agree to
file appropriate documents with the IRS under Treasury Regulation Section
1.351-3 reflecting the foregoing.
1.6 Transfer Taxes. All transfer taxes, fees and duties under
applicable law incurred in connection with the acquisition of the Subject
Assets under this Agreement will be borne and paid by Melamed and Smith,
respectively, and Melamed and Smith each hereby covenants to promptly reimburse
the Company for any such tax, fee or duty which either the Company, Melamed or
Smith is required to pay under applicable law.
ARTICLE 2A. REPRESENTATIONS AND WARRANTIES OF MELAMED.
2A.1 Making of Representations and Warranties. As a material
inducement to the Company to enter into this Agreement and to consummate the
transactions contemplated hereby, Melamed hereby makes to the Company the
representations and warranties contained in this Section 2A.
2A.2 Authority; Noncontravention. Melamed has full capacity to enter
into this Agreement, each agreement, document and instrument to be executed and
delivered by him pursuant to or contemplated by this Agreement and to carry out
the transactions contemplated hereby and thereby. The execution, delivery and
performance by Melamed of this Agreement and each such other agreement,
document and instrument have been duly authorized by all
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necessary corporate and partnership action and no other action on the part of
Melamed or any other person or entity is required in connection therewith.
This Agreement and each such agreement, document and instrument executed and
delivered by Melamed pursuant to this Agreement constitute valid and binding
obligations of Melamed enforceable in accordance with their respective terms.
The execution, delivery and performance by Melamed of this Agreement and
each such agreement, document and instrument contemplated by this Agreement to
which he is a party:
(i) do not and will not violate in any material respect
any laws of the United States or any state or other jurisdiction
applicable to Melamed or require Melamed or any other person or entity
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
(ii) do not and will not result in a breach of,
constitute a default under, accelerate any obligation under, or give
rise to a right of termination of any indenture or loan or credit
agreement or any other agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award, whether written or oral, to which
Melamed or any other person or entity is a party or by which the
property of Melamed is bound or affected, 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 the Monarch Dental Centers business
(as defined in the Redemption Agreement) taken as a whole, or result in
the creation or imposition of any mortgage, pledge, lien, security
interest or other charge or encumbrance on any of the asset transferred
by Melamed pursuant to this Agreement.
2A.3 Transfer of Title. At the Closing the Company will receive good,
valid and (if applicable) marketable title to the Melamed Partners Dental
Stock, Oral Health Stock and the Trademarks, free and clear of all liens,
encumbrances, charges, restrictions on transfer, stockholder or similar
agreements, equities and other claims of every kind, including the right and
ability to transfer any of the foregoing to its subsidiaries.
ARTICLE 2B. REPRESENTATIONS AND WARRANTIES OF SMITH.
2B.1 Making of Representations and Warranties. As a material
inducement to the Company to enter into this Agreement and to consummate the
transactions contemplated hereby, Smith hereby makes to the Company the
representations and warranties contained in this Section 2B.
2B.2 Authority; Noncontravention. Smith has full capacity to enter
into this Agreement, each agreement, document and instrument to be executed and
delivered by him pursuant to or contemplated by this Agreement and to carry out
the transactions contemplated
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hereby and thereby. The execution, delivery and performance by Smith of this
Agreement and each such other agreement, document and instrument have been duly
authorized by all necessary corporate and partnership action and no other
action on the part of Smith or any other person or entity is required in
connection therewith. This Agreement and each such agreement, document and
instrument executed and delivered by Smith pursuant to this Agreement
constitute valid and binding obligations of Smith enforceable in accordance
with their respective terms.
The execution, delivery and performance by Smith of this Agreement and
each such agreement, document and instrument contemplated by this Agreement to
which he is a party:
(i) do not and will not violate in any material respect
any laws of the United States or any state or other jurisdiction
applicable to Smith or require Smith or any other person or entity 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
(ii) do not and will not result in a breach of,
constitute a default under, accelerate any obligation under, or give
rise to a right of termination of any indenture or loan or credit
agreement or any other agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award, whether written or oral, to which
Smith or any other person or entity is a party or by which the property
of Smith is bound or affected, 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 the Monarch Dental Centers business (as defined
in the Redemption Agreement) taken as a whole, or result in the creation
or imposition of any mortgage, pledge, lien, security interest or other
charge or encumbrance on any of the asset transferred by Smith pursuant
to this Agreement.
2B.3 Transfer of Title. At the Closing the Company will receive good,
valid and (if applicable) marketable title to the Smith Partners Dental Stock,
Oral Health Stock and the Trademarks, free and clear of all liens,
encumbrances, charges, restrictions on transfer, stockholder or similar
agreements, equities and other claims of every kind, including the right and
ability to transfer any of the foregoing to its subsidiaries.
ARTICLE 2C. REPRESENTATIONS AND WARRANTIES OF MELAMED AND SMITH.
2C.1 Investment Representations. Each of Melamed and Smith, in
connection with his acquisition of Common Stock, represents that he is an
"accredited investor" as such term is defined in Rule 501 under the Securities
Act of 1933, as amended (the "Securities Act"). Each of Melamed and Smith
represents to the Company that he is acquiring such Common Stock for his own
account, for investment only and not with a view to, or any present
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<PAGE> 10
intention of, effecting a distribution of such securities or any part thereof
except pursuant to a registration or an available exemption under applicable
law. Each of Melamed and Smith acknowledges that the Common Stock of the
Company 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. Each of Melamed and Smith
represents that he has such knowledge and experience in financial and business
matters that he is 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.
Each of Melamed and Smith acknowledges and agrees that the following
legend shall be typed on each certificate evidencing shares of 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 OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A
STOCKHOLDERS' AGREEMENT DATED AS OF FEBRUARY 5, 1996, INCLUDING THEREIN CERTAIN
RESTRICTIONS ON TRANSFER, AND VOTING REQUIREMENTS. A COMPLETE AND CORRECT COPY
OF THIS AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
ARTICLE 3. COVENANTS OF MELAMED AND SMITH.
3.1 Making of Covenants and Agreements. Each of Melamed and Smith
hereby makes the covenants and agreements as set forth in this Article 3 for
the period from and after the Closing.
3.2 Cooperation. Each of Melamed and Smith shall cooperate with all
reasonable requests of the Company, or any of their representatives and agents
to more effectively consummate the transactions contemplated hereby and the
transactions referred to herein.
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3.3 Consents. Each of Melamed and Smith shall assist 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.
3.4 Notice of Default. Promptly upon the occurrence of, or promptly
upon Melamed or Smith becoming aware of the impending or threatened occurrence
of, any event which would cause or constitute a breach or default, or would
have caused or constituted a breach or default had such event occurred or been
known to Melamed or Smith prior to the date hereof, of any of the
representations, warranties or covenants of Melamed or Smith contained in or
referred to in this Agreement or in any Schedule or Exhibit referred to in this
Agreement, Melamed or Smith, as the case may be shall give detailed written
notice thereof to the Company and use his best efforts to prevent or promptly
remedy the same.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
4.1 Making of Representations and Warranties. As a material
inducement to each of Melamed and Smith to enter into this Agreement and to
consummate the transactions contemplated hereby, the Company hereby makes the
representations and warranties to Melamed and Smith contained in this Section
4.
4.2 Common Stock. Upon consummation of the transactions contemplated
hereby, the shares of Common Stock issued to each of Melamed and Smith pursuant
to Section 1.1(b) shall be duly authorized, validly issued, fully paid and
non-assessable.
4.3 Cooperation. The Company shall cooperate with all reasonable
requests of Melamed and Smith, or any of their representatives and agents, to
more effectively consummate the transactions contemplated hereby and the
transactions referred to herein.
ARTICLE 5. 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 regardless of any investigation and shall not merge in the
performance of any obligation by either party hereto.
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ARTICLE 6. MISCELLANEOUS.
6.1 Fees, Expenses and Certain Taxes.
(a) The Company will pay its fees and expenses in connection
with this Agreement and the transactions contemplated hereby.
(b) Melamed will pay all costs incurred, whether at or
subsequent to the Closing, in connection with the transfer of the Oral Health
Stock and the Melamed Partners Dental Stock to the Company as contemplated by
this Agreement, including without limitation, all transfer taxes and charges
applicable to such transfer. Smith will pay all costs incurred whether at or
subsequent to the Closing, in connection with the transfer of the Smith Partner
Dental Stock and the Smith Mesquite L.P. Interest to the Company as
contemplated by this Agreement, including without limitation, all transfer
taxes and charges applicable to such transfer.
6.2 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.
6.3 Notices. Any notice, request, demand 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 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:
TO THE COMPANY: Monarch Dental Corporation
6757 Arapaho Road, Suite 779
Dallas, TX 75248
Attn: President
Fax: (214) 458-0934
With a copy to: Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Attn: John R. LeClaire, P.C.
Fax: (617) 570-1234
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TO MELAMED: Warren F. Melamed, D.D.S.
c/o Monarch Dental Corporation
6757 Arapaho Road, Suite 779
Dallas, TX 75248
Attn: President
Fax: (214) 458-0934
With a copy to: Haynes and Boone, L.L.P.
3100 Nationsbank Plaza
Dallas, TX 75202
Attn: Kenneth K. Bezozo
Fax: (214) 651-5940
TO SMITH: Roy D. Smith, III, D.D.S.
3501 Towne Crossing Boulevard
Suite 180
Mesquite, TX 75150
Fax: (214) 279-3714
With a copy to: Flint & Harden, P.C.
14785 Preston Road
Suite 360
Dallas, TX 75240
Attn: George B. Flint
Fax: (214) 386-0646
Any notice given hereunder may be given on behalf of any party by his counsel
or other authorized representatives.
6.4 Entire Agreement. This Agreement (together with the Redemption
Agreement in the case of Melamed), including the Schedules 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 letter dated November 2, 1995.
6.5 Assignability; Binding Effect. This Agreement and any rights
hereunder shall be assignable by the Company to one or more corporations or
partnerships controlling, controlled by or under common control with the
Company, directly or indirectly, provided the Company shall remain liable for
its obligations hereunder in connection with any such assignment, or to any
successor or acquiror of the Company or its affiliates provided such entity
assumes or agrees to be bound by the Company's obligations hereunder, or to any
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 financing), upon written
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notice to each of Melamed and Smith. This Agreement may not be assigned by
Melamed or Smith without the prior written consent of the Company. 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 each of
Melamed and Smith in the event of his death).
6.6 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.
6.7 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.
6.8 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.
6.9 Consent to Jurisdiction; Certain Remedies. Solely for the
purpose of allowing a party to enforce its indemnification and other rights
hereunder, each of the parties hereby consents to personal jurisdiction,
service of process and venue in the federal or state courts of Texas or in the
court in which any claim for which indemnification may be sought hereunder is
brought against an indemnified party. 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 the remedy of specific performance, and
each of the parties hereto expressly waives the defense that a remedy in
damages will be adequate.
6.10 Certain Definitions. For purposes of this Agreement, the term:
(a) "affiliate" of a person shall (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 an
entity, any officer, director, stockholder, partner or investor in such entity
or of or in any affiliate of such entity; and (iii) with respect to a person or
entity, any person or entity which directly or indirectly controls, is
controlled by, or is under common control with such person or entity.
(b) "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;
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(c) "person" means an individual, corporation, partnership,
association, trust or any unincorporated organization; and
(d) "subsidiary" of a person means any corporation more than
50 percent of whose outstanding voting securities, or any partnership, joint
venture or other entity more than 50 percent of whose total equity interest, is
directly or indirectly owned by such person.
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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.
THE COMPANY:
ATTEST MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
- ------------------------------------ ---------------------------------
Secretary Name: Warren F. Melamed, D.D.S.
[Corporate Seal] Title: President
SPOUSE'S CONSENT MELAMED:
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
/s/ JANET L. MELAMED /s/ WARREN F. MELAMED
- ------------------------------------ ------------------------------------
Janet L. Melamed Warren F. Melamed, D.D.S.
SPOUSE'S CONSENT SMITH:
I acknowledge that I have read the
foregoing Agreement and that I
understand the contents thereof.
/s/ JOANIE M. SMITH /s/ ROY D. SMITH III DDS
- ------------------------------------ ------------------------------------
Joanie M. Smith Roy D. Smith, III, D.D.S.
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
(Dr. Melamed)
Employment Agreement, dated the 5th day of February, 1996 by and between
Dr. Warren F. Melamed (the "Employee") and Monarch Dental Corporation, a
Delaware corporation ("Monarch"), and Monarch Dental Associates, L.P., a Texas
limited partnership (the "Company").
W I T N E S S E T H
WHEREAS, the Employee is the founder and the president of Monarch Dental
Associates ("Monarch Dental"); and
WHEREAS, reference is made to that certain Stock Purchase Agreement (the
"Stock Purchase Agreement") and those certain Stock Redemption and Asset
Contribution Agreements (the "Monarch Agreements"), each dated as of February
5, 1996 pursuant to which (i) Monarch will issue shares of Convertible
Participating Preferred Stock in consideration of capital contributions
aggregating $10 million, and (ii) Monarch will redeem certain of its shares
held by the Employee and the Employee and a partner will contribute certain
assets to Monarch; and
WHEREAS, concurrently with the above-described transactions, Monarch
will acquire the assets of the MacGregor Dental Centers business; and
WHEREAS, the parties hereto desire to assure that the Employee's
knowledge and experience will continue to be available after the above-
described transactions.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties hereto agree as follows:
1. Employment. Subject to the provisions of Section 6, the Company
and Monarch hereby employ the Employee and the Employee accepts such employment
upon the terms and conditions hereinafter set forth.
2. Term of Employment. Subject to the provisions of Section 6, the
term of the Employee's employment pursuant to this Agreement shall commence on
and as of the date hereof (the "Effective Date") and shall terminate on the
fourth anniversary of the Effective Date; provided, however, that this
Agreement shall be extended automatically for successive one-year periods
ending on the relevant anniversary of Effective Date unless either party gives
the other notice not less than 180 days prior to the scheduled termination date
(i.e., the fourth anniversary of the Effective Date or any later anniversary)
of his or its determination not to extend this Agreement, whereupon it shall
terminate as of such anniversary date. The period during which the Employee
serves as an employee of the Company in accordance with and
<PAGE> 2
subject to the provisions of this Agreement is referred to in this Agreement as
the "Term of Employment."
3. Duties.
During the Term of Employment, the Employee (a) shall serve as an
employee of the Company and Monarch with the title and position of Chairman,
President and Chief Executive Officer of each Company, reporting to the Board
of Directors of Monarch, (b) shall have general supervisory responsibility in
such capacity over all aspects of the business of Monarch and its subsidiaries,
including the Company, as well as such other responsibilities as may be
specified from time to time by the Board of Directors of Monarch, consistent
with the Employee's position and general area of experience and skills,
provided that, in all cases the Employee shall be subject to the oversight and
supervision of the Board of Directors of Monarch in the performance of his
duties and provided further the Employee's duties and responsibilities shall be
performed principally, and the Employee shall be based, at the Company's
offices in Dallas, Texas, subject to reasonable travel requirements for
business purposes consistent with the travel requirements of executive officers
of Monarch and the Company generally, (c) upon the request of the Board of
Directors of Monarch, shall serve as an officer and/or director of any of
Monarch's subsidiaries, and (d) shall render all services reasonably incident
to the foregoing. The Employee hereby accepts such employment, agrees to serve
the Company and Monarch in the capacities indicated, and agrees to use his best
efforts in, and shall devote his full working time, attention, skill and
energies to, the advancement of the interests of the Company, Monarch and each
of their affiliates and the performance of his duties and responsibilities
hereunder, provided that the foregoing shall not be deemed to preclude service
on civic or professional boards to the extent not inconsistent with that
certain Non-Competition Agreement dated as of February 5, 1996 executed by the
Employee concurrently herewith and in connection with the Monarch Agreements.
During the Term of Employment, the Employee shall, as the
Chairman, President and Chief Executive Officer of Monarch, make
recommendations from time to time to the Board of Directors of Monarch (or the
Option or Compensation Committee thereof) with respect to grants of options
and/or restricted stock to employees and officers of the Company and its
subsidiaries (including himself) and dental providers involved with the
business of the Company and its subsidiaries, provided that the Employee shall
consider the best interests of the Company, consistent with his fiduciary
obligations, in making such recommendations. The parties agree that any grant
of any such option or restricted stock by the Company in the absence of such
recommendation by the Employee shall constitute a default under this Agreement
for purposes of Section 6(f) hereof. It is understood that the Employee's role
in the granting of options and restricted stock shall cease to be a matter
governed by this Agreement, and the provisions of the preceding sentence shall
terminate, upon completion of the initial public offering of Monarch or any
successor to Monarch.
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<PAGE> 3
4. Salary and Bonus.
(a) During the Term of Employment, the Company shall pay the
Employee a salary at the annual rate of $300,000 per annum (the "Base Salary").
Such salary shall be subject to withholding under applicable law, shall be pro
rated for partial years and shall be payable in periodic installments not less
frequently than monthly in accordance with the Company's and Monarch's usual
practice for executive officers of the Company and Monarch as in effect from
time to time.
(b) The Employee shall not receive a bonus in respect of the
year ending December 31, 1996. For each calendar year or portion thereof
thereafter during the Term of Employment (including any extensions thereof),
the Employee shall be eligible to receive a bonus if and to the extent
determined by and in the discretion of the Compensation Committee of the Board
of Directors of Monarch, or the Board of Directors of Monarch if a Compensation
Committee is not then appointed, in its discretion, based upon its evaluation
of the Employee's performance during such year or portion thereof.
5. Benefits.
(a) During the Term of Employment, the Employee shall be
entitled to participate in any and all medical, pension, dental and life
insurance plans and disability income plans, retirement arrangements and other
employment benefits as in effect from time to time for executive officers of
Monarch and the Company generally. Such participation shall be subject to (i)
the terms of the applicable plan documents (including, as applicable,
provisions granting discretion to the Board of Directors of Monarch and the
general partner of the Company or any administrative or other committee
provided for therein or contemplated thereby) and (ii) generally applicable
policies of Monarch and the Company. In the event the Company elects to
maintain term life insurance with respect to the Employee, upon termination of
the Employee's employment for any reason other than death the Employee shall
have the right, to the extent permitted under the relevant policy, to assume
the Employer's obligations thereunder.
(b) The Company shall promptly reimburse the Employee for all
reasonable business expenses incurred by the Employee during the Term of
Employment in accordance with Monarch's and the Company's practices for
executive officers of Monarch and the Company with a similar level of
responsibility, as in effect from time to time.
(c) During the Term of Employment, the Employee shall receive
paid vacation annually in accordance with the Company's and Monarch's practices
for executive officers, as in effect from time to time, but in any event not
less than four (4) weeks per calendar year.
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<PAGE> 4
(d) Car Allowance. During the Term of Employment, the Company
shall provide the Employee with a car allowance of $1,000 per month and shall
reimburse the Employee for all gas, oil, maintenance and insurance for the
Employee's automobile.
(e) Compliance with the provisions of this Section 5 shall in
no way create or be deemed to create any obligation, express or implied, on the
part of the Company, Monarch or any of their affiliates with respect to the
continuation of any particular benefit or other plan or arrangement maintained
by them or their subsidiaries as of or prior to the date hereof or the creation
and maintenance of any particular benefit or other plan or arrangement at any
time after the date hereof.
6. Termination of Employment of the Employee. Prior to the
expiration of the Term of Employment as provided in Section 2 hereof, this
Agreement may or shall (as applicable) be terminated as follows:
(a) At any time by the mutual consent of the Employee and
Monarch and the Company.
(b) At any time for "cause" by Monarch and the Company upon
written notice to the Employee. For purposes of this Agreement, a
termination shall be for "cause" if:
(i) the Employee shall commit an act of fraud,
embezzlement, misappropriation or breach of fiduciary duty
against Monarch or any of its subsidiaries (including the Company
and also including for purposes of this Section 6, Warren F.
Melamed, D.D.S., P.C.), or shall be convicted by a court of
competent jurisdiction of, or shall plead guilty or nolo
contendere to, any felony or any crime involving moral turpitude;
or
(ii) the Employee shall commit a breach of any of the
covenants, terms or provisions hereof, which breach has not been
remedied within thirty (30) days after delivery to the Employee
by the Boards of Directors of Monarch and the Company's general
partner of written notice of the facts constituting the breach
(provided that if such breach cannot reasonably be cured within
such thirty (30) day period, the Employee shall be granted such
longer period as may be necessary, so long as the Employee
diligently pursues such cure); or
(iii) the Employee shall commit a breach of any of the
covenants, terms or provisions of that certain Non-Competition
Agreement of even date herewith executed by the Employee and such
other parties, which breach has not been remedied within thirty
(30) days after delivery to the Employee by Monarch and the
Company of written notice of the facts constituting the breach;
or
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<PAGE> 5
(iv) the Employee shall have failed to comply with
written instructions from Monarch's Board of Directors, which are
reasonable and consistent with Section 3, or shall have
substantially failed to perform the Employee's duties hereunder,
after written notice from Monarch and the Company and after a
fair hearing at which the Employee is allowed to present evidence
or testimony regarding the reasons for the Employee's actions and
other evidence bearing on the situation.
Upon termination for cause as provided in this Section 6(b), (A) all
obligations of Monarch and the Company under this Agreement shall
thereupon immediately terminate other than any obligation of the Company
with respect to earned but unpaid Base Salary and benefits contemplated
hereby to the extent then accrued or vested, it being understood that
upon any such termination (1) the Employee shall not be entitled to
receive any bonus or portion thereof from the Company, Monarch or any of
their affiliates to the extent granted in the discretion of the Company
or Monarch but not then paid with respect to any period during or after
the Term of Employment or (2) any continuation of benefits except as may
be required by law, and (B) Monarch and the Company shall have any and
all rights and remedies under this Agreement and applicable law.
(c) Upon the death or upon the permanent disability (as
defined below) of the Employee continuing for a period in excess of one
hundred eighty (180) consecutive days. Upon any such termination of the
Employee's employment as provided in this Section 6(c), all obligations
of Monarch and the Company under this Agreement shall thereupon
immediately terminate other than any obligation of the Company with
respect to earned but unpaid Base Salary and benefits contemplated
hereby to the extent accrued or vested through the date of termination.
As used herein, the terms "permanent disability" or "permanently
disabled" shall mean the inability of the Employee, by reason of injury,
illness or other similar cause, to perform a major part of his duties
and responsibilities in connection with the conduct of the business and
affairs of Monarch and the Company, as determined reasonably and in good
faith by an independent physician reasonably acceptable to the Employee
and Monarch and the Company.
(d) At any time by the Employee upon forty-five (45) days'
prior written notice to Monarch and the Company. Upon termination by
the Employee as provided in this Section 6(d), all obligations of the
Company and Monarch under this Agreement thereupon immediately shall
terminate other than any obligation of the Company with respect to
earned by unpaid Base Salary and benefits contemplated hereby to the
extent accrued or vested through the date of termination, it being
understood that in the event of such a termination the Employee shall
not be entitled to receive any bonus not then paid from the Company,
Monarch or any of their affiliates not then paid with respect to any
period during or after the Term of Employment.
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<PAGE> 6
(e) At any time without "cause" (as defined in Section 6(b))
by Monarch and the Company upon written notice to the Employee. In the
event of termination of the Employee by the Company pursuant to this
Section 6(e), the Company shall (i) continue to make Base Salary
payments to the Employee from the date of termination through (a) the
later of the fourth anniversary of the Effective Date or the first
anniversary of the date on which such a termination occurs, if such
termination occurs prior to February 5, 2000, or (b) the first
anniversary of the date in which such termination occurs, if such
termination occurs on or after February 5, 2000 during any extension
year of the Term of Employment hereunder, in any such case in the manner
contemplated by Section 4(a), and (ii) continue the benefit arrangements
applicable to the Employee for as long as Base Salary payments continue,
with such amounts agreed by the parties hereto to be in full
satisfaction and compromise of any claims arising out of any termination
of the Employee's employment pursuant to this Section 6(e) or Section
6(f). The Employee shall not be under any obligation to mitigate the
Company's severance obligation under this Section 6(e) by obtaining
other employment.
(f) The Employee shall have the right to terminate his
employment hereunder in the event of a material default by Monarch or
the Company in the performance of its obligations hereunder, including,
among others, any material change in the Employee's title or duties
under Section 3, after the Employee has given written notice to the
Monarch and the Company specifying such default by Monarch or the
Company and giving Monarch or the Company, as applicable, a reasonable
time, not less than 30 days, to conform its performance to its
obligations hereunder. The rights and obligations of the parties shall
be as set forth in Section 6(e) in the event of any such termination.
The Employee shall not be under any obligation to mitigate the Company's
severance obligation under this Section 6(f) by obtaining other
employment.
(g) In the event either party gives a notice of non-renewal to
be effective as of the fourth anniversary of the Effective Date or any
subsequent anniversary thereof, then all obligations of the parties
hereunder shall terminate as of the end of the Term of Employment except
as contemplated by Sections 6(h) and 7 hereof.
(h) Notwithstanding termination of this Agreement as provided
in this Section 6 or any other termination of the Employee's employment
with Monarch or the Company, the Employee's obligations under Section 7
hereof and in the Employee's Non-Competition Agreement of even date
herewith shall survive any termination of the Employee's employment with
Monarch or the Company at any time and for any reason.
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<PAGE> 7
7. Confidentiality; Proprietary Rights.
(a) In the course of performing services hereunder, on behalf
of the Company, Monarch and their affiliates and predecessors, and otherwise,
the Employee has had, and it is anticipated that the Employee will from time to
time have, access to confidential records, data, customer lists, trade secrets
and other confidential information owned or used in the course of business by
the Company, Monarch and their affiliates and predecessors (the "Confidential
Information"). The Employee agrees (a) to hold the Confidential Information in
strict confidence, (b) not to disclose the Confidential Information to any
person (other than in the regular business of the Company, Monarch or any of
their affiliates), and (c) not to use, directly or indirectly, any of the
Confidential Information for any competitive or commercial purpose other than
on behalf of his Company, Monarch and their affiliates; provided, however, that
the limitations set forth above shall not apply to any Confidential Information
which (i) is then generally known to the public; (ii) became or becomes
generally known to the public through no fault of the Employee; or (iii) is
disclosed in accordance with an order of a court of competent jurisdiction or
applicable law. Upon the termination of the Employee's employment with the
Monarch and the Company for any reason, all Confidential Information
(including, without limitation, all data, memoranda, customer lists, notes,
programs and other papers and items, and reproductions thereof relating to the
foregoing matters), in the Employee's possession or control, shall be returned
to Monarch, the Company or the applicable affiliate and remain in its or their
possession.
(b) The Employee recognizes that the Company, Monarch and
their affiliates possess a proprietary interest in all of the information
described in Section 7(a) and have the exclusive right and privilege to use,
protect by copyright, patent or trademark, or otherwise exploit the processes,
ideas and concepts described therein to the exclusion of the Employee, except
as otherwise agreed between the Company, Monarch and the Employee in writing.
The Employee expressly agrees that any products, inventions, discoveries or
improvements made by the Employee or his agents or affiliates in the course of
the Employee's employment, during the Term of Employment, including any of the
foregoing which is based on or arising out of the information described in
Section 7(a), shall be the property of and inure to the exclusive benefit of
the Company or Monarch as applicable. The Employee further agrees that any and
all products, inventions, discoveries or improvements developed by the Employee
(whether or not able to be protected by copyright, patent or trademark) during
the course of his employment, or involving the use of the time, materials or
other resources of the Company, Monarch or any of their affiliates, shall be
promptly disclosed to the Company and Monarch and shall become the exclusive
property of the Company or Monarch, as applicable, and the Employee shall
execute and deliver any and all documents necessary or appropriate to implement
the foregoing.
(c) The Employee agrees, while he is employed by the Company
or Monarch, to offer or otherwise make known or available to them, as directed
by the Board of Directors of Monarch and without additional compensation or
consideration, any business prospects, contracts or other business
opportunities that he may discover, find, develop or
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<PAGE> 8
otherwise have available to him in any field in which the Company, Monarch or
their affiliates are engaged, and further agrees that any such prospects,
contracts or other business opportunities shall be the property of the Company
or Monarch as applicable.
(d) The Employee acknowledges that the Non-Competition
Agreement executed and delivered concurrently herewith is an integral part of
his employment arrangements with the Company and Monarch.
8. Specific Performance; Severability. It is specifically
understood and agreed that any breach of the provisions of Section 7 hereof by
the Employee is likely to result in irreparable injury to the Company, Monarch
and/or its or their affiliates, 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, Monarch and the Company shall be entitled to enforce the specific
performance of this Agreement by the Employee and to seek both temporary and
permanent injunctive relief (to the extent permitted by law), without the
necessity of posting a bond or proving actual damages. In case any of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, any such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement, but this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had been limited or modified (consistent with its
general intent) to the extent necessary to make it valid, legal and
enforceable, or if it shall not be possible to so limit or modify such invalid,
illegal or unenforceable provision or part of a provision, this Agreement shall
be construed as if such invalid, illegal or unenforceable provision or part of
a provision had never been contained in this Agreement.
9. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
faxed (with transmission acknowledgment received), delivered personally or
mailed by certified or registered mail (return receipt requested) as follows:
To Monarch or the Company:
Monarch Dental Corporation
Monarch Dental Associates, L.P.
6757 Arapaho Road, Suite 779
Dallas, TX 75248
Fax No.: (214) 458-0934
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<PAGE> 9
With a copy to:
John R. LeClaire, P.C.
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Fax No.: (617) 523-1231
To the Employee:
Dr. Warren F. Melamed
c/o Monarch Dental Corporation
6757 Arapaho, Suite 779
Dallas, TX 75248
Fax No.: (214) 458-0934
With a copy to:
Kenneth K. Bezozo, Esq.
Haynes and Boone, L.L.P.
3100 Nationsbank Plaza
Dallas, TX 75202
Fax No.: (214) 651-5940
or to such other address or fax number of which any party may notify the other
parties as provided above. Notices shall be effective as of the date of such
delivery, mailing or fax.
10. Miscellaneous. This Agreement shall be governed by and construed
under the laws of the State of Texas, and shall not be amended, modified or
discharged in whole or in part except by an agreement in writing signed by both
of the parties hereto. The failure of either 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 Monarch and the Company by way of merger, consolidation or sale
and may not be otherwise assigned by Monarch and the Company or the Employee.
This Agreement supersedes all prior understandings and agreements between the
parties relating to the subject matter hereof.
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<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date first set forth above.
MONARCH DENTAL ASSOCIATES, L.P.
By: Oral Health Concepts, Inc.,
General Partner
By: /s/ WARREN F. MELAMED
----------------------------------
Name: Warren F. Melamed, D.D.S.
Title: President
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
----------------------------------
Name: Warren F. Melamed, D.D.S.
Title: President
/s/ WARREN F. MELAMED
---------------------------------------
Dr. Warren F. Melamed
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<PAGE> 1
EXHIBIT 10.10
NON-COMPETITION AGREEMENT
(Dr. Melamed)
NON-COMPETITION AGREEMENT dated this 5th day of February, 1996 by and
between Monarch Dental Corporation, a Delaware corporation (the "Company"), and
Dr. Warren F. Melamed ("Dr. Melamed"). Reference is made to those Stock
Redemption and Asset Contribution Agreements (the "Purchase Agreements") dated
as of February 5, 1996, pursuant to which the Company has agreed to redeem
stock held by Dr. Melamed and to acquire certain assets held by him in
consideration of substantial cash payments and the issuance of shares of Common
Stock of the Company, subject to the terms and conditions set forth in the
Purchase Agreements. Capitalized terms used in this Agreement and not defined
herein shall have the meanings ascribed to them in the Purchase Agreements.
WITNESSETH
WHEREAS, Dr. Melamed beneficially owned substantially all of the
outstanding equity interest in the entities that have heretofore conducted the
Monarch Dental Associates business and has served as President and Chief
Executive Officer of such entities;
WHEREAS, as a material inducement to the Company to enter into the
Purchase Agreements and in consideration of the Company's covenants and
agreements contained in the Purchase Agreements, including the payment of the
substantial consideration specified therein, and of the payment made pursuant
to Section 1(b) hereof, and in further consideration of the covenants and
agreements set forth herein, and in reflection of the fact that investors are
making substantial investments in the Company concurrently herewith in partial
reliance on this Agreement, Dr. Melamed has agreed to execute and deliver this
Agreement; and
WHEREAS, the execution and delivery by Dr. Melamed of this Agreement is
a condition to the Company's willingness to consummate the transactions
specified in the Purchase Agreements.
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 Purchase Agreements, as a material inducement to and a condition precedent
of the Company's payment of substantial consideration under the Purchase
Agreements, in consideration of the payment of the consideration to be paid by
the Company pursuant to Section 1(b) below and the other covenants set forth
herein, and to preserve the goodwill associated with the Monarch Dental
Associates business, 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 which is
five (5) years after
<PAGE> 2
the date hereof, 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 in any activity which is, or participate or invest
in, 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 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")) during any period in
which Dr. Melamed serves as an officer or employee of the Company or any of its
subsidiaries (but not during any consulting period as provided below), 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 the shares of which are publicly traded if such investment
constitutes less than five (5) percent 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 a subsidiary of the Company of even date, 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 (5) percent.
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<PAGE> 3
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 Payment. In consideration of the
execution and delivery by Dr. Melamed of this Agreement, on the date hereof the
Company shall make a cash payment to Dr. Melamed in the amount of $10,000.
(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 fifth anniversary of the date hereof. Such engagement shall
continue until the fifth 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 Purchase Agreements, (b) are given as an integral and
essential part of the transactions contemplated by the Purchase Agreements and
(c) but for the covenants of Dr. Melamed contained in this Agreement, the
Company would not have entered into the Purchase Agreements or consummated the
transactions contemplated thereby. Dr. Melamed has independently consulted
with his counsel and has been advised in
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<PAGE> 4
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 (including, without limitation, the
limited partnership which employs Dr. Melamed as an intended beneficiary
hereof) 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
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:
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<PAGE> 5
To the Company: With a copy to:
Monarch Dental Corporation Goodwin, Procter & Hoar
6757 Arapaho Road, Suite 779 Exchange Place
Dallas, TX 75248 Boston, MA 02109
Attn: John R. LeClaire, P.C.
To Dr. Melamed: With a copy to:
Monarch Dental Corporation Haynes and Boone, L.L.P.
6757 Arapaho Road, Suite 779 3100 NationsBank Plaza
Dallas, TX 75248 Dallas, TX 75202
Attn: Kenneth K. Bezozo, Esq.
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 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 Purchase Agreements and the Employment Agreement
executed by Dr. Melamed as of the date hereof).
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<PAGE> 6
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/ WARREN F. MELAMED
----------------------------------------
Dr. Warren F. Melamed
6
<PAGE> 1
EXHIBIT 10.17
NON-COMPETITION AGREEMENT
(Dr. Shears)
NON-COMPETITION AGREEMENT dated this 5th day of February, 1996 by and
between Monarch Dental Corporation, a Delaware corporation (the "Company"), and
Dr. Charles G. Shears ("Dr. Shears") and Shears Vanguard Inc., Shears Vanguard
SMI Inc., Shears Vanguard, Ltd., (the "Partnership"), Shears Vanguard General,
Inc. and MDC Dental, Inc. (collectively, the "Seller Entities" and individually
a "Seller Entity"). Reference is made to that certain Asset Contribution
Agreement (the "Purchase Agreement") effective as of January 31, 1996, by and
among the Company, Dr. Shears and the Seller Entities relating to the
acquisition by the Company from the Partnership of the assets and certain
liabilities comprising the MacGregor Dental Centers business in consideration
of a substantial cash payment and the issuance of 1,400,000 shares of Common
Stock of the Company to the Partnership, in each case subject to the terms and
conditions set forth in the Purchase Agreement. Capitalized terms used in this
Agreement and not defined herein shall have the meanings ascribed to them in
the Purchase Agreement.
WITNESSETH
WHEREAS, Dr. Shears beneficially owns a substantial portion of the
outstanding equity interest in the entities that have heretofore conducted the
MacGregor Dental Centers business and has served as President and Chief
Executive Officer of such entities, having founded such business many years
ago;
WHEREAS, as a material inducement to the Company to enter into the
Purchase Agreement and in consideration of the Company's covenants and
agreements contained in the Purchase Agreement, including the payment of the
substantial consideration specified therein for the assets conveyed thereunder,
and of the payment made pursuant to Section 1(b) hereof, and in further
consideration of the covenants and agreements set forth herein, Dr. Shears and
the Seller Entities have agreed to execute and deliver this Agreement; and
WHEREAS, the execution and delivery by Dr. Shears and the Seller
Entities of this Agreement is a condition to the Company's willingness to
consummate the transactions specified in the Purchase 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. Shears or any Seller Entity 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 Purchase Agreement, as a material inducement to and
a condition precedent of the Company's payment of substantial consideration
under the Purchase Agreement for the assets to be acquired by it thereunder, in
consideration of the payment of the consideration to be paid by the Company
pursuant to Section 1(b) below and the other covenants set forth herein, and to
preserve the goodwill
<PAGE> 2
associated with the MacGregor Dental Centers business, Dr. Shears and each
Seller Entity hereby agree to the following restrictions on his and their
activities:
(a) Non-Competition Agreement. Dr. Shears and each Seller
Entity hereby agree that during the period commencing on the date hereof and
ending on the date which is three (3) years after the date hereof, he and they
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 in any activity which is, or participate or invest in, 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 Dr. Shears, 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
service in connection with the business of the Company and its subsidiaries
(herein "Dental Providers")) during any period in which Dr. Shears serves as an
officer or employee of the Company or any of its subsidiaries (but not during
any consulting period as provided below), 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 itself 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 itself 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 itself 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) any business
activity consisting solely of the factoring of receivables arising from the
provision of dental services by dentists or professional corporations other
than those who or which provide services through facilities of the Company and
its affiliates, and the provision of dental services by Dr. Shears as a sole
practitioner, shall be exempt from the provisions of this Agreement, (ii) Dr.
Shears and the Seller Entities may engage on the business of underwriting
dental insurance, the provision of utilization review and case management
services and the provision of claims management or third party administrator
services provided that the relevant entity or entities involved in such
business do not offer (directly or through one or more associated professional
corporations or other licensed professionals) dental health care services to
patients (including without
2
<PAGE> 3
limitation any so-called "staff model" DMO), and (iii) Dr. Shears and the
Seller Entities may make passive investments in any enterprise the shares of
which are publicly traded if such investment constitutes less than five (5)
percent of the equity of such enterprise.
Neither Dr. Shears nor any Seller Entity nor any business entity
controlled by him or them 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 the
MacGregor Dental Centers business or restrain or restrict Dr. Shears from
performing his obligations under his Employment Agreement with the Company and
a subsidiary of the Company of even date, and as of the date of this Agreement
neither Dr. Shears nor any Seller Entity has any business interests in the
health care industry whatsoever other than his interest in the Company.
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 interest 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 Payment. In consideration of the
execution and delivery by Dr. Shears and the Seller Entities of this Agreement,
on the date hereof the Company shall make a cash payment to Dr. Shears in the
amount of $10,000.
(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. Shears 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. Shears serves as an officer or employee of
the Company or any of its subsidiaries, conducts business, provided that
the Company shall notify Dr. Shears 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. Shears, on an independent contractor
basis and not as an employee, as a consultant upon any termination of his
employment for any reason other than death or disability prior to the third
anniversary of the date hereof. Such engagement shall continue until the third
anniversary of the date hereof and Dr. Shears shall be paid $500 per month
3
<PAGE> 4
during such period, subject to withholding (if applicable), by the Company or a
subsidiary of the Company for his consulting services. Dr. Shears shall not be
required to devote more than one (1) hour per week to the performance of
consulting services or 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 Purchase Agreement, (b) are given as an integral and
essential part of the transactions contemplated by the Purchase Agreement and
(c) but for the covenants of Dr. Shears and the Seller Entities contained in
this Agreement, the Company would not have entered into the Purchase Agreement
or consummated the transactions contemplated thereby. Dr. Shears and the
Seller Entities have independently consulted with their counsel and have 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. Shears or any Seller Entity 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 (including, without limitation, the
limited partnership which employs Dr. Shears as an intended beneficiary hereof)
shall be entitled to enforce the specific performance of this Agreement by Dr.
Shears or the relevant Seller Entity through both temporary and permanent
injunctive relief without the necessity of proving actual damages or the
posting of any bond, 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 Dr. Shears or any Seller Entity 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
4
<PAGE> 5
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: With a copy to:
Monarch Dental Corporation Haynes and Boone, L.L.P.
6757 Arapaho Road, Suite 779 3100 NationsBank Plaza
Dallas, TX 75248 Dallas, TX 75202
Attn: President Attn: Kenneth K. Bezozo, Esq.
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
Attn: John R. LeClaire, P.C.
To Dr. Shears: With a copy to:
MacGregor Dental Centers Thompson & Knight, P.C.
1325 LaConcha Lane, Suite 200 1700 Pacific Avenue, Suite 3300
Houston, TX 77054 Dallas, TX 75201-4693
Attn: Steven K. Cochran, Esq.
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. Shears. 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
5
<PAGE> 6
may not be assigned by Dr. Shears or any Seller Entity. This Agreement
supersedes all prior understandings and agreements between the parties relating
to the subject matter hereof (without limitation of the Purchase Agreement and
the Employment Agreement executed by Dr. Shears and the Seller Entities as of
the date hereof).
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed or caused this Agreement
to be executed under seal.
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
------------------------------------
Name: Warren F. Melamed, D.D.S.
Title: President
/s/ CHARLES G. SHEARS
---------------------------------------
Dr. Charles G. Shears
SHEARS VANGUARD, LTD.
ATTEST By: Shears Vanguard General, Inc.,
its General Partner
By: /s/ CHARLES G. SHEARS
- ----------------------------------- --------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
ATTEST SHEARS VANGUARD INC.
By: /s/ CHARLES G. SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
ATTEST SHEARS VANGUARD SMI INC.
By: /s/ SOPHIA SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Sophia Shears
[Seal] Title: President
ATTEST SHEARS VANGUARD GENERAL, INC.
By: /s/ CHARLES G. SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
<PAGE> 8
ATTEST MDC DENTAL, INC.
By: /s/ CHARLES G. SHEARS
- ----------------------------------- ------------------------------------
Secretary Name: Charles G. Shears
[Seal] Title: President
<PAGE> 1
EXHIBIT 10.18
RESTRICTED STOCK AGREEMENT
UNDER THE MONARCH DENTAL CORPORATION
1996 STOCK OPTION AND INCENTIVE PLAN
NAME OF GRANTEE: Dr. Warren F. Melamed
CLASS OF SHARES: Common Stock
NO. OF SHARES: 300,000 GRANT DATE: February 6, 1996
PER SHARE PURCHASE PRICE: $0.106
Pursuant to the Monarch Dental Corporation 1996 Stock Option and
Incentive Plan (the "Plan"), Monarch Dental Corporation, a Delaware corporation
(the "Company"), hereby grants, sells and issues to the person named above (the
"Grantee"), who is an officer or full-time employee of the Company or any of
the Subsidiaries (as defined below) of the Company, the number of shares of
Common Stock, par value $0.01 per share ("Common Stock"), of the Company
indicated above (subject to the provisions below, the "Shares"), for the per
share purchase price specified above, subject to the terms and conditions set
forth herein and in the Plan. The Grantee agrees to the provisions set forth
herein and acknowledges that each such provision is a material condition of the
Company's agreement to issue and sell the Shares to him. The Company hereby
acknowledges receipt of $31,800 in full payment for the Shares. All references
to share prices and amounts herein shall be equitably adjusted to reflect stock
splits, stock dividends, recapitalizations and similar changes affecting the
capital stock of the Company, and any shares of capital stock of the Company
received on or in respect of Shares in connection with any such event
(including any shares of capital stock or any right, option or warrant to
receive the same or any security convertible into or exchangeable for any such
shares) shall be subject to this Agreement on the same basis and extent at the
relevant time as the Shares in respect of which they were issued, and shall be
deemed Shares as if and to the same extent they were issued at the date hereof.
Section 1. Definitions. For the purposes of this Agreement, the
following terms shall have the following respective meanings:
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Bankruptcy" means (i) the filing of a voluntary petition under
any bankruptcy or insolvency law, or a petition for the appointment of a
receiver or the making of an assignment for the benefit of creditors, with
respect to the Grantee or any Permitted Transferee, or (ii) the Grantee or any
Permitted Transferee being subjected involuntarily to such a petition or
assignment or to an attachment or other legal or equitable interest with
respect to his assets, which involuntary petition or assignment or attachment
is not discharged
<PAGE> 2
within 60 days after its date, and (iii) the Grantee or any Permitted
Transferee being subject to a transfer of Restricted Shares by operation of
law, except by reason of death.
"Common Stock" shall mean the Company's Common Stock, par value
$.01 per share.
"Permitted Transferees" shall have the meaning specified in
Section 2.1 of that certain Stockholders' Agreement dated as of February 5,
1996 to which the Grantee, the Company and others are parties (the
"Stockholders' Agreement").
"Restricted Shares" shall initially mean all of the Shares being
purchased by the Grantee on the date hereof, provided that on each anniversary
of the date hereof, prior to the date of any Termination Event, the incremental
number of shares indicated below shall cease to be Restricted Shares and shall
become Vested Shares.
<TABLE>
<CAPTION>
Incremental Total Restricted/
Vesting Date Vested Shares* Vested Shares*
------------ ------------- -----------------
<S> <C> <C>
February 6, 1996 0 300,000/0
February 6, 1997 75,000 225,000/75,000
February 6, 1998 75,000 150,000/150,000
February 6, 1999 75,000 75,000/225,00
February 6, 2000 75,000 0/300,000
</TABLE>
"Shares" shall mean the number of shares of Common Stock being
purchased by the Grantee on the date hereof and any additional shares of Common
Stock or other securities received as a dividend on, or otherwise on account
of, the Shares, as contemplated by the first paragraph of this Agreement.
"Subsidiary" shall mean any corporation or limited partnership of
which stock or other equity interests possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock or other equity
interests is owned directly or indirectly by the Company.
"Termination Event" shall mean the termination of the Grantee's
employment with the Company and its subsidiaries pursuant to or under the
circumstances contemplated by Section 6(b) or 6(d) of the Employment Agreement
between the Company, its subsidiary and the Grantee dated as of February 5,
1996.
"Vested Shares" shall mean all Shares which are not Restricted
Shares.
- ---------------
* Subject to stock splits, stock dividends, recapitalizations
and similar changes, as provided above.
2
<PAGE> 3
Section 2. Purchase and Sale of Shares; Investment Representations.
2.1. Purchase and Sale. On the date hereof, the Company hereby sells
to the Grantee, and the Grantee hereby purchases from the Company, the number
of Shares set forth above for the purchase price per share set forth above.
2.2. Investment Representations. In connection with the purchase and
sale of the Shares contemplated by Section 2.1 above, the Grantee hereby
represents and warrants to the Company as follows:
(a) The Grantee is purchasing the Shares for his own account
for investment only, and not for resale or with a view to the distribution
thereof.
(b) The Grantee has had such an opportunity as he has deemed
adequate to obtain from the Company such information as is necessary to permit
him to evaluate the merits and risks of his investment in the Company and has
consulted with his own advisers with respect to his investment in the Company.
(c) The Grantee has sufficient experience in business,
financial and investment matters to be able to evaluate the risks involved in
the purchase of the Shares and to make an informed investment decision with
respect to such purchase.
(d) The Grantee is an "accredited investor" as that term is
defined in Rule 501 promulgated under the Act.
(e) The Grantee can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for an
indefinite period.
(f) The Grantee understands that the Shares are not registered
under the Act (it being understood that the Shares are being issued and sold in
reliance on the exemption provided in Rule 701 thereunder) or any applicable
state securities or "blue sky" laws and may not be sold or otherwise
transferred or disposed of in the absence of an effective registration
statement under the Act and under any applicable state securities or "blue sky"
laws (or exemptions from the registration requirements thereof). The Grantee
further acknowledges that certificates representing the Shares will bear
restrictive legends reflecting the foregoing.
Section 3. Repurchase of Restricted Shares.
3.1. Repurchase. Upon the occurrence of a Termination Event or the
Bankruptcy of the Grantee, the Company or its assigns shall repurchase and the
Grantee and each Permitted Transferee shall sell to it or them all of the
Restricted Shares held by the Grantee or any Permitted Transferee as of the
date of such Termination Event or Bankruptcy at the per share purchase price
set forth above. In addition, upon the Bankruptcy of any of the Grantee's
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<PAGE> 4
Permitted Transferees, the Company or its assigns shall purchase and each such
Permitted Transferee shall sell to it or them all of the Restricted Shares held
by such Permitted Transferee as of the date of such Bankruptcy at a price equal
to the per share purchase price set forth above. The purchase and sale
arrangements contemplated by the preceding sentences of this Section 3.1 are
referred to herein as the "Repurchase."
3.2. Closing Procedure. The Company or its assigns shall effect the
Repurchase by delivering or mailing to the Grantee (and/or, if applicable, his
Permitted Transferees) written notice within six (6) months after the
Termination Event or Bankruptcy, specifying a date within such six-month period
in which the Repurchase shall be effected. Upon such notification, the Grantee
and his Permitted Transferees shall promptly surrender to the Company any
certificates representing the Restricted Shares being purchased, together with
a duly executed stock power for the transfer of such Restricted Shares to the
Company or the Company's assignee or assignees (as contemplated by Section 6,
if applicable). Upon the Company's or its assignee's receipt of the
certificates from the Grantee or his Permitted Transferees, the Company or its
assignee or assignees shall deliver to him, her or them a cashier's check for
the purchase price of the Restricted Shares. At such time, the Grantee and/or
any holder of the Restricted Shares shall deliver to the Company the
certificate or certificates representing the Restricted Shares so repurchased,
duly endorsed for transfer, free and clear of any lien or encumbrances. The
Repurchase obligation specified herein shall survive and remain in effect as to
Restricted Shares following and notwithstanding any public offering by the
Company and certificates representing such Restricted Shares shall bear legends
to such effect.
3.3. Remedy. Without limitation of any other provision of this
Agreement or other rights, in the event that the Grantee, his or her Permitted
Transferees or any other person or entity is required to sell his or her
Restricted Shares pursuant to the provisions of this Section 3 and in the
further event that he or she refuses or for any reason fails to deliver to the
designated purchaser of such Restricted Shares the certificate or certificates
evidencing such Restricted Shares together with a related stock power, such
designated purchaser may deposit the purchase price for such Restricted Shares
with any bank doing business within fifty (50) miles of the Company's principal
office, or with the Company's independent public accounting firm, as agent or
trustee, or in escrow, for the Grantee, his or her Permitted Transferees or
other person or entity, to be held by such bank or accounting firm for the
benefit of and for delivery to him, them or it. Upon such deposit by the
designated purchaser of such amount and upon notice to the person or entity who
was required to sell the Restricted Shares to be sold pursuant to the
provisions of this Section 3, such Restricted Shares shall at such time be
deemed to have been sold, assigned, transferred and conveyed to such purchaser,
the holder thereof shall have no further rights thereto (other than the right
to withdraw the payment thereof held in escrow), and the Company shall record
such transfer in its stock transfer book or in any appropriate manner.
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<PAGE> 5
Section 4. Restrictions on Transfer of Shares. None of the Restricted
Shares now owned or hereafter acquired shall be sold, assigned, transferred,
pledged, hypothecated, given away or in any other manner disposed of or
encumbered, whether voluntarily or by operation of law, except pursuant to
Section 2.1(a)(iii) of the Stockholders' Agreement. Further, no such transfer
of any Shares may be effected unless such transfer is in compliance with all
foreign, federal and state securities laws (including, without limitation, the
Act), and such disposition is in accordance with the terms and conditions of
the Stockholders' Agreement and this Section 4. In connection with any such
transfer of any Shares, the Company may require the transferor to provide at
his or her own expense an opinion of counsel to the transferor, satisfactory to
the Company, that such transfer is in compliance with all foreign, federal and
state securities laws (including without limitation, the Act). Any attempted
transfer of Shares not in accordance with the terms and conditions of this
Section 4 shall be null and void, and the Company shall not reflect on its
records any change in record ownership of any Shares as a result of any such
disposition, shall otherwise refuse to recognize any such disposition and shall
not in any way give effect to any such disposition of any Shares.
The parties acknowledge and agree that, in addition to the foregoing,
the Shares shall be subject to the provisions of Articles II and V of the
Stockholders' Agreement and shall not be deemed Registrable Securities for
purposes of Article IV of the Stockholders' Agreement.
Section 5. Legend. Any certificate(s) representing the Shares shall
carry substantially the following legends:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and conditions
(including repurchase and restrictions against transfers) contained in a
certain Restricted Stock Agreement dated February 6, 1996 between the
Company and the holder of this certificate (copies of which are
available at the offices of the Company for examination)."
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 or the securities laws of
any state. The shares may not be sold or transferred in the absence of
such registration or an exemption from registration."
Section 6. Escrow. In order to carry out the provisions of Sections 3
and 4 of this Agreement more effectively, the Company shall hold the Shares in
escrow together with separate stock powers executed by the Grantee in blank for
transfer, and any Permitted Transferee under Section 2.1(a)(iii) of the
Stockholders' Agreement shall, as an additional condition to any transfer of
Shares, execute a like stock power as to such Shares. The Company shall not
dispose of the Shares except as otherwise provided in this Agreement. In the
event of any Repurchase, the Company is hereby authorized by the Grantee and
each Permitted Transferee, as the Grantee's and each such Permitted
Transferee's attorney-in-fact,
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<PAGE> 6
to date and complete the stock powers necessary for the transfer of the Shares
being purchased and to transfer such Shares in accordance with the terms
hereof. At such time as any Shares are no longer Restricted Shares, the
Company shall, at the written request of the Grantee, deliver to the Grantee
(or the relevant Permitted Transferee) a certificate representing such Shares
with the balance of the Shares to be held in escrow pursuant to this Section 6.
Section 7. Withholding Taxes. The Grantee acknowledges and agrees that
the Company or any of its Subsidiaries have the right to deduct from payments
of any kind otherwise due to the Grantee, or from the Shares held pursuant to
Section 6 hereof, any federal, state or local taxes of any kind required by law
to be withheld with respect to the purchase of the Shares by the Grantee. In
furtherance of the foregoing the Grantee agrees to elect, in accordance with
Section 83(b) of the Internal Revenue Code of 1986, as amended, to recognize
ordinary income in the year of acquisition of the Shares, and to pay to the
Company all withholding taxes shown as due on his Section 83(b) election form,
or otherwise ultimately determined to be due with respect to such election,
based on the excess, if any, of the fair market value of such Shares as of the
date of the purchase of such Shares by the Grantee over the purchase price for
such Shares.
Section 8. Assignment. At the discretion of the Board of Directors of
the Company, the Company shall have the right to assign the right to exercise
its obligation and rights with respect to the Repurchase to any person or
persons, in whole or in part in any particular instance, upon the same terms
and conditions applicable to the exercise thereof by the Company, and such
assignee or assignees of the Company shall then take and hold any Shares so
acquired subject to such terms as may be specified by the Company in connection
with any such assignment.
Section 9. Miscellaneous Provisions.
9.1. Record Owner; Dividends. The Grantee and any Permitted
Transferees, during the duration of this Agreement, the Grantee and any
Permitted Transferees shall be considered the record owners of and shall be
entitled to vote the Shares. The Grantee and any Permitted Transferees shall
be entitled to receive all dividends and any other distributions declared on
the Shares; provided, however, that the Company is under no duty to declare any
such dividends or to make any such distribution.
9.2. Equitable Relief. The parties hereto agree and declare that legal
remedies are inadequate to enforce the provisions of this Agreement and that
equitable relief, including specific performance and injunctive relief, may be
used to enforce the provisions of this Agreement.
9.3. Change and Modifications. This Agreement may not be orally
changed, modified or terminated, nor shall any oral waiver of any of its terms
be effective. This Agreement may
6
<PAGE> 7
be changed, modified or terminated only by an agreement in writing signed by
the Company and the Grantee.
9.4. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
9.5. Headings. The headings are intended only for convenience in
finding the subject matter and do not constitute part of the text of this
Agreement and shall not be considered in the interpretation of this Agreement.
9.6. Saving Clause. If any provision(s) of this Agreement shall be
determined to be illegal or unenforceable, such determination shall in no
manner affect the legality or enforceability of any other provision hereof.
9.7. Notices. All notices, requests, consents and other communications
shall be in writing and be deemed given when delivered personally, by telex or
facsimile transmission or when received if mailed by first class registered or
certified mail, postage prepaid. Notices to the Company or the Grantee shall
be addressed as set forth underneath their signatures below, or to such other
address or addresses as may have been furnished by such party in writing to the
other. Notices to any holder of the Shares other than the Grantee shall be
addressed to the address furnished by such holder to the Company.
9.8. Benefit and Binding Effect. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto, their respective
successors, assigns, and legal representatives. The Company has the right to
assign this Agreement, and such assignee shall become entitled to all the
rights of the Company hereunder to the extent of such assignment.
9.9. 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.
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<PAGE> 8
IN WITNESS WHEREOF, the Company and the Grantee have executed this
Agreement as of the date first above written.
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
-----------------------------------
Name: Warren F. Melamed
Title: President
GRANTEE
/s/ WARREN F. MELAMED
---------------------------------------
Dr. Warren F. Melamed
---------------------------------------
---------------------------------------
Address
8
<PAGE> 1
EXHIBIT 10.19
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement"), is entered on the
29th day of August, 1996, by and between Monarch Dental Corporation, a Delaware
corporation (the "Purchaser"), and David L. Hehli, an individual residing in
Eau Claire County, Wisconsin (the "Seller").
R e c i t a l s
Seller owns 100% of the outstanding voting common stock, par value
$1.00 per share, and 100% of the outstanding non-voting common stock, par value
$1.00 per share, of Midwest Dental Care, Mondovi, Inc., a Wisconsin
corporation, and Seller owns 100% of the outstanding voting common stock, no
par value, of Midwest Dental Care, Sheboygan, Inc., a Wisconsin corporation,
(individually, an "Entity" and collectively, the "Entities"). The Seller
desires to sell to the Purchaser, and the Purchaser desires to buy from the
Seller, all of the issued and outstanding shares of capital stock of the
Entities (the "Stock" ), 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. SALE OF STOCK.
Subject to the terms and conditions hereof and in reliance upon the
representations, warranties, covenants and agreements contained herein, at the
Closing (as defined in Article 2 below), the Seller will sell and transfer to
the Purchaser, and the Purchaser will purchase from the Seller, the Stock.
ARTICLE 2. CLOSING.
Subject to the terms hereof, the purchase of the Stock shall be
consummated at a closing (the "Closing"), to take place on August 29, 1996, at
10:00 a.m., at the offices of Haynes and Boone, L.L.P. at 901 Main Street,
Dallas, Texas 75202. The purchase and sale of the Stock shall be deemed valid
and effective for all purposes upon the Closing except that for all tax and
accounting purposes, such Closing shall be deemed to be effective as of August
31, 1996 at 11:59 p.m.
<PAGE> 2
ARTICLE 3. CLOSING EXCHANGE.
The Purchase Price to be paid by Purchaser to Seller for the purchase
of the Stock at the Closing (the "Closing Purchase Price") shall be paid as set
forth in Sections 3.1, 3.2 and 3.3.
3.1 Cash Consideration. $402,397.00 shall be paid in immediately
available funds by wire transfer to Cole Taylor Bank, ABA No. 071000343, Credit
Account No. 0653-15383, Attn: Ms. Tracy Krueger, (847) 808-6063, or by
certified or bank check made payable to Seller.
3.2 Common Stock. 700,000 shares of common stock, par value $.01
per share, of the Purchaser (the "Purchaser's Common Stock"), shall be issued
to the Seller subject to the terms and conditions set forth in this Agreement.
Upon the issuance of Purchaser's Common Stock, Seller shall own approximately
6.1% of the issued and outstanding Common Stock of Purchaser on a fully-diluted
basis (including shares of Common Stock issuable upon conversion of Purchaser's
preferred stock) as of the Closing.
3.3 Performance Options. Seller believes that the Entities are
capable of producing higher Revenues (as defined below) and greater
profitability than has been achieved by the Entities prior to the Closing Date.
Therefore, in further consideration of the Stock sold by Seller to Purchaser
pursuant to this Agreement and, with respect to the options reserved for grant
under Section 3.3(b), without regard to the continuing employment status of
Seller with Purchaser, Seller or his designee shall be entitled to receive from
Purchaser options to purchase shares of the Purchaser's Common Stock, as set
forth in paragraphs (a) and (b) of this Section 3.3.
(a) Revenue Options. Seller or his designee shall be
entitled to receive options to purchase up to an aggregate of 90,000 shares of
the Purchaser's Common Stock, as set forth in the following table. Such
options to purchase will be granted by Purchaser to Seller or his designee
following the end of each of the first five (5) full calendar years following
the Closing, commencing with the period January 1, 1997 through December 31,
1997 (each such period being referred to as an "Earnout Period"), subject to
the Entities' or their successors achievement of the Revenue levels set forth
in the following table:
<TABLE>
<CAPTION>
THEN, OPTIONS TO PURCHASE
PURCHASER'S COMMON STOCK IN
IF REVENUES EQUAL OR THE FOLLOWING SHARE AMOUNTS
EXCEED THE WILL BE GRANTED ON
FOLLOWING AMOUNTS: A CUMULATIVE BASIS:
<S> <C>
$20,000,000 30,000 shares
$25,000,000 15,000 shares
$30,000,000 15,000 shares
$35,000,000 15,000 shares
$40,000,000 15,000 shares
-------------------
TOTAL OPTIONS AVAILABLE: 90,000 shares
</TABLE>
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<PAGE> 3
For purposes of this Section 3.3(a) only, "Revenues" means, for the
applicable Earnout Period, the gross revenues of the business operations of
Purchaser and its affiliates conducted within the States of Iowa, Minnesota and
Wisconsin (the "Region") (including for this purpose Advance Dental Management,
Inc. ("ADM")) determined (except as provided herein) 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.
Any options granted pursuant to this Section 3.3(a) shall be at an
exercise price equal to 100% of the Fair Market Value of the Purchaser's Common
Stock on the date of the option grant which shall be deemed to mean (a) the
five (5) preceding days' average of the high and low stock prices of the
Purchaser's Common Stock on the primary national securities exchange or system
where the Purchaser's Common Stock is then traded, or (b) if the Purchaser does
not have a class of equity securities registered under the Securities Act of
1933, as amended, the fair market value determined by the Purchaser's Board of
Directors for grants of options pursuant to the Plan on the date of grant. All
options reserved for grant under this Section 3.3(a) shall automatically and
immediately terminate upon the termination of Seller's employment with Midwest
Dental Management, Inc. ("Management") or any of its affiliates (i) for "cause"
(as defined in Seller's employment agreement with Management) or (ii) upon
Seller's voluntary termination or resignation of his employment status pursuant
to such employment agreement.
(b) EBITDA Options. Seller shall be entitled to receive
options to purchase up to an aggregate of 70,000 shares of the Purchaser's
Common Stock as set forth in the matrix attached hereto as Exhibit A. Such
options to purchase will be granted by Purchaser to Seller following the end of
each of the first five (5) full calendar years following the Closing,
commencing with the period January 1, 1997 through December 31, 1997 (each such
period being referred to as an "Earnout Period") in the share amounts set forth
on the matrix attached hereto as Exhibit A. The number of shares subject to an
option granted under this Section 3.3(b) for any Earnout Period shall be that
number of shares in the matrix specified in the column that contains the
percentage increase in Revenues for the Earnout Period, and the row that
contains the EBITDA percentage, expressed as a percentage of Revenues, for the
Earnout Period.
For purposes of this Section 3.3(b) only, "Revenues" means,
for the applicable Earnout Period, the gross revenues of the business
operations conducted by the Entities (including for this purpose ADM) as the
Entities existed as of the Closing
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<PAGE> 4
determined (except as provided herein) 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.
For purposes of this Article 3, "EBITDA" means, for the
applicable Earnout Period, the net income of the business operations conducted
by the Entities (including for this purpose ADM) as of the Closing determined
(except as provided herein) 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, and before deduction of interest, tax, depreciation
and amortization expense.
Any options granted pursuant to this Section 3(b) shall
contain an option price equal to 80% of the lesser of (i) the price at which
the Purchaser's Common Stock is sold to the public in the Purchaser's first
underwritten offering of Purchaser's Common Stock that is registered under the
Securities Act of 1933, as amended, registering the offering and sale of
Purchaser's Common Stock to the general public for the Purchaser's account, and
that results in the Purchaser's Common Stock being traded on a national
securities exchange or system, such as the Nasdaq National Market System (an
"Initial Public Offering") or (ii) the Fair Market Value of the Purchaser's
Common Stock, as determined under Section 3.3(a). None of the options granted
under this Section 3.3(b) shall terminate solely by reason of the termination
of Seller's employment with Management or any of its affiliates.
(c) Financial Calculations. The financial calculations
required under this Section 3.3 shall be determined from the 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 public accountants employed by
Seller. If within thirty (30) days after delivery of the Statement to the
Seller, Seller has not given written notice to Purchaser disputing such
Statement and stating the basis of such dispute, Purchaser shall thereafter
have no further liability to grant options to Seller with respect to that
Earnout Period. If Purchaser 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 the 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,
satisfactory to Purchaser and Seller, whose decision on such dispute shall be
binding on all parties.
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<PAGE> 5
(d) Option Terms. The following provisions of this
Section 3.3 shall apply to all options granted under this Section 3.3. Options
granted hereunder, if any, shall be granted pursuant to the Purchaser's 1996
Equity Acquisition Option Plan, and shall be subject to all limitations of such
Plan, including the aggregate number of options which may be granted
thereunder. Options granted pursuant to this Section 3.3 shall be fully vested
when granted and shall expire ten (10) years from the date of grant subject, in
the case of options granted under Section 3.3(a), to earlier termination as
provided therein. Purchaser shall grant the options to Seller for the
applicable Earnout Period pursuant to this Section 3.3 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.
3.4 Other Agreements. In connection and simultaneously with the
Closing, Seller and his affiliates and Purchaser and its affiliates will enter
into the following agreements with terms and conditions as are set forth in
such agreements: (i) Asset Purchase Agreement (herein so called) providing for
the sale of certain of the assets of ADM to Management; (ii) Put Option
Agreement generally providing Seller with the right to put certain shares of
the Purchaser's Common Stock to Purchaser; (iii) Amended and Restated
Stockholders' Agreement with respect to the shares of Purchaser's Common Stock;
(iv) Assignment and Assumption Agreements generally providing for Purchaser's
(or its affiliates') assumption of certain capital leases, operating leases and
installment sales on equipment; (v) Employment Agreement for the Seller; (vi)
Non-Competition Agreement for the Seller and certain Seller affiliates; (vii)
Administrative Service Agreement between Management and Midwest Dental Plan,
Ltd. ("MDP"); (viii) Amendment to Provider Service Agreements between the Plan
and Midwest Dental Care, Mondovi, Inc. and Midwest Dental Care, Sheboygan,
Inc., respectively, (ix) those certain Leases between (1) Seller, as lessor,
and Midwest Dental Care, Mondovi, Inc., as lessee, for the lease of (a) the
Mondovi location and (b) the Eau Claire South location; (2) Seller, as lessor,
and Midwest Dental Management, Inc., as lessee, for the lease of the Mondovi
location (corporate office); (3) David L. Hehli, as lessor, and Midwest Dental
Care, Sheboygan, Inc., as lessee, for the lease of the Sheboygan location; and
(4) Todd and Tammie Hehlie, as lessor and Midwest Dental Care Mondovi, Inc., as
lessee; (x) Indemnification Agreement between Purchaser and Seller; (xi)
Termination and Cancellation of Administrative Services and Management
Agreement and Mutual Release between Midwest Dental Plan, Ltd. and ADM; (xii)
Employment Agreements between Management and each of Yvonne M. Mayberry, Kevin
G. Moug, Todd Hehli, D.D.S. and Jeffrey Moos, D.D.S.; (xiii) General Release by
Seller and consented to by Mary K. Hehli; (xiv) General Release by Seller; (xv)
Bill of Sale among Seller, ADM and Management; and (xvi) Assumption Agreement
between ADM and Management (collectively, the "Collateral Agreements").
Also, in connection and simultaneously with the Closing, Seller and
Purchaser, or at Purchaser's request, one or both of the Entities, will enter
into triple net real property lease agreements for the Entities' offices
located at the Sheboygan, Mondovi,
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<PAGE> 6
and Eau Claire South office buildings, and such leases shall be guaranteed by
Management. Such leases will have a term of five (5) years with two successive
five (5) year renewal options exercisable at the option of the lessee and will
contain such other terms and conditions as are mutually agreed to by Seller and
Purchaser.
3.5 Delivery of Stock Certificates. Upon (i) payment of the cash
portion of the Closing Purchase Price, (ii) the issuance of the Purchaser's
Common Stock, and (iii) the execution of this Agreement and the Collateral
Agreements, the Seller shall sell, assign, convey, transfer and deliver to the
Purchaser free and clear of any pledges, security interests, liens, charges,
options, encumbrances or restrictions of whatever nature (collectively, a
"Lien"), stock certificates Nos. 4 (Midwest Dental Care-Mondovi, Inc.) and 2
(Midwest Dental Care-Sheboygan, Inc.) representing 100% of the outstanding
common stock of Midwest Dental Care, Mondovi, Inc. and Midwest Dental Care,
Sheboygan, Inc., either duly endorsed in blank or with stock powers duly
executed in blank attached thereto with signatures guaranteed by a commercial
bank.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER.
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 hereby makes to the Purchaser the
representations and warranties contained in this Article 4.
For the purposes of this Agreement, references to "knowledge" or "best
knowledge" of Seller or "known" by Seller or words of similar import, shall be
deemed to include such knowledge as Seller or executive officers (defined as
Yvonne Mayberry, Todd Hehli, Jeff Moos and Kevin Moug only) of the Entities
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, the Seller
is deemed to have knowledge of each of the documents entered into in connection
with the transactions contemplated hereby. For purposes of this Agreement, the
term "predecessor" when used with respect to Seller shall be deemed to include
First Dental, S.C. and Midwest Dental Care, Appleton Mall, S.C.
4.2 Organization and Qualification; Capital Stock. Each Entity is
a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation or organization, as applicable, as
listed in Section 4.2(i) of the Disclosure Schedule 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 each Entity as amended to date and certified
by the Secretary of State of each relevant jurisdiction, and of the by-laws of
each Entity, as amended to date, certified by its Secretary, and heretofore
delivered to the Purchaser, have been duly adopted and are current,
- 6 -
<PAGE> 7
complete and correct, no amendments thereto are pending, and no Entity is in
violation thereof.
Each such Entity is duly qualified to do business as a corporation in
the states or the jurisdictions listed in Section 4.2(ii) of the Disclosure
Schedule, 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
any of the Entities. Immediately prior to the Closing, all of the issued and
outstanding capital stock or other equity interests of each Entity is owned
beneficially and of record as set forth in Section 4.2(iii) of the Disclosure
Schedule, free and clear of any Lien, 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
any such Entity. The total authorized capital stock of each Entity is set
forth on Section 4.2(iv) of the Disclosure Schedule.
At the Closing, and after giving effect to each of the transactions
contemplated by this Agreement, all of the issued and outstanding capital stock
or other equity interests of each Entity will be duly and validly authorized
and issued, fully paid and nonassessable, and owned beneficially and of record
by Purchaser, free and clear of any Lien, and there will be 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 any other equity
interest of any Entity. To the best of Seller's knowledge, each Entity 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. Neither Entity has any 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 (such business shall be referred to herein collectively as the "Entities
businesses"), except as listed in Section 4.3 of the Disclosure Schedule.
4.4 Authority; Noncontravention. Seller and each Entity have full
individual and/or corporate power and authority or capacity, as applicable, (i)
to enter into (a) this Agreement and (b) each agreement, document and
instrument to be executed and delivered by him, it or 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 each Entity of
this Agreement, the Collateral Agreements and each such other agreement,
document and instrument have been duly authorized by all necessary action of
Seller and each Entity including any required action of its respective owners,
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<PAGE> 8
and no other action on the part of Seller or either Entity or its owners is
required in connection therewith. This Agreement, the Collateral Agreements
and each such agreement, document and instrument executed and delivered by
Seller and each Entity pursuant to or in connection with this Agreement
constitute valid and binding obligations of Seller and each Entity enforceable
in accordance with their 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 and each Entity of
this Agreement, the Collateral Agreements and each such agreement, document and
instrument pursuant to or in connection with this Agreement to which he or it
is a party:
(i) do not and will not violate any provision of
the charter, by-laws or equivalent constituent documents of any Entity;
(ii) do not and will not violate in any respect any
laws of the United States or any state or other jurisdiction
applicable to Seller or any Entity or require Seller or any Entity,
except as set forth in Section 4.4 of the Disclosure Schedule, 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, authorization, order, writ, judgment,
injunction, decree, determination or arbitration award, whether
written or oral, to which Seller or any Entity is a party or
by which the property of Seller or any Entity is bound or affected, or
(e) result in the creation or imposition of any mortgage, pledge,
lien, security interest or other charge or encumbrance on any of the
Stock, except to the extent that any of the foregoing would not have
an adverse effect on the business, operations, results of operations,
assets, condition (financial or other) or prospects of the Seller or
any Entity.
4.5 Status of Property.
(a) Real Property. No Entity owns any real estate. The
Base Balance Sheet (as defined herein) reflects real property not
owned by the Entities.
(b) Leased Real Property. All of the real property leased
in connection with the Entities businesses 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
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<PAGE> 9
Disclosure Schedule sets forth any other real estate previously owned, leased or
otherwise operated by any Entity or the Seller in connection with the Entities
at any time during the five years immediately preceding the date hereof and the
time periods of any such ownership, lease or operation, except for any offices
in personal residences of employees of any Entity. 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 the best of Seller'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 Entities businesses;
(C) all obligations of the tenant or
lessee under the Leases which have accrued have been performed,
and neither the Seller nor any Entity is in default under or in
arrears in the payment of any sum or in the performance of any
material obligation required of him 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 any Entity; and
(D) Seller and each Entity 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
the Seller or any Entity or his or its assignees, except as set
forth in Section 4.5(b)(i)(D) of the Disclosure Schedule.
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<PAGE> 10
(ii) Title and Description. The relevant
Entity, as applicable, 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, except for
those matters set forth in Section 4.5(b)(ii) of the Disclosure
Schedule (collectively, the "Title Exceptions").
(iii) Compliance with Law; Government
Approvals. Except as set forth in Section 4.5(b)(iii) of the
Disclosure Schedule, neither Seller nor any Entity has 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.
Improvements located on or constituting a part of the Leased Real
Property and the construction, installation, use and operation thereof
(including, without limitation, the construction, installation, use
and operation of any signs located thereon) were completed and
installed and, to the best of Seller's knowledge, are now 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 except as set forth
in Section 4.5(b)(iii) of the Disclosure Schedule, 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 Entities businesses, except as set forth in Section 4.5(b)(iii)
of the Disclosure Schedule. The Leased Real Property has at least the
minimum access required by applicable subdivision or similar law.
(iv) Real Property Taxes. Except as set
forth in Section 4.5(b)(iv) of the Disclosure Schedule, neither Seller
nor any Entity has received notice of any pending or threatened
reassessment of all or any portion of any of the Leased Real Property,
and the consummation of the transactions contemplated by this
Agreement or referred to herein will not result in any such
reassessment.
(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 relevant Entity, as applicable,
owns and has good, valid and (if
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<PAGE> 11
applicable) marketable title to all of the personal property used in connection
with the conduct of the Entities businesses, and none of such personal property
or assets is subject to any mortgage, pledge, lien, conditional sale agreement,
restriction on transfer, stockholder or similar agreement, security title,
encumbrance or other charge 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 Entities businesses,
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
Entities 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.
(d) Transfer of Title. At the Closing, the
Purchaser will receive good, valid and (if applicable) marketable title to the
Stock, free and clear of all liens, encumbrances, charges, restrictions on
transfer, stockholder or similar agreements, equities and other claims of every
kind.
4.6 Financial Statements; Undisclosed Liabilities.
(a) Seller has previously delivered to the Purchaser the
following financial statements, copies of which are attached hereto as Section
4.6(a) of the Disclosure Schedule:
(i) Reviewed balance sheets for the Entities for
the fiscal years ended December 31, 1994 (herein the "Reviewed Base
Balance Sheet"), and December 31, 1993 and reviewed statements of
income, retained earnings and cash flows for the years then ended
including full generally accepted accounting principles disclosures;
(ii) An unaudited balance sheet for the
Entities for the fiscal year ended December 31, 1995 and an unaudited
statement of income, retained earnings and cash flows for the
twelve-month period then ended including full generally accepted
accounting principles disclosures for interim financial information
(which does not include all information and footnotes required by
generally accepted accounting principles for complete financial
statements); and
(iii) An unaudited balance sheet for the Entities
for the fiscal quarter ended March 31, 1996 (herein the "Base
Balance Sheet"), and an unaudited statement of income, retained
earnings and cash flows for the three-month period then ended
including full generally accepted accounting principles disclosures
for interim financial information (which does not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements).
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<PAGE> 12
Said financial statements have been prepared by the Entities from their
respective books and records, and present fairly in all respects the financial
condition of the Entities at the dates of said statements and the results of
their operations for the periods covered thereby in accordance with generally
accepted accounting principles in the United States except as set forth above.
(b) As of the date of the Reviewed 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 Entities, except liabilities (i) stated or adequately reserved
against on the Reviewed Base Balance Sheet or the notes thereto, (ii)
specifically disclosed in Section 4.6(b) of the Disclosure Schedule furnished
to the 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 Reviewed Base Balance Sheet.
(c) As of the date hereof, there are no liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
asserted or unasserted, known or unknown, relating to the Entities, except
liabilities (i) stated or adequately reserved against on the Reviewed Base
Balance Sheet or the notes thereto, (ii) specifically disclosed in Section
4.6(c) of the Disclosure Schedule furnished to the 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 Reviewed Base Balance Sheet.
(d) 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 Entities, except liabilities (i) stated or adequately reserved against on
the Base Balance Sheet or the notes thereto, (ii) specifically disclosed in
Section 4.6(d) of the Disclosure Schedule furnished to the 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.
(e) As of the date hereof, there are no liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
asserted or unasserted, known or unknown, relating to the Entities, except
liabilities (i) stated or adequately reserved against on the Base Balance Sheet
or the notes thereto, (ii) specifically disclosed in Section 4.6(e) of the
Disclosure Schedule furnished to the 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.
4.7 Taxes.
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<PAGE> 13
(a) Each of the Entities and their 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 and property taxes, whether or not measured
in whole or in part by net income and all deficiencies, or other additions to
tax, interest, fines, charges and penalties owed by it (collectively, "Taxes")
shown to be due on all tax returns required to be filed through the date
hereof, whether disputed or not.
(b) Each of the Entities and their 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 Entities and their predecessors
for taxable periods ended on or after December 31, 1990, have been previously
provided to the 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 threatening to assert against any of the
Entities or their predecessors any deficiency or claim for additional Taxes.
No claim has ever been made by an authority in a jurisdiction where any of the
Entities and their predecessors do not file reports and returns that the
Entities or their predecessors are or may be subject to taxation by that
jurisdiction. There are no security interests or liens on any of the assets of
any Entity that arose in connection with any failure (or alleged failure) to
pay any Tax. Neither the Entities nor their 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) Except as set forth in Section 4.7(d) of the
Disclosure Schedule, there has not been during the past five years any audit of
any tax return filed by any of the Entities or their predecessors, no audit of
any tax return of any of the Entities or their predecessors is in progress, and
neither the Entities nor their predecessors have been notified by any tax
authority that any such audit is contemplated or pending. Except as set forth
in Section 4.7(d) of the Disclosure Schedule, no extension of time with respect
to any date on which a tax return was or is to be filed by any of the Entities
or their predecessors is in force, and no waiver or agreement by any of the
Entities or their predecessors is in force for the extension of time for the
assessment or collection of any Taxes.
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<PAGE> 14
(e) The Entities and their 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 Entities nor their predecessors have ever filed, or have ever been
required to file, a consolidated, combined or unitary tax return with any other
entity. Neither the Entities nor their predecessors own or have ever owned a
direct or indirect interest in any trust, partnership, corporation or other
entity except as set forth in Section 4.7(e) of the Disclosure Schedule, and no
assets of any either Entity include an interest in any such entity. Neither
the Entities nor their predecessors are parties to any tax sharing or similar
agreement.
(f) Neither Entity nor its respective predecessors is a
"foreign person" within the meaning of Section 1445 of the Code and Treasury
Regulations Section 1.1445-2.
(g) Neither Entity nor its respective 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) Neither Entity nor its respective predecessors is or
has ever been an "S corporation" within the meaning of Section 1361(a)(1) of
the Code except as set forth in Section 4.7(h) of the Disclosure Schedule.
(i) 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.
(j) [INTENTIONALLY OMITTED]
(k) Section 4.7(k) of the Disclosure Schedule sets forth
a list of related party transactions (i) included in the Base Balance Sheet or
(ii) entered into since the date of the Base Balance Sheet.
(l) Except as set forth in Section 4.7(l) of the
Disclosure Schedule, each of the Entities and their 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
pay-roll related taxes ("Employment Taxes"). With respect to the persons shown
on Section 4.7(l) of the Disclosure Schedule, the classification of such
workers as non-employees for purposes of Employment Taxes is correct and no
amount of Employment Taxes or other additions to tax, interest, fines or
penalties are or may be owed by the Entities with respect to such non-employee
workers.
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<PAGE> 15
(m) Except as provided in Section 4.7(m) of the
Disclosure Schedule, the Base Balance Sheet reflects and includes adequate
charges, accruals, reserves and provisions, established in accordance with
generally accepted accounting principles, for the payment in full of all Taxes
relating to the Entities for any and all periods (i) ending on or before the
date the Base Balance Sheet and (ii) ending subsequent to the date of the Base
Balance Sheet and through and including the Closing Date.
4.8 Collectibility of Accounts Receivable. All of the accounts
receivable of the Entities businesses (subject to contractual allowances
consistent with the past practices of the Entities businesses) as described in
Section 4.8 of the Disclosure Schedule are reflected properly in the Seller's
books and records and are valid and enforceable claims, are current (consistent
with aging practice of Seller) and collectible (subject to reasonable allowance
for doubtful accounts as reflected on the balance sheets of the Seller) 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.
Section 4.8 of the Disclosure Schedule contains a complete and accurate summary
of the amount of accounts receivable. Except as disclosed in Section 4.8 of
the Disclosure Schedule, the Entities businesses do not have any accounts
receivable or loans receivable from any person, firm or corporation which is
affiliated with the Seller or any Entity or from any stockholder, director,
officer or employee of the Seller or any Entity 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) or personnel,
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 Entities
businesses 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 Entities businesses;
(c) Any mortgage, encumbrance or lien placed on any of
the properties of the Entities businesses 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 Entities businesses 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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<PAGE> 16
(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 Entities businesses 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 Entities businesses;
(g) Any declaration, set aside or payment of any dividend
by either Entity or the making of any other distribution in respect of the
capital stock or other equity interest of either Entity or any direct or
indirect redemption, purchase or other acquisition by either Entity of its own
capital stock or other equity interest except as described in Section 4.9(g) of
the Disclosure Schedule;
(h) Any labor trouble or claim of unfair labor practices
involving the Entities businesses;
(i) Except as set forth in Section 4.9(i) of the
Disclosure Schedule, any change in the compensation (in the form of salaries,
wages, incentive arrangements or otherwise) or benefits payable by the Entities
businesses 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 entity; 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;
(j) 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
Entities or involved in the Entities businesses, any grant of any severance or
termination pay to any officer, employee, agent, independent contractor,
dentist or dental professional corporation of the Entities or involved in the
Entities businesses or any increase in benefits payable under any existing
severance or termination pay policies or employment agreement or relationship;
(k) Any payment or discharge of a material lien or
liability relating to the Entities businesses which was not shown on the Base
Balance Sheet or incurred in the ordinary course of business thereafter;
(l) Any payment made or obligation or liability incurred
by either Entity to, or any other transaction by either Entity with, any of its
respective officers, directors, partners, stockholders, employees or
independent contractors (including dentists and dental professional
corporations), or any loans or advances made by either Entity to any of its
respective officers, directors, partners, stockholders, employees or
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<PAGE> 17
independent contractors (including dentists and dental professional
corporations), except normal compensation and expense allowances consistent
with past practice;
(m) Any change in accounting methods or practices, credit
practices, collection policies or payment policies used by either Entity
including, without limitation, any change in the discharge or recording of
accounts payable relative to past practices;
(n) Any material cancellation or loss of any material
right or asset, or waiver of any right, of either Entity;
(o) Any material change in the Entities' relationships
with suppliers, distributors, licensees, licensors, customers or others with
whom either Entity or the Entities businesses has business relationships which
would have an adverse effect on the Entities or the Entities businesses, and
Seller does not have knowledge of any fact or contemplated event which may
cause any such adverse change;
(p) Any alteration or change in the methods of operation
employed by the Entities businesses other than in the ordinary course of
business;
(q) Any other material transaction relating to the
Entities or the Entities businesses other than transactions in the ordinary
course of business and consistent with past practices;
(r) Any agreement or understanding, whether in writing or
otherwise, by either Entity or any other person that would result in any of the
transactions or events or require either Entity to take any of the actions
specified in paragraphs (a) through (q) above;
(s) Any amendment or termination of any material Contract
with respect to the Advance Dental Management business to which an Entity is a
party; or
(t) Any changes in the amount or scope of coverage of
insurance now carried by the Entities.
4.10 Ordinary Course. Since the date of the Base Balance Sheet,
the Entities have conducted their businesses 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 Entities businesses are accurately and in all
material respects described in Section 4.11 of the Disclosure Schedule,
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.
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4.12 Intellectual Property.
(a) Except as described in Section 4.12(a) of the
Disclosure Schedule, the relevant Entity 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 Entities businesses as
presently conducted. The relevant Entity'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 and, except as set forth in Section 4.12(a) of the
Disclosure Schedule, 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 relevant Entity in
respect of any Intellectual Property, and to the best knowledge of Seller,
except as set forth in Section 4.12(a) of the Disclosure Schedule, no other
person has or alleges any rights in or to the Intellectual Property. The
Seller or the relevant Entity has the right to use, free and clear of claims or
rights of other persons, all customer lists, designs, manufacturing or other
processes, computer software (subject to the first sentence of this paragraph),
systems, data compilations, research results and other information required for
or incident to the conduct of the Entities businesses as presently conducted or
contemplated.
(b) All patents, patent applications, trademarks, service
marks, trademark and service mark applications and registrations and registered
copyrights related to the conduct of the Entities businesses as presently
conducted or contemplated to be conducted, are listed in Section 4.12(b) of the
Disclosure Schedule. Such patents, patent applications, trademark and service
mark registrations, trademark and service mark applications and registered
copyrights have been duly registered in, filed in or issued by the United
States Patent and Trademark Office, the United States Register of Copyrights,
or the corresponding offices of other jurisdictions as identified on said
Schedule, and have been properly maintained and renewed in accordance with all
applicable provisions of law and administrative regulations in the United
States and each such jurisdiction, to the extent, if any, set forth in Section
4.12(b) of the Disclosure Schedule.
(c) All licenses or other agreements under which the
Entities are 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 either Entity, 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. The licensors under said licenses and other agreements had
and have all requisite power and authority to grant the rights purported to be
conferred thereby. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been provided to the Purchaser.
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<PAGE> 19
(d) All licenses or other agreements under which the
Entities have granted rights to others in Intellectual Property are listed in
Section 4.12(d) of the Disclosure Schedule. All of said licenses or other
agreements are in full force and effect, there is no default by any Entity, or
any other party thereto, and, except as set forth in Section 4.12(d) of the
Disclosure Schedule and as provided in Section 4.12(a) above, all of the
relevant Entity's rights thereunder are freely assignable. True and complete
copies of all such licenses or other agreements, and any and all amendments
thereto, have been provided to the Purchaser.
(e) The Entities have taken all steps required in
accordance with sound business practice to establish and preserve their
ownership of all material copyright, trade secret and other proprietary rights.
Neither Seller nor any Entity has any knowledge of any infringement by others
of any of his, its or their Intellectual Property rights. No employee or
consultant of any Entity owns any rights in any products, technology or
Intellectual Property of any Entity which ownership adversely affects the
conduct of the Entities businesses.
(f) The conduct of the Entities businesses has not and
does not infringe any Intellectual Property of any other person. No proceeding
charging either Entity with infringement of any adversely held Intellectual
Property has been filed or, to the best knowledge of Seller, 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 Entities businesses. The conduct of
the Entities businesses 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. Except as set
forth in Section 4.12(f) of the Disclosure Schedule, neither Entity, nor any of
their respective employees, has any agreements or arrangements with any persons
other than the Entity 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.
(g) The computer software included in the Intellectual
Property performs in all material respects in accordance with the documentation
and other written material used in connection with the software and is free of
material defects in programming. The Entities have all the databases and
computer software used or necessary to conduct the Entities businesses, except
as set forth in Section 4.12(g) of the Disclosure Schedule.
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), neither Entity
is a party to or subject to:
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<PAGE> 20
(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 providing
for the purchase of all or substantially all of its requirements of a
particular product from a supplier;
(vi) any contract or agreement which by its terms
does not terminate or is not terminable without penalty within one
year after the date hereof;
(vii) any contract or agreement for the sale or
lease of its products not made in the ordinary course of business;
(viii) any contract with any sales agent or
distributor;
(ix) any contract containing covenants limiting
its freedom to compete in any line of business or with any person or
entity;
(x) 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;
(xi) any license agreement (as licensor or
licensee) for a total consideration exceeding $50,000 for any one
such license;
(xii) any agreement involving a lease or license
of real property or any "capitalized" or "financing" lease;
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<PAGE> 21
(xiii) any indenture, mortgage, promissory
note, loan agreement, guaranty or other agreement or commitment for
the borrowing of money and any related security agreement;
(xiv) any contract or agreement with any
officer, employee, director, or stockholder or with any persons or
organizations controlled by or affiliated with any of them;
(xv) 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 maintenance organization, preferred
provider organization, self-insured employer or other third-party
payor of any kind or nature;
(xvi) any power of attorney; or
(xvii) any judgment, decree or order
affecting either Entity or the Entities businesses.
(b) All contracts, agreements, leases and instruments to
which either Entity 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 relevant Entity and the other
parties thereto, enforceable in accordance with their 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 Entity nor, to the best knowledge of Seller, any other party to
any contract, agreement, lease or instrument to which either Entity is a party
or any judgment, decree or order applicable to either Entity or the Entities
businesses 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 either Entity or on the part
of any other party thereto in any such case that could have an adverse effect
on the business, operations, results of operations, assets, condition
(financial or other) or prospects of the Entities businesses. Except as
disclosed in Section 4.13(b) of the Disclosure Schedule, neither Entity is
subject to or bound by any agreement, judgment, decree or order which adversely
affects the business, operations, results of operations, assets, condition
(financial or other) or prospects of the Entities businesses.
(c) Except as disclosed in Section 4.13(c) of the
Disclosure Schedule, 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"), in connection with the Entities businesses
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<PAGE> 22
or pursuant to which Seller or either Entity 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 the Seller or either
Entity 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 either Entity or the Entities
businesses which may have an adverse effect on the business, operations,
results of operations, assets, condition (financial or other) or prospects of
the Entities businesses 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 Entities are 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, Wisconsin Regulatory Board investigations, suits, notices of intent to
institute arbitrations or proceedings, either administrative or judicial,
involving the Entities businesses 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 Entities businesses have all
franchises, authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations, qualifications or other rights and
privileges (collectively "Permits") necessary to permit the ownership of
respective properties involved therein and the conduct of such business as the
same is presently conducted. To the best of Seller'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 an adverse effect on the
business, operations, results of operations, assets, condition (financial or
other) or prospects of the Entities businesses. Except as set forth in Section
4.15(a) of the Disclosure Schedule, 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. Except as set forth in Section
4.15(a) of the Disclosure Schedule, the Entities businesses are now and have
heretofore been in compliance with all 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
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conduct of the Entities businesses, 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 Entities businesses. Since
January 1, 1993, neither the Seller nor any Entity 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 Wisconsin (except
for license revocation or suspension proceedings currently in process of which
Seller has 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, 1990: (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 of the Health Care Providers who
provide services in connection with the Entities businesses are set forth in
Section 4.15(b) of the Disclosure Schedule. To the best of Seller'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 either Entity, as applicable.
Except as set forth in Section 4.15(b) of the Disclosure Schedule, to the best
of Seller'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 either
Entity.
(c) Medicare/Medicaid. The Entities businesses do not
involve and, since 1992, have not involved patients covered by or arrangements
with Medicare or Medicaid.
(d) Other. Neither Entity is 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 their respective businesses as presently conducted. The dental plan
services and related products
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<PAGE> 24
offered and provided by the Entities businesses 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 businesses and
neither Entity has 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 conducts its business.
Except as set forth in Section 4.15(d) of the Disclosure Schedule, to
the best knowledge of Seller, there exists no legislation, rule or regulation
which shall either (i) have been proposed and be in the Seller's reasonable
judgment reasonably likely to be adopted in Wisconsin in the foreseeable
future, or (ii) have been adopted in Wisconsin in either case that,
individually or in the aggregate, has an adverse effect or could reasonably be
anticipated to have an adverse effect on the business, operations, results of
operations, assets, (financial or otherwise) or prospects of either Entity.
4.16 Insurance. The physical properties and assets of the Entities
businesses are insured to the extent disclosed in Section 4.16 of the
Disclosure Schedule, and all insurance policies, binders and arrangements
relating to the Entities businesses 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 each Entity is in compliance in
all material respects with the terms thereof. Said insurance is adequate and
customary for the Entities businesses and is sufficient for compliance with all
requirements of law and all agreements and leases to which the Entities
businesses are subject. Except as disclosed in Section 4.16 of the Disclosure
Schedule, (i) 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 an adverse effect on either Entity
and (ii) 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. Neither Seller nor any Entity 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 9.10(a)) of any such person, is currently a party to any transaction
with either Entity, including, without limitation, any contract, agreement or
other arrangement providing for the employment of, loan
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<PAGE> 25
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 best knowledge of Seller 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
either Entity, or any organization which has a contract or arrangement with
either Entity, provided that no representation shall be deemed made with
respect to the provision of dental services by any former employee or
independent contractor. Except as set forth in Section 4.18 of the Disclosure
Schedule, 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 the Seller or either Entity, and, following the Closing,
neither Entity shall have any obligation or commitment of any kind or
description to any such affiliate.
4.19 Employee Benefit Programs.
(a) Section 4.19 of the Disclosure Schedule sets forth a
list of every Employee Program (as defined below) that has been maintained (as
such term is further defined below) in connection with the Entities businesses
at any time during the three-year period ending on the Closing.
(b) Each Employee Program which has ever been maintained
by either Entity and which has at any time been intended to qualify under
Section 401(a) or 501(c)(9) of the Code has received a favorable determination
or approval letter from the Internal Revenue Service ("IRS") regarding its
qualification under such section and has been continuously qualified under the
applicable section of the Code since the effective date of such Employee
Program. No event or omission has occurred which would cause any such Employee
Program to lose its qualification under the applicable Code section.
(c) To the best knowledge of Seller, there is no, and
Seller has no reason to know of, any failure of any laws applicable to the
Employee Programs that have been maintained in connection with the Entities
businesses. With respect to any Employee Program ever maintained in connection
with the Entities businesses, there has occurred no "prohibited transaction,"
as defined in Section 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code (for which there exists
neither a statutory nor regulatory exception), or breach of any duty under
ERISA or other applicable law (including, without limitation, any health care
continuation requirements or any other tax law requirements, or conditions to
favorable tax treatment, applicable to such plan or to any person in regard to
such plan), which could result, directly or indirectly (including, without
limitation, through any obligation of indemnification or contribution), in any
taxes, penalties or other liability to the Seller, either Entity or any of
their affiliates. No litigation, arbitration, or governmental administrative
proceeding (or investigation) or other proceeding (other than those relating to
routine claims for benefits) is pending or to the best of Seller's knowledge,
threatened with respect to any such Employee Program.
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<PAGE> 26
(d) None of the Seller, any Entity nor any Affiliate (as
defined in subparagraph (f) below) (i) has ever maintained any Employee Program
which has been subject to Title IV of ERISA or Section 412 of the Code
(including, but not limited to, any Multiemployer Plan (as defined below)) or
(ii) has ever provided health care or any other non-pension benefits to any
employees after their employment is terminated (other than as required by part
6 of subtitle B of Title I of ERISA) or has ever promised to provide such
post-termination benefits.
(e) With respect to each Employee Program maintained by
or on behalf of either Entity within the three years preceding the Closing,
complete and correct copies of the following documents (if applicable to such
Employee Program) have previously been delivered to the Purchaser: (i) all
documents embodying or governing such Employee Program, and any funding medium
for the Employee Program (including, without limitation, trust agreements), as
they may have been amended to the date hereof; (ii) the most recent IRS
determination or approval letter with respect to such Employee Program under
Code Section 401 or 501(c)(9), and any applications for determination or
approval subsequently filed with the IRS; (iii) the three most recently filed
IRS Forms 5500, with all applicable schedules attached thereto and related
accountants' opinions; (iv) the summary plan description for such Employee
Program (or other descriptions of such Employee Program provided to employees)
and all modifications thereto; (v) any insurance policy (including any
fiduciary liability insurance policy and any excess loss policy) related to
such Employee Program; (vi) any documents evidencing any loan to an Employee
Program that is a leveraged employee stock ownership plan; and (vii) all other
materials reasonably necessary for the Seller or either Entity to perform any
of its responsibilities with respect to any Employee Program subsequent to the
Closing (including, without limitation, health care continuation requirements).
(f) For purposes of this Article 4.19:
(i) "Employee Program" means (A) all employee
benefit plans within the meaning of ERISA Section 3(3), including, but
not limited to, multiple employer welfare arrangements (within the
meaning of ERISA Section 3(40)), plans to which more than one
unaffiliated employer contributes and employee benefit plans (such as
foreign or excess benefit plans) which are not subject to ERISA; and
(B) all stock or cash option plans, restricted stock plans, bonus or
incentive award plans, severance pay policies or agreements, deferred
compensation agreements, supplemental income arrangements, vacation
plans, and all other employee benefit plans, agreements, and
arrangements not described in (A) above. In the case of an Employee
Program funded through an organization described in Code Section
501(c)(9), each reference to such Employee Program shall include a
reference to such organization.
(ii) An entity "maintains" an Employee Program if
such entity sponsors, contributes to, or provides (or has promised to
provide) benefits under
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<PAGE> 27
such Employee Program, or has any obligation (by agreement or under
applicable law) to contribute to or provide benefits under such
Employee Program, or if such Employee Program provides benefits to or
otherwise covers employees of such entity (or their spouses,
dependents, or beneficiaries).
(iii) An entity is an "Affiliate" of the Seller or
either Entity if it would have ever been considered a single employer
with the Seller or either Entity under ERISA Section 4001(b) or part
of the same "controlled group" as the Seller or any Entity for
purposes of ERISA Section 302(d)(8)(C).
(iv) "Multiemployer Plan" means a (pension or
non-pension) employee benefit plan to which more than one employer
contributes and which is maintained pursuant to one or more collective
bargaining agreements.
4.20 Environmental Matters.
(a) Except as set forth in Section 4.20(a) of the
Disclosure Schedule (i) neither the Seller nor any Entity has ever generated,
transported, used, stored, treated, disposed of, or managed any Hazardous Waste
(as defined below) except in the ordinary course of operating a dental office;
(ii) no Hazardous Material (as defined below) has ever been or is threatened to
be spilled, released, or disposed of by the Seller or any Entity, at any site
presently or formerly owned, operated, leased, or used in connection with the
Entities businesses, or has ever come to be located in the soil or groundwater
at any such site; (iii) no Hazardous Material of the Seller or any Entity has
ever been transported from any site presently or formerly owned, operated,
leased, or used in connection with the Entities businesses for treatment,
storage, or disposal at any other place; (iv) neither the Seller nor any Entity
presently owns, operates, leases, or uses, nor has any of them previously
owned, operated, leased, or used, any site on which underground storage tanks
are or were located; and (v) no lien has ever been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased, or used in connection with the Entities businesses in connection with
the presence of any Hazardous Material and based upon any action or inaction of
the Seller or any Entity.
(b) Except as set forth in Section 4.20(b) of the
Disclosure Schedule, (i) neither the Seller nor any Entity has any liability
under, nor has it ever violated in any material respect, any Environmental Law
(as defined below); (ii) the Seller, each Entity, any property owned, operated,
leased, or used in connection with the Entities businesses, and any facilities
and operations thereon are presently in compliance in all material respects
with all applicable Environmental Laws; (iii) neither the Seller nor any Entity
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
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<PAGE> 28
Law; and (iv) to the best knowledge of Seller none of the items enumerated in
clause (iii) of this paragraph will be forthcoming.
(c) Except as set forth in Section 4.20(c) of the
Disclosure Schedule, no site owned, operated, leased, or used in connection
with the Entities businesses contains any asbestos or asbestos-containing
material, any polychlorinated biphenyls (PCBS) or equipment containing PCBS, or
any urea formaldehyde foam insulation, except, in each case, as either
individually, or in the aggregate, as would not have an adverse effect on the
business, operations, assets, condition (financial or other) or prospects of
the Entities businesses.
(d) The Purchaser has been provided with copies of all
documents, records, and information available concerning any environmental or
health and safety matter relevant to the Entities businesses, whether generated
in connection with the Entities businesses or otherwise, including, without
limitation, environmental audits, environmental risk assessments, site
assessments, documentation regarding off-site disposal of Hazardous Materials,
spill control plans, and reports, correspondence, permits, licenses, approvals,
consents, and other authorizations related to environmental or health and
safety matters issued by any governmental agency.
(e) For purposes of this Section 4.20, (i) "Hazardous
Material" shall mean and include any hazardous waste, hazardous material,
hazardous substance, petroleum product, oil, toxic substance, pollutant,
contaminant, or other substance which may pose a threat to the environment or
to human health or safety, as defined or regulated under any Environmental Law;
(ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or
regulated under any Environmental Law; (iii) "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, whether existing as of the
date hereof, or subsequently enacted; and (iv) the "Entities businesses" shall
include the Seller, any Entity and any predecessor to any of the foregoing.
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
Entities businesses who, individually, have received for the fiscal year ended
December 31, 1995, or are scheduled to receive for the fiscal year ended
December 31, 1996, 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 Entities businesses made payments
aggregating $100,000 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 the best knowledge of Seller, no supplier has any plan or
intention to terminate or reduce its business with the Entities businesses or
to materially and adversely modify its relationship therewith.
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<PAGE> 29
4.22 Employees; Labor Matters. The Entities businesses (i) employ
approximately 138 full-time non-dentist employees and 66 part-time non-dentist
employees, (ii) employ approximately 37 dentists (including both full-time and
part-time) (all dentists are employed pursuant to a written agreement between
an Entity and the dentist) and (iii) generally enjoy a good employer-employee
relationship. No Entity is 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. 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. Except as set forth in
Section 4.22 of the Disclosure Schedule, the Entities businesses have 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. Each Entity 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. Except as
set forth in Section 4.22 of the Disclosure Schedule, 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, nor are there,
and within the last three years there have not been, any strikes, slowdowns,
stoppages of work, or any other concerted interference with normal operations
existing, pending or threatened against or involving the Entities businesses.
No question concerning representation exists respecting the employees of either
Entity. To the best knowledge of Seller, there are no grievances, complaints
or charges that have been filed under any dispute resolution procedure
(including, but not limited to, any proceedings under any dispute resolution
procedure under any collective bargaining agreement) that might have an adverse
effect on the Entities businesses. No arbitration or similar proceeding is
pending and no claim therefor has been asserted. No collective bargaining
agreement is in effect or is currently being or is about to be negotiated by
either Entity. Each Entity 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. Except as set forth in Section 4.22 of
the Disclosure Schedule, there are no changes pending or, of which Seller has
knowledge, threatened with respect to (including, without limitation,
resignation of) the senior management, key supervisory personnel or dentists of
the Entities businesses, nor has Seller or either Entity received any notice or
information concerning any prospective change with respect to such senior
management or key supervisory personnel.
4.23 Material Relationships and Government Contracts.
(a) Except as set forth in Section 4.23(a) of the
Disclosure Schedule, to the best knowledge of Seller, the relationships of the
Entities businesses with its customers, Health Care Providers and the parties
to the contracts referred to in Section 4.13(a)(xv) are good commercial working
relationships. To the best knowledge of
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<PAGE> 30
Seller, no Health Care Provider or dental health maintenance organization
("DHMO") with which the Entities businesses do 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. Except as set forth in Section
4.23(a) of the Disclosure Schedule, no DHMO relationship or material contract
or other material business relationship of either Entity has been terminated in
the past year.
(b) Neither Entity has any contracts or subcontracts with
any government (including any municipal government) or governmental agency or
activity, and neither Entity is ineligible to submit bids to any DHMO.
4.24 Disclosure. To the best knowledge of Seller, the
representations, warranties and statements contained in this Agreement and in
the certificates, exhibits and schedules delivered by Seller and the Entities
pursuant to this Agreement, together with all materials provided by Seller and
the Entities or their agents with respect to the Entities businesses, 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 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 Entities businesses which has not been
specifically disclosed herein or in a Schedule furnished herewith.
4.25 Powers of Attorney. Neither Entity has any outstanding power
of attorney.
4.26 Corporate Records. The corporate record books and files and
records maintained by each Entity accurately record in all material respects
all corporate action taken by its respective stockholders, board of directors,
governing bodies and committees. The copies of the corporate records of each
Entity provided to the Purchaser for review, are true and complete copies of
the originals of such documents.
4.27 List of Directors and Officers. Section 4.27 of the
Disclosure Schedule contains a true and complete list of all current directors
and officers of and each Entity.
4.28 Transfer of Equity Interests. No holder of stock or other
equity interest of either Entity has at any time transferred any of such
instruments to any employee or professional independent contractor of either
Entity, which transfer constituted or could be viewed as compensation for
services rendered to either Entity by said employee or professional independent
contractor.
4.29 Equity Interest Repurchase. Neither Entity has redeemed or
repurchased any of its capital stock, or any other equity interest, as
applicable.
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<PAGE> 31
4.30 Additional Financial Representations.
(a) Cash on Hand. As of and immediately prior to the
Closing, the Entities have cash on hand of not less than $125,000.00 in the
aggregate (which aggregate amount also shall include the amount of cash
transferred by ADM to Management in connection with the sale of ADM's assets to
Management).
(b) Bank Debt and Non-Trade Debt. Except as provided in
Section 4.30(b) of the Disclosure Schedule, as of the Closing, the aggregate
outstanding bank debt and non-trade debt obligations of the Entities, together
with the amount of any bank debt and non-trade debt obligations the payment of
which has been guaranteed by either of the Entities, is zero.
(c) Capital Leases. As of the Closing, amounts due or
that may become due under all capital leases of the Entities (including for
this purpose ADM), together with the amount of capital lease obligations the
payment of which has been guaranteed by either of the Entities (including for
this purpose ADM), shall be no more than $184,000.
(d) No Other Extraordinary Indebtedness. As of the
Closing, except as provided in this Section 4.30, the aggregate outstanding
extraordinary indebtedness (i.e., indebtedness which is not in the ordinary
course of the Entities businesses), together with the amount of extraordinary
indebtedness the payment of which has been guaranteed by either of the
Entities, is zero.
(e) [INTENTIONALLY OMITTED]
(f) Entities Accounts Receivable. As of the Closing, the
Entities' aggregate accounts receivable shall be at least equal to the average
of the Entities' accounts receivable as of the last day of May 1996, June 1996
and July 1996, all of which have been calculated by the Seller in accordance
with generally accepted accounting principles, consistently applied.
(g) Entities Accounts Payable. As of the Closing, none
of the accounts payable of the Entities were past due. For purposes of this
representation, a payable shall not be deemed to be past due if the amount of
time that it is outstanding as of the Closing is consistent with the Entities'
prior payment practices.
(h) Termination of Insurance Premiums. As of the
Closing, neither of the Entities is obligated to pay any premiums on any life
insurance policy (either currently or in the future) covering Seller or any of
Seller's affiliates or family members.
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<PAGE> 32
(i) Gel-Kam Payments. On and after the Closing, all
receipts on account of sales of Gel-Kam by Seller, either of the Entities or
ADM, or any of their respective affiliates, will be the property of and
delivered to Management.
4.31 Investment Representations. Seller, in connection with his
acquisition of the Purchaser's Common Stock, represents that he 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 he is acquiring the Purchaser's Common Stock for his 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 Purchaser's 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 he has such knowledge and
experience in financial and business matters that he is 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 Purchaser's 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 OTHERWISE
ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY
LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF AN
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT DATED AS OF AUGUST 29, 1996,
INCLUDING THEREIN CERTAIN RESTRICTIONS ON TRANSFER AND VOTING REQUIREMENTS. A
COMPLETE AND CORRECT COPY OF THIS AGREEMENT IS AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
4.32 Statutory Mergers. The statutory mergers of First Dental,
S.C. with and into Midwest Dental Care, Mondovi, S.C. (now known as Midwest
Dental Care, Mondovi, Inc.) and Midwest Dental Care, Appleton Mall, S.C. with
and into Midwest
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<PAGE> 33
Dental Care, Sheboygan, S.C. (now known as Midwest Dental Care, Sheboygan,
Inc.) became effective under and in accordance with Wisconsin law. Midwest
Dental Care, Mondovi, S.C. was the sole surviving entity of its merger with
First Dental, S.C. Midwest Dental Care, Sheboygan, S.C. was the sole surviving
entity of its merger with Midwest Dental Care, Appleton Mall, S.C. Subsequent
to these mergers, neither First Dental, S.C. nor Midwest Dental Care, Appleton
Mall, S.C. were, and neither are currently, in existence. As a result of these
mergers, (i) all right, title and interest in and to all of the assets, rights
and property of First Dental, S.C. and Midwest Dental Care, Appleton Mall, S.C.
vested in Midwest Dental Care, Mondovi, S.C. and Midwest Dental Care,
Sheboygan, S.C., respectively, without reversion or impairment and (ii) Midwest
Dental Care, Mondovi, S.C. and Midwest Dental Care, Sheboygan, S.C. have and
assume all liabilities and obligations of First Dental, S.C. and Midwest Dental
Care, Appleton Mall, S.C., respectively.
ARTICLE 5. COVENANTS OF SELLER.
5.1 Making of Covenants and Agreements. Seller hereby makes the
covenants and agreements as set forth in this Article 5 for the period from and
after the Closing.
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 promptly following the Closing,
and in no event later than October 31, 1996, 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 which would cause or constitute a breach or default, or would
have caused or constituted a breach or default had such event occurred or been
known to Seller prior to the date hereof, 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, Seller shall give
detailed written notice thereof to the Purchaser, and Seller shall use his best
efforts to prevent or promptly remedy the same.
5.5 Payment of Certain Liabilities. Seller covenants and agrees
to immediately reimburse the Entities for any payments the Entities may be
required to
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make to Deloitte & Touche, Seller's real estate interests or Seller's attorneys
on account of the negotiation or performance of this Agreement.
5.6 No Liability Relating to HPH Partnership. In connection with
any ownership interest that either Entity has or has had in HPH Partnership, a
general partnership (the "Ownership Interest"), Seller covenants and agrees to
defend and hold harmless the Entities from all obligations, duties and
liabilities of any kind to HPH Partnership, Hehli and any other person(s) and
government agency or agencies whatsoever for or with respect to the Ownership
Interest.
5.7 Environmental Issues Relating to Sheboygan Lease. In
connection with that certain lease agreement entered into by and between Seller
and Midwest Dental Care, Sheboygan, Inc., dated August 29, 1996, for certain
real property located at 3709 Kohler Memorial Drive, Sheboygan, Wisconsin 53801
(the "Leased Premises"), Seller covenants and agrees to defend and hold
harmless the Entities from all obligations, duties and liabilities of any kind
including, but not limited to, liabilities relating to the underground storage
tanks and the buried hydraulic lift located on the Leased Premises, to any
person(s) or governmental agency or agencies whatsoever.
5.8 Obtain Termination Statements. On or before September 15,
1996, Seller shall obtain and deliver to Purchaser Forms UCC-3, Termination
Statements, releasing all security interests in the Entities held of record by
any person or entity as of August 27, 1996.
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 his 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 Entities 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 Restricted Stock Grants. The Purchaser's Compensation
Committee shall immediately adopt a resolution granting 80,000 shares of the
Purchaser's restricted stock to key management personnel of the Entities in
such amounts and to such key management selected by Seller and approved by the
Purchaser's Compensation Committee, whose approval shall not be unreasonably
withheld. The purchase price for such shares of restricted stock shall be
$.106 per share. These restricted stock grants shall be subject to such terms
and conditions as are determined by the
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<PAGE> 35
Purchaser's 1996 Stock Option and Incentive Plan and shall vest in equal
monthly amounts over a forty-eight (48) month period.
6.5 Working Group. The Purchaser agrees to form a working group
promptly after the Closing that will be comprised of the leaders of all group
practices acquired by Purchaser or its affiliates in the Region. The purposes
of this working group will be to share ideas and attempt to resolve problems
that arise with respect to such group practices. The Purchaser agrees to
appoint Seller as chairman of this working group through December 31, 2001.
6.6 Removal of Seller as a Guarantor. Following the Closing and
prior to February 28, 1997, the Purchaser and its affiliates shall use its and
their best reasonable efforts, with the strong cooperation of Seller, to cause
each lessor of property to the Entities to remove Seller as a guarantor and
release him from any liability to each such lessor; provided, however, that
Seller shall not be removed as a guarantor if such removal will prevent the
Seller from obtaining any consent, authorization or approval required or
necessary in connection with the transfer of the Stock.
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 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 himself and
his successors, executors, administrators, estate, heirs and assigns
(collectively, for purposes of this Article 8, "Seller"), agrees to defend,
indemnify and hold the Purchaser, each Entity, all subsidiaries and affiliates
of any of the foregoing (including without limitation stockholders of any of
the foregoing (other than Seller) and persons serving as officers, directors,
employees or agents of the Purchaser, each Entity or such subsidiaries or
affiliates thereof (in each case, other than Seller)) (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 ("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 Purchaser Indemnified Party (a "Loss"
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<PAGE> 36
or "Losses"), 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 as part of or pursuant to this
Agreement, or any claim, action or proceeding asserted, instituted or arising
out of any matter or thing covered by such representations or warranties
(collectively, "Warranty Claims");
(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;
or
(c) any liability of either Entity for Taxes arising from
an event or transaction prior to the Closing or as a result of the Closing
which have not been paid or accrued by such Entity prior to the Closing,
including without limitation, any increase in Taxes due to the unavailability
of any loss or deduction claimed by an Entity; provided, however, it is
specifically acknowledged and agreed that the Entities net operating loss
carryovers will be subject to limitation under the Code.
The rights of Purchaser Indemnified Parties to recover indemnification
in respect of any occurrence referred to in either of clauses (b) and (c) 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 Limitations on Indemnification by Seller.
(a) The right of Purchaser Indemnified Parties to
indemnification under Section 8.1 shall be subject to the following provisions:
(i) Indemnification with respect to Warranty
Claims (other than any such claims arising under Section 4.30 hereof)
shall expire eighteen (18) months after the Closing; provided,
however, that the limitation of this clause (i) shall not apply to
Warranty Claims involving fraud, intentional misrepresentation, title
to the Stock or Taxes, for which the period for making such claims
shall expire on the date which is six (6) months after the termination
of the applicable statute of limitations relating thereto. If prior
to the relevant date of expiration, a specific set of facts shall have
become known which may constitute or give rise to any Warranty Claim
as to which indemnity may be payable and a Purchaser Indemnified Party
shall have given notice of such facts to Seller, then the right to
indemnification with respect thereto shall remain in effect without
regard to when such matter shall have been finally determined and
disposed of, according to the date on which notice of the applicable
claim is given.
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<PAGE> 37
(ii) No indemnification shall be payable with
respect to Warranty Claims (not involving fraud, intentional
misrepresentation, title to the Stock or Taxes or any Warranty Claim
arising under Section 4.30 hereof) and with respect to Warranty Claims
under the Asset Purchase Agreement entered into between ADM and
Management of even date ("Asset Purchase Agreement") (not involving
fraud, intentional misrepresentation, title to the Stock or Taxes, or
any Warranty Claim arising under Section 4.30 hereof) to Purchaser
Indemnified Parties unless the total of all Warranty Claims shall
exceed SEVENTY-FIVE THOUSAND DOLLARS ($75,000) in the aggregate,
whereupon the full amount of such claims shall be recoverable in
accordance with the terms hereof.
(iii) Seller shall not be obligated to indemnify
Purchaser Indemnified Parties for Warranty Claims (other than any such
claims arising under Section 4.30 hereof and other such claims
involving fraud, intentional misrepresentations, title to the Stock or
Taxes) and with respect to Warranty Claims under the Asset Purchase
Agreement (not involving fraud, intentional misrepresentation, title
to the Stock or Taxes, or any Warranty Claim arising under Section
4.30 hereof) after the cumulative amount of all amounts paid by Seller
to Purchaser Indemnified Parties with respect thereto exceeds ONE
MILLION DOLLARS ($1,000,000).
(iv) The limitations herein with respect to
certain Warranty Claims shall not limit the rights of any Purchaser
Indemnified Party with respect to any other claims arising under
provisions of Section 8.1.
(b) In the event any claim for Indemnification hereunder
arises under more than one provision of Section 8.1, and as such may be subject
to limitations pursuant to this Section 8.2 if deemed to arise under a
particular provision but not if deemed to arise under a different provision
(e.g., a matter constituting both a breach of a representation and a breach of
a covenant), then the claim shall be deemed to arise under the provision to
which no restrictions or the least restrictive provisions apply.
(c) Indemnification pursuant to Section 8.1 is the
exclusive remedy of Purchaser Indemnified Parties against Seller for matters
arising out of the representations and warranties of Seller set forth in this
Agreement and the Schedules hereto and certificates delivered in connection
herewith after the Closing.
(d) The amount of any Losses suffered, sustained or
incurred by Purchaser Indemnified Parties or required to be paid by Seller
shall be reduced by the amount of any insurance proceeds and other amounts paid
to such Purchaser Indemnified Parties by any person whether or not a party to
this Agreement.
8.3 Indemnification by Purchaser. The Purchaser agrees to defend,
indemnify and hold Seller and his heirs (individually a "Seller Indemnified
Party" and collectively
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the "Seller Indemnified Parties") harmless from and against any and all Claims,
whether or not arising out of third- party claims, and including all amounts
paid in respect of Losses (as defined in Section 8.1 hereof) 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 the
Purchaser in this Agreement or in any Schedule, Exhibit or certificate
delivered by the 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 covered by such representations or warranties (collectively "Seller
Warranty Claims"); (b) any breach of any covenant or agreement made by the
Purchaser in this Agreement, or in any Schedule, Exhibit or certificate,
delivered by the Purchaser as part of or pursuant to this Agreement; or (c)
operation of the Entities from and after the Closing but only to the extent
Seller or ADM or both has potential or actual liability pursuant to any
guarantee or indemnification he or it executed in connection with the Entities
or either Entity (such claims under clauses (a), (b) or (c) being hereinafter
collectively referred to as "Seller Indemnifiable Claims"). The rights of
Seller Indemnified Parties to recover indemnification in respect of any
occurrence referred to in clause (b) of this Section 8.3 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
8.3.
8.4 Limitations on Indemnification by the Purchaser.
(a) The right of Seller Indemnified Parties to
indemnification under Section 8.3 shall be subject to the following provisions:
(i) Indemnification with respect to
Seller Warranty Claims shall expire eighteen (18) months after
the Closing; provided, however, that the limitation of this
clause (i) shall not apply to Seller Warranty Claims involving
fraud or intentional misrepresentation, for which the period
for making such claims shall expire on the date which is six
(6) months after the termination of the applicable statute of
limitations relating thereto. If prior to the relevant date
of expiration a specific state of facts shall have become
known which may constitute or give rise to any Seller Warranty
Claim as to which indemnity may be payable and a Seller
Indemnified Party shall have given notice of such facts to the
Purchaser, then the right to indemnification with respect
thereto shall remain in effect without regard to when such
matter shall have been finally determined and disposed of,
according to the date on which notice of the applicable claim
is given.
(ii) No indemnification shall be payable
with respect to Seller Warranty Claims (not involving fraud or
intentional misrepresentation) and with respect to all Seller
Warranty Claims under the Asset Purchase Agreement (other than
any such claims involving fraud or intentional
misrepresentation) to Seller Indemnified Parties
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<PAGE> 39
unless the total of all Seller Warranty Claims shall exceed
SEVENTY-FIVE THOUSAND DOLLARS ($75,000) in the aggregate,
whereupon the full amount of such claims in excess of such
amount shall be recoverable in accordance with the terms
hereof.
(iii) The Purchaser shall not be obligated
to indemnify Seller Indemnified Parties for Seller Warranty
Claims (other than any such claims involving fraud or
intentional misrepresentation) and with respect to all Seller
Warranty Claims under the Asset Purchase Agreement (other than
any such claims involving fraud or intentional
misrepresentation) after the cumulative amount of all amounts
paid by the Purchaser to Seller Indemnified Parties with
respect thereto exceeds ONE MILLION DOLLARS ($1,000,000).
(iv) The limitations herein with respect
to certain Seller Warranty Claims shall not limit the rights
of any Seller Indemnified Party with respect to any other
claims arising under Section 8.3.
(b) In the event any claim for Indemnification hereunder
arises under more than one provision of Section 8.3, and as such may be subject
to limitations pursuant to this Section 8.4 if deemed to arise under a
particular provision but not if deemed to arise under a different provision
(e.g., a matter constituting both a breach of a representation and a breach of
a covenant), then the claim shall be deemed to arise under the provision to
which no restrictions or the least restrictive provisions apply.
(c) Indemnification pursuant to Section 8.3 is the sole
and exclusive remedy of Seller Indemnified Parties against the Purchaser for
matters arising out of the representations and warranties of the Purchaser set
forth in this Agreement and the Schedules hereto and certificates delivered in
connection herewith after the Closing.
(d) The amount of any Losses suffered, sustained or
incurred by Seller Indemnified Parties or required to be paid by the Purchaser
shall be reduced by the amount of any insurance proceeds and other amounts paid
to such Seller Indemnified Parties by any person whether or not a party to this
Agreement.
8.5 Notice; Defense of Claims. 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
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<PAGE> 40
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. 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 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.
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.
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
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<PAGE> 41
parties may reasonably request and shall cooperate with the indemnifying party
or parties in such defense.
8.6 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) Except as provided herein, each party to this Agreement
will pay its fees and expenses in connection with this Agreement and the
transactions contemplated hereby and thereby. The Purchaser will pay the cost
for its independent accounting firm to prepare audited financial statements for
the Entities for the two (2) fiscal years ended December 31, 1994 and December
31, 1995.
(b) 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.
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:
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<PAGE> 42
TO THE PURCHASER: Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, Texas 75244
Attn: Warren F. Melamed, D.D.S.
Fax: (214) 458-0934
With a copy to: Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, Texas 75202
Attn: Kenneth K. Bezozo
Fax: (214) 651-5940
TO THE SELLER: David L. Hehli, D.D.S.
680 Hehli Way
Mondovi, Wisconsin 54755
Fax: (715) 926-5405
With a copy to: Steven M. Harris
Harris Kessler & Goldstein
640 North LaSalle Street, Suite 590
Chicago, Illinois 60610
Fax: (312) 280-8232
Any notice given hereunder may be given on behalf of any party by his 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
sheets and letters dated May 23, 1996, July 10, 1996, July 17, 1996 and July
23, 1996.
9.5 Assignability; Binding Effect. This Agreement and any rights
hereunder shall be assignable by the Purchaser 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, or 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 to
any 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), upon written notice to Seller.
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<PAGE> 43
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 Hehli in the event of his death).
9.6 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.
9.7 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.
9.8 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.
9.9 Consent to Jurisdiction; Certain Remedies. Solely for the
purpose of allowing a party to enforce its indemnification and other rights
hereunder, each of the parties hereby consents to personal jurisdiction,
service of process and venue in the federal or state courts of Texas or in the
court in which any claim for which indemnification may be sought hereunder is
brought against an indemnified party. 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.
9.10 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 an
entity, any officer, director, stockholder, partner or investor in such entity
or of or in any affiliate of such entity; and (iii) with respect to a person or
entity, any person or entity which directly or indirectly controls, is
controlled by, or is under common control with such person or entity.
(b) "control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly or as
trustee or executor, of
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<PAGE> 44
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;
(c) "person" means an individual, corporation,
partnership, association, trust or any unincorporated organization; and
(d) "subsidiary" of a person means any corporation more than
50 percent of whose outstanding voting securities, or any partnership, joint
venture or other entity more than 50 percent of whose total equity interest, is
directly or indirectly owned by such person.
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" or "best
knowledge" of Purchaser or "known" by Purchaser or words of similar import,
shall be deemed to include such knowledge as Purchaser or any executive officer
of the Purchaser (i.e., Warren Melamed, Gary Cage and Steve 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 Delaware
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 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 subject to
bankruptcy, reorganization, insolvency and other similar laws affecting the
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<PAGE> 45
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 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 or bylaws of Purchaser;
(ii) do not and will not violate in any 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; and
(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.
10.4 Litigation. There is no litigation pending or, to the best
knowledge of Purchaser, threatened against Purchaser which would 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 Common Stock. Upon consummation of the transactions
contemplated hereby, the shares of Purchaser's Common Stock issued to Seller
pursuant to Section 3.2 shall be duly authorized, validly issued, fully paid
and non- assessable. All shares of Purchaser's Common Stock, if any, issued
pursuant to any stock options granted under Section 3.3 or any restricted stock
awards made under Section 6.4 shall be, when issued, duly authorized, validly
issued, fully paid and non-assessable. As of the date hereof and after giving
effect to the transactions contemplated hereby, the authorized capital stock of
Purchaser consists of 15,000,000 shares of Common Stock, 1,000,000 shares of
Class A Common Stock, 4,800,000 shares of Convertible Participating Preferred
Stock and 3,840,000 shares of Redeemable Preferred Stock, of which 6,200,000,
407,500, 4,800,000 and zero shares, respectively, are issued and
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<PAGE> 46
outstanding. In addition, Purchaser has authorized and reserved for issuance
upon conversion of the Convertible Participating Preferred Stock 4,800,000
shares of Common Stock and 3,840,000 shares of Redeemable Preferred Stock, and
has reserved 800,000 shares of Class A Common Stock for issuance as options or
restricted stock awards under Purchaser's 1996 Stock Option and Incentive Plan.
10.7 Financial Statements; Undisclosed Liabilities.
(a) Purchaser has previously delivered to Seller the following
financial statements, copies of which are attached hereto as Section 10.7(a) of
Purchaser's Disclosure Schedule:
(i) Audited balance sheet for Monarch Dental
Associates, L.P., a Texas limited partnership as of December 31, 1995
(herein, "Purchaser's Audited Base Balance Sheet"), and audited
statements of income, retained earnings and cash flows for the year
then ended including full generally accepted accounting principles
disclosures; and
(ii) An unaudited consolidated balance sheet for
Purchaser as of June 30, 1996 (herein, "Purchaser's Base Balance
Sheet"), and an unaudited statement of income, retained earnings and
cash flows for the three-month and six-month period(s) ended June 30,
1996, prepared in accordance with generally accepted accounting
principles for interim financial statements (which do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements).
Said financial statements have been prepared by Purchaser from its books and
records, and present fairly in all respects the consolidated financial
condition of Purchaser at the dates of said statements and the consolidated
results of operations for the periods covered thereby in accordance with
generally accepted accounting principles in the United States except as set
forth above.
10.8 Common Stock. Upon the issuance of Purchaser's Common Stock
pursuant to Section 3.2 of this Agreement, Seller shall own approximately 6.1%
of the issued and outstanding Common Stock of Purchaser on a fully-diluted
basis (including shares of Common Stock issuable upon conversion of Purchaser's
preferred stock) as of the Closing.
10.9 Payment of Obligations. Subsequent to the Closing, Purchaser
shall pay, or cause to pay, all of the Entities' liabilities in the ordinary
course of business as such liabilities become due except as may be contested in
good faith.
10.10 Investment Representations. Purchaser, in connection with its
acquisition of the Entities' Common Stock, represents that it is an "accredited
investor" as such term is defined in Rule 501 under the Securities Act.
Purchaser represents to
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<PAGE> 47
the Seller that it is acquiring the Common Stock of the Entities for its 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.
Purchaser acknowledges that the Common Stock of the Entities 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. Purchaser represents that it has such
knowledge and experience in financial and business matters that it is 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.
Purchaser acknowledges and agrees that the following legend shall be
typed on each certificate evidencing shares of the Common Stock of the Entities
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 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.
10.11 Ordinary Course. Since the date of the Purchaser's Base
Balance Sheet, Purchaser has conducted its businesses only in the ordinary
course and in a manner consistent with prior practices.
10.12 Solvency. After giving effect to the transactions
contemplated under this Agreement, Purchaser's assets shall (i) have a value,
both at book value and at fair market value, greater than the amount of
Purchaser's liabilities, and (ii) be sufficient to provide Purchaser with
sufficient working capital to enable it to operate its business and to meet its
obligations as they become due.
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<PAGE> 48
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:
ATTEST MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
--------------------------------- ------------------------------------
Secretary Name: Warren F. Melamed, D.D.S.
[Corporate Seal] Title: President
SPOUSE'S CONSENT SELLER:
I acknowledge that I have read
the foregoing Stock Purchase
Agreement and that I understand the
contents thereof.
/s/ MARY K. HEHLI /s/ DAVID L. HEHLI
--------------------------------- ---------------------------------------
Mary K. Hehli David L. Hehli, D.D.S.
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<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
(Dr. David L. Hehli)
Employment Agreement, dated the 29th day of August, 1996, by and among
David L. Hehli, D.D.S. (the "Employee"), Monarch Dental Corporation, a Delaware
corporation ("Parent") and Midwest Dental Management, Inc., a Wisconsin
corporation (the "Company").
W I T N E S S E T H
WHEREAS, the Employee is the founder and the president of Midwest
Dental Care, Mondovi, Inc. ("MDC-Mondovi"), Midwest Dental Care, Sheboygan,
Inc. ("MDC-Sheboygan") and Advance Dental Management, Inc. ("ADM")
(collectively "Midwest Dental Care"); and
WHEREAS, reference is made to that certain Stock Purchase Agreement
(the "Stock Purchase Agreement") relating to the sale of all of the capital
stock of MDC-Mondovi and MDC-Sheboygan to the Parent; and
WHEREAS, reference is made to that certain Asset Purchase Agreement
(the "Asset Purchase Agreement") relating to the sale of substantially all of
the assets of ADM to the Company; and
WHEREAS, the parties hereto desire to assure that the Employee's
knowledge and experience will continue to be available after the
above-described transactions.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the parties hereto agree as follows:
1. Employment. Subject to the provisions of Section 6, the
Company hereby employs the Employee and the Employee accepts such employment
upon the terms and conditions hereinafter set forth.
2. Term of Employment. Subject to the provisions of Section 6,
the term of the Employee's employment pursuant to this Agreement shall commence
on and as of the date hereof (the "Effective Date") and shall terminate on
December 31, 2001. The period during which the Employee serves as an employee
of the Company in accordance with and subject to the provisions of this
Agreement is referred to in this Agreement as the "Term of Employment."
3. Duties. During the Term of Employment, the Employee (a) shall
serve as an employee of the Company with the title and position of President of
the
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<PAGE> 2
Company, (b) shall have such duties as may be prescribed from time to time by
the Chief Executive Officer of the Parent, consistent with the Employee's
general area of experience and skills, (c) as President of the Company, shall
have general supervisory responsibility over all aspects of its business, which
shall consist of the conduct of the business heretofore known as Midwest Dental
Care, subject to the supervision of the Chief Executive Officer of the Parent,
(d) upon the request of the Chief Executive Officer of the Parent, shall serve
as an officer of any of Parent's subsidiaries, and (e) shall render all
services reasonably incident to the foregoing. The Employee shall report to
the Chief Executive Officer of the Parent in carrying out his duties and
responsibilities hereunder, and such duties and responsibilities shall be
performed principally, and the Employee shall be based, at the Company's
offices in Mondovi, Wisconsin, subject to reasonable travel requirements for
business purposes consistent with the travel requirements of executive officers
of the Parent and the Company generally.
Employee also shall serve as the chairman of the working group which
shall consist of all of the leaders of group practices acquired by Parent or
its affiliates within the boundaries of the states of Wisconsin, Minnesota and
Iowa. Employee shall serve as the chairman of the working group beginning on
the date of this Agreement and continuing through December 31, 2001.
The Employee hereby accepts such employment, agrees to serve the
Company in the capacities indicated, and agrees to use his best efforts in, and
shall devote substantially all of his working time, attention, skill and
energies to, the advancement of the interests of the Company, the Parent and
each of their affiliates and the performance of his duties and responsibilities
hereunder, provided that the foregoing shall not be deemed to preclude service
on civic or professional boards to the extent not inconsistent with that
certain Non-Competition Agreement of even date executed by the Employee
concurrently herewith and in connection with the Stock Purchase Agreement and
Asset Purchase Agreement (the "Non-Competition Agreement").
4. Compensation. During the Term of Employment, the Company
shall pay the Employee a salary at the annual rate of $200,000.00 per annum
(the "Base Salary"). Such salary shall be subject to withholding under
applicable law, shall be pro rated for partial years and shall be payable in
periodic installments not less frequently than monthly in accordance with the
Company's usual practice for officers of the Company, as in effect from time to
time.
The Company agrees that Employee's then current Base Salary shall be
increased once each calendar year on the anniversary of the date hereof
beginning in calendar year 1997 by the amount necessary to reflect the increase
during the previous calendar year in the Consumer Price Index (as defined
below). The adjustment in Base Salary shall take effect as of each anniversary
of the date hereof after the official publication of the Consumer Price Index
for the end of the calendar year immediately
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preceding such anniversary. For the purposes of this Section 4, the Consumer
Price Index shall mean the "Consumer Price Index - Urban Wage Earners
(1967=100)" published by the Bureau of Labor Statistics of the United States
Department of Labor, utilizing the columns for Milwaukee, Wisconsin, "all
items," or any successor index.
5. Benefits.
(a) During the Term of Employment, the Employee shall be
entitled to participate in any and all medical, pension, dental and life
insurance plans and disability income plans, retirement arrangements and other
employment benefits as in effect from time to time for officers of the Parent.
Such participation shall be subject to (i) the terms of the applicable plan
documents (including, as applicable, provisions granting discretion to the
Board of Directors of the Parent or the Company or any administrative or other
committee provided for therein or contemplated thereby) and (ii) generally
applicable policies of the Company consistent with the terms herein.
(b) From the date hereof through November 1999, the
Company shall provide the Employee with the use of its Lexus LS400 automobile
and, beginning December 1999 through December 2001, the Company shall provide a
car allowance of $1,000 per month. In addition, the Company shall reimburse
Employee for gas, oil, maintenance and insurance for the business use of
Employee's automobile.
(c) During the Term of Employment, the Employee shall
receive paid vacation annually in accordance with the Company's and the
Parent's practices for executive officers, as in effect from time to time, but
in any event not less than four (4) weeks per calendar year.
(d) Compliance with the provisions of this Section 5
shall in no way create or be deemed to create any obligation, express or
implied, on the part of the Company, the Parent or any of their affiliates with
respect to the continuation of any particular benefit or other plan or
arrangement maintained by them or their predecessors as of or prior to the date
hereof or the creation and maintenance of any particular benefit or other plan
or arrangement at any time after the date hereof. Notwithstanding the
foregoing sentence to the contrary, the benefit conferred upon Employee
pursuant to Section 5(b) shall continue without interruption throughout the
Term of Employment.
6. Termination of Employment of the Employee. Prior to the
expiration of the Term of Employment as provided in Section 2 hereof, this
Agreement may or shall (as applicable) be terminated as follows:
(a) At any time by the mutual consent of the Employee and
the Company.
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<PAGE> 4
(b) At any time for "cause" by the Company and the Parent
upon written notice to the Employee. For purposes of this Agreement,
a termination shall be for "cause" only if:
(i) the Employee shall be convicted by a court of
competent jurisdiction of, or shall plead guilty or nolo
contendere to, an act of fraud, embezzlement, misappropriation
or breach of fiduciary duty against the Company, Parent or any
of their affiliates, or shall be convicted by a court of
competent jurisdiction of, or shall plead guilty or nolo
contendere to, any felony, except a felony resulting from the
operation of a motor vehicle; or
(ii) the Employee shall commit a breach of any of
the covenants, terms or provisions hereof, which breach has
not been remedied within thirty (30) days after delivery to
the Employee by the Parent and the Company of written notice
of the facts constituting the breach (provided that if such
breach cannot reasonably be cured within such thirty (30) day
period, the Employee shall be granted such longer period as
may be necessary, so long as the Employee diligently pursues
such cure); or
(iii) the Employee shall commit a breach of any of
the covenants, terms or provisions of the Non-Competition
Agreement, which breach has not been remedied within thirty
(30) days after delivery to the Employee by the Parent and the
Company of written notice of the facts constituting such
breach; or
(iv) the Employee shall have failed to comply with
written instructions from the Parent's Chief Executive
Officer, which are reasonable and consistent with Section 3,
or shall have substantially failed to perform the Employee's
duties hereunder, after written notice from the Chief
Executive Officer of the Parent and after a fair hearing, at
which the Employee is allowed to present evidence or testimony
regarding the reasons for the Employee's actions and other
evidence bearing on the situation.
Upon termination for cause as provided in this Section 6(b), (A) all
obligations of the Company and the Parent under this Agreement shall thereupon
immediately terminate other than any obligation of the Company with respect to
earned but unpaid Base Salary and benefits contemplated hereby to the extent
then accrued or vested, it being understood that upon any such termination, the
Employee shall not be entitled to receive any continuation of benefits except
as may be required by law, and (B) the Company and the Parent shall have any
and all rights and remedies under this Agreement and applicable law.
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<PAGE> 5
(c) Upon the death or upon the permanent disability (as
defined below) of the Employee continuing for a period in excess of
one hundred twenty (120) days. Upon any such termination of the
Employee's employment as provided in this Section 6(c), all
obligations of the Company and Parent under this Agreement shall
thereupon immediately terminate other than any obligation of the
Company with respect to earned but unpaid Base Salary and benefits
contemplated hereby to the extent then accrued or vested through the
date of termination. As used herein, the terms "permanent disability"
or "permanently disabled" shall mean the inability of the Employee, by
reason of injury, illness or other similar cause, to perform the
material functions of his duties and responsibilities in connection
with the conduct of the business and affairs of the Company, as
determined reasonably and in good faith by an independent physician
reasonably acceptable to the Employee and the Company and the Parent.
(d) At any time by the Employee upon ninety (90) days'
prior written notice to the Company. Upon termination by the Employee
as provided in this Section 6(d), all obligations of the Company and
the Parent under this Agreement thereupon immediately shall terminate
other than any obligation of the Company with respect to earned by
unpaid Base Salary and benefits contemplated hereby to the extent then
accrued or vested through the date of termination.
(e) At any time without "cause" (as defined in Section
6(b)) by the Company and the Parent upon written notice to the
Employee. In the event of termination of the Employee by the Company
and the Parent pursuant to this Section 6(e) or Section 6(f) below,
the Company shall (i) continue to make Base Salary payments to the
Employee from the date of termination through December 31, 2001, as
contemplated by Section 4, and (ii) continue the benefit arrangements
applicable to the Employee as contemplated by Section 5 through
December 31, 2001, with such amounts agreed by the parties hereto to
be in full satisfaction and compromise of all claims of Employee
arising out of this Agreement. The Employee shall not be under any
obligation to mitigate the Company's severance obligation under this
Section 6(e) by obtaining other employment.
(f) The Employee shall have the right to terminate his
employment hereunder in the event of a material default by the Company
or the Parent in the performance of its obligations hereunder after
the Employee has given written notice to the Company and the Parent
specifying such default by the Company or the Parent and giving the
Company or the Parent, as applicable, a reasonable time, not less than
thirty (30) days, to conform its performance to its obligations
hereunder. The rights and obligations of the parties shall be as set
forth in Section 6(e) in the event of any such termination. The
Employee
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shall not be under any obligation to mitigate the Company's severance
obligation under this Section 6(f) by obtaining other employment.
(g) Notwithstanding termination of this Agreement as
provided in this Section 6 or any other termination of the Employee's
employment with the Company, the Employee's obligations under Section
7 hereof and in the Non-Competition Agreement of even date herewith
shall survive any termination of the Employee's employment with the
Company at any time and for any reason unless and until it is
determined by a court of competent jurisdiction that the Company
materially breached this Agreement prior to a material breach of this
Agreement by the Employee.
7. Confidentiality: Proprietary Rights.
(a) In the course of performing services hereunder, on
behalf of the Company and the Parent, the Employee has had, and it is
anticipated that the Employee will from time to time have, access to
confidential records, data, customer lists, trade secrets and other
confidential information owned or used in the course of business by the
Company, the Parent and their affiliates and predecessors (the "Confidential
Information"). The Employee agrees (a) to hold the Confidential Information in
strict confidence, (b) not to disclose the Confidential Information to any
person (other than in the regular course of business of the Company, the Parent
or any of their affiliates), and (c) not to use, directly or indirectly, any of
the Confidential Information for any competitive or commercial purpose other
than on behalf of the Company, the Parent and their affiliates; provided,
however, that the limitations set forth above shall not apply to any
Confidential Information which (i) is then generally known to the public; (ii)
became or becomes generally known to the public through no fault of the
Employee; (iii) is disclosed in accordance with an order of a court of
competent jurisdiction or applicable law; or (iv) is disclosed by Company to
Midwest Dental Plan, Ltd. ("MDP") in connection with MDP's marketing or sale of
its dental plan(s). Upon the termination of the Employee's employment with the
Company for any reason, all Confidential Information (including, without
limitation, all data, memoranda, customer lists, notes, programs and other
papers and items, and reproductions thereof relating to the foregoing matters)
in the Employee's possession or control, shall be returned to the Company, the
Parent or the applicable affiliate and remain in its or their possession.
Notwithstanding the foregoing provisions of this Section 7(a), if the
employment of Employee with the Company is terminated by the Company without
cause (as defined in Section 6(b)), the Employee's obligations under this
Section 7(a) shall automatically cease during any period of time that the
Company or the Parent are in default of their obligations to make the severance
payments to Employee as provided in Sections 6(e) and 11. The Employee's
remedies in this Section 7(a) and elsewhere in this Agreement are cumulative.
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(b) The Employee recognizes that the Company, the Parent
and their affiliates possess a proprietary interest in all of the information
described in Section 7(a) and have the exclusive right and privilege to use,
protect by copyright, patent or trademark, or otherwise exploit the processes,
ideas and concepts described therein to the exclusion of the Employee, except
as otherwise agreed between the Company, the Parent and the Employee in
writing. The Employee expressly agrees that any products, inventions,
discoveries or improvements made by the Employee in the course of the
Employee's employment, during the Term of Employment, including any of the
foregoing which is based on or arising out of the information described in
Section 7(a), shall be the property of and inure to the exclusive benefit of
the Company or the Parent, as applicable. The Employee further agrees that any
and all products, inventions, discoveries or improvements developed by the
Employee (whether or not able to be protected by copyright, patent or
trademark) during the course of his employment, or involving the use of the
time, materials or other resources of the Company, the Parent or any of their
affiliates, shall be promptly disclosed to the Company and the Parent and shall
become the exclusive property of the Company or the Parent as applicable, and
the Employee shall execute and deliver any and all documents necessary or
appropriate to implement the foregoing.
(c) The Employee agrees, while he is employed by the
Company, to offer or otherwise make known or available to it, as directed by
the Chief Executive Officer of the Parent, and without additional compensation
or consideration, any business prospects, contracts or other business
opportunities that he may discover, find, develop or otherwise have available
to him in any field in which the Company, the Parent or their affiliates are
engaged, and further agrees that any such prospects, contracts or other
business opportunities shall be the property of the Company or the Parent, as
applicable.
(d) The Employee acknowledges that the Non-Competition
Agreement is an integral part of his employment arrangements with the Company.
8. Specific Performance; Severability. It is specifically
understood and agreed that any breach of the provisions of Section 7 hereof by
the Employee is likely to result in irreparable injury to the Company, the
Parent and/or its or their affiliates, 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 shall be entitled to enforce the specific performance of
this Agreement by the Employee and to seek both temporary and permanent
injunctive relief (to the extent permitted by law), without the necessity of
posting a bond or proving actual damages. In case any of the provisions
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, any such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had been limited or modified (consistent with its general intent) to
the extent necessary to
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make it valid, legal and enforceable, or if it shall not be possible to so
limit or modify such invalid, illegal or unenforceable provision or part of a
provision, this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or part of a provision had never been contained in this
Agreement.
9. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if faxed (with transmission acknowledgment received), delivered
personally or mailed by certified or registered mail (return receipt
requested), as follows:
To the Company or the Parent:
Monarch Dental Corporation
4201 Spring Valley, Suite 320
Dallas, TX 75244
Attn: Warren F. Melamed, D.D.S.
Fax No.: (214) 458-0934
With a copy to:
Kenneth K. Bezozo, Esq.
Haynes and Boone, L.L.P.
901 Main Street, Suite 3100
Dallas, TX 75202
Fax No.: (214) 651-5940
To the Employee:
David L. Hehli, D.D.S.
680 Hehli Way
Mondovi, WI 54755
Fax No.: (715) 926-5405
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With a copy to:
Steven M. Harris, Esq.
Harris Kessler & Goldstein
640 North LaSalle Street
Suite 590
Chicago, IL 60610
Fax No.: (312) 280-8232
or to such other address or fax number of which any party may notify the other
parties as provided above. Notices shall be effective as of the date of such
delivery, mailing or fax.
10. Miscellaneous. This Agreement shall be governed by and
construed under the laws of the State of Wisconsin, and shall not be amended,
modified or discharged in whole or in part except by an agreement in writing
signed by both of the parties hereto. The failure of either 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 sale and may not
be otherwise assigned by the Company or the Employee. This Agreement
supersedes all prior understandings and agreements between the parties relating
to the subject matter hereof.
11. Guaranty by Parent. Parent unconditionally and irrevocably
guarantees the Company's performance and payment of the Company's obligations
to the Employee under this Agreement. Employee may immediately commence any
action against Parent to enforce his rights hereunder without first exhausting
his remedies against Company. This guarantee shall not be adversely effected
in any way due to a modification of the employment relationship between Company
and Employee nor due to a modification to the legal relationship between
Company and Parent. Parent represents and warrants that it benefits from
Employee's employment relationship with Company and therefore this guarantee is
supported by adequate consideration.
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 an entity, any officer, director, stockholder, partner or investor
in such entity or of or in any affiliate of such entity; and (iii) with
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respect to a person or entity, any person or entity which directly or
indirectly controls, is controlled by, or is under common control with such
person or entity.
(b) "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;
(c) "person" means an individual, corporation,
partnership, association, trust or any unincorporated organization; and
(d) "subsidiary" of a person means any corporation more
than 50 percent of whose outstanding voting securities, or any partnership,
joint venture or other entity more than 50 percent of whose total equity
interest, is directly or indirectly owned by such person.
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IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date first set forth above.
COMPANY:
MIDWEST DENTAL MANAGEMENT, INC.
By: /s/ GARY W. GAGE
---------------------------------
Gary W. Cage, Vice President
PARENT:
MONARCH DENTAL CORPORATION
By: /s/ WARREN F. MELAMED
---------------------------------
Warren F. Melamed, D.D.S.,
President
EMPLOYEE:
/s/ DAVID L.HEHLI
------------------------------------------
David L. Hehli, D.D.S.
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EXHIBIT 10.21
NON-COMPETITION AGREEMENT
(Dr. Hehli)
NON-COMPETITION AGREEMENT dated this 29th day of August, 1996 by and
among Monarch Dental Corporation, a Delaware corporation (the "Company"), on
the one hand, and Dr. David L. Hehli ("Dr. Hehli"), Advance Dental Management,
Inc., a Wisconsin corporation ("ADM") and Midwest Dental Plan, Ltd., a
Wisconsin limited service health organization ("MDP") (collectively, the
"Seller Entities" and individually a "Seller Entity"), on the other hand.
Reference is made to that certain Stock Purchase Agreement dated of even date
relating to the acquisition by the Company from Hehli of all of the common
stock in Midwest Dental Care, Sheboygan, Inc., a Wisconsin corporation and
Midwest Dental Care, Mondovi, Inc., a Wisconsin corporation (collectively,
"Midwest Dental Care Entities") in consideration of substantial cash payments
and the issuance of shares of Common Stock of the Company to Dr. Hehli, that
certain Asset Purchase Agreement dated of even date relating to the acquisition
by Midwest Dental Management, Inc. ("Management") from ADM of certain assets
subject to certain liabilities in consideration of substantial cash payments,
in each case subject to the terms and conditions set forth in the Stock
Purchase Agreement and the Asset Purchase Agreement (collectively, the
"Purchase Agreements") and that certain Employment Agreement dated of even date
among the Company, Management and Dr. Hehli (the "Employment Agreement").
Capitalized terms used in this Agreement and not defined herein shall have the
meanings ascribed to them in the Purchase Agreements.
WITNESSETH
WHEREAS, Dr. Hehli beneficially owned all of the outstanding equity
interest in the Midwest Dental Care Entities and ADM, which have heretofore
conducted the Midwest Dental Care business and has served and continues to
serve as President and Chief Executive Officer of such entities;
WHEREAS, as a material inducement to the Company and Management
(collectively, the "Purchaser Entities") entering into the Purchase Agreements
and in consideration of the Purchaser Entities' covenants and agreements
contained in the Purchase Agreements, including the payment of the substantial
consideration specified therein, and of the payment made by Company pursuant to
Section l(b) hereof, and in further consideration of the covenants and
agreements set forth herein, Dr. Hehli and the Seller Entities have agreed to
execute and deliver this Agreement; and
WHEREAS, the execution and delivery by Dr. Hehli and the Seller
Entities of this Agreement is a material condition to the Company's and
Management's willingness to consummate the transactions specified in the
Purchase Agreements.
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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. Hehli or any Seller Entity in violation of the terms hereof
would deprive the Purchaser Entities and their respective subsidiaries (as
defined below) of the benefit of the Purchaser Entities bargain under the
Purchase Agreements, as a material inducement to and a condition precedent of
the Purchaser Entities payment of substantial consideration under the Purchase
Agreements, in consideration of the payment to be paid by the Company pursuant
to Section l(b) below and the other covenants set forth herein, and to preserve
the goodwill associated with the Midwest Dental Care business, Dr. Hehli and
each Seller Entity hereby agree to the following restrictions on his and their
activities:
(a) Non-Competition Agreement of Dr. Hehli and Seller
Entities. Dr. Hehli and each Seller Entity hereby agree that during the period
commencing on the date hereof and ending on the date which is one (1) year
after the date of the later of (i) the termination of Dr. Hehli's employment
with Management for any reason or (ii) the date the Company pays to Dr. Hehli
his last base salary payment as provided in the Employment Agreement, including
but not limited to, base salary payments paid as a result of termination
pursuant to Sections 6(e) or 6(f) of the Employment Agreement (such date in (i)
or (ii) defined as the"Effective Date"), he and they will not, without the
express written consent of the Company, directly or indirectly, anywhere in the
Region, as defined in Section 1(c), engage in any activity which is, or
participate or invest in, 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 subsidiary of
the Company), and including particularly any such business, organization or
person involving, or which is, a family member of Dr. Hehli, whose business,
activities, products or services are competitive with any of the businesses,
activities, products or services conducted or offered by the Company and its
subsidiaries within the Region (including for purposes of this Agreement any
employees and independent contractors which or who provide dental services in
connection with the business of the Company and its subsidiaries (herein,
"Dental Providers")) during any period in which Dr. Hehli serves as an officer
or employee of Management or any of its affiliates, 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 itself or any such competitor, any officer or employee of, or any
Dental Provider who provides services in connection with the business of, any
of the Purchaser Entities or their respective affiliates, encouraging for or on
behalf of himself or itself or any such competitor, any such officer, employee
or Dental Provider
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to terminate his, her or its relationship or employment with any of the
Purchaser Entities or their respective affiliates (including Dental Providers),
soliciting for or on behalf of himself or itself or any such competitor, any
client of any of the Purchaser Entities or their respective affiliates
(including Dental Providers) and diverting to any person (as hereinafter
defined) any client or business opportunity of any of the Purchaser Entities or
their respective affiliates (including Dental Providers).
Notwithstanding anything herein to the contrary, (i) the provision of
dental services by Dr. Hehli as a sole practitioner shall be exempt from the
provisions of this Agreement, (ii) Dr. Hehli may make passive investments in
any enterprise competitive with Company and its subsidiaries in the Region (as
defined below) the shares of which are publicly traded if such investment
constitutes less than five percent (5%) of the equity of such enterprise and
(iii) MDP may engage in the sale of managed care dental services to groups
provided that it does not offer (directly or through one or more associated
services corporations or other licensed professionals) dental health care
services to patients (including, without limitation, any so-called "staff
model" dental health maintenance organization).
Neither Dr. Hehli nor any Seller Entity nor any business entity
controlled by him or them is a party to any contract, commitment, arrangement
or agreement which could, following the date hereof, restrain or restrict the
Purchaser Entities or their respective affiliates from carrying on the Midwest
Dental Care business or restrain or restrict Dr. Hehli from performing his
obligations under his Employment Agreement among Dr. Hehli, Management and the
Company of even date, and as of the date of this Agreement neither Dr. Hehli
nor any Seller Entity has any business interests (not publicly traded) in the
health care industry whatsoever other than his interest in the Company, MDP and
Management (as an employee).
Notwithstanding the foregoing provisions of this Section 1(a), if the
employment of Dr. Hehli with Management is terminated by Management and the
Company without "cause," as defined in Section 6(b) of the Employment
Agreement, or by Dr. Hehli pursuant to Section 6(f) therein, then Dr. Hehli's
obligations under this Section 1(a) shall automatically cease during any period
of time that the Company and the Parent are in default of their obligations to
make the severance payments to Dr. Hehli as provided in Section 6(e) of his
Employment Agreement.
(b) Non-Competition Payment. In consideration of the
execution and delivery by Dr. Hehli and the Seller Entities of this Agreement,
on the date hereof the Company shall make a cash payment to Dr. Hehli in the
amount of $10,000.
(c) Geographic Area. The provisions of Section 1 of this
Agreement shall apply only within a 25 mile radius of any dental health or
dental management office owned or operated by the Company, the Seller Entities
or their respective affiliates on the Effective Date within the State of
Wisconsin (the "Region").
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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 Purchase Agreements, (b) are given as an integral and
essential part of the transactions contemplated by the Purchase Agreements and
(c) but for the covenants of Dr. Hehli and the Seller Entities contained in
this Agreement, the Company and Management would not have entered into the
Purchase Agreements or consummated the transactions contemplated thereby. Dr.
Hehli and the Seller Entities have independently consulted with their counsel
and have been advised in all respects concerning the covenants contained
herein, including the reasonableness of such covenants, with specific regard to
the business to be conducted by the Purchaser Entities and their subsidiaries.
Section 3. Certain Remedies; Severability. It is specifically
understood and agreed that any breach of the provisions of this Agreement by
Dr. Hehli or any Seller Entity 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 (including, without limitation, Management which
employs Dr. Hehli as an intended beneficiary hereof) shall be entitled to
enforce the specific performance of this Agreement by Dr. Hehli or the
relevant Seller Entity through both temporary and permanent injunctive relief
without the necessity of proving actual damages or the posting of any bond, 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, such covenant 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. Except as
specifically provided in this Agreement, the existence of any claim or cause of
action which Dr. Hehli or any Seller Entity may have against the Company or any
of its subsidiaries shall not constitute a defense or bar to the enforcement of
any of the provisions of this Agreement.
Section 4. Jurisdiction. The parties hereby submit to the
non-exclusive jurisdiction of the courts of the State of Wisconsin 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
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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: With a copy to:
Monarch Dental Corporation Haynes and Boone, L.L.P.
4201 Spring Valley, Suite 320 901 Main Street
Dallas, Texas 75244 Suite 3100
Attn: Warren F. Melamed, D.D.S., Dallas, Texas 75202
President Attn: Kenneth K. Bezozo
To Dr. Hehli: With a copy to:
David L. Hehli, D.D.S. Harris Kessler & Goldstein
680 Hehli Way 640 N. LaSalle Street
Mondovi, Wisconsin 54755 Suite 590
Chicago, Illinois 60610
Attn: Steven M. Harris
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 Wisconsin, and shall not be
modified or discharged in whole or in part except by an agreement in writing
signed by the Company and Dr. Hehli. 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 Dr. Hehli or any Seller Entity. This
Agreement supersedes all prior understandings and agreements between the
parties relating to the subject matter hereof (without limitation of the
Purchase Agreements executed by Dr. Hehli and ADM and the Employment Agreement
executed by Dr. Hehli as of the date hereof).
Section 7. Certain Definitions. For purposes of this Agreement,
the term:
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(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 an entity, any officer, director, stockholder, partner or investor
in such entity or of or in any affiliate of such entity; and (iii) with respect
to a person or entity, any person or entity which directly or indirectly
controls, is controlled by, or is under common control with such person or
entity.
(b) "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;
(c) "person" means an individual, corporation,
partnership, association, trust or any unincorporated organization; and
(d) "subsidiary" of a person means any corporation more
than 50 percent of whose outstanding voting securities, or any partnership,
joint venture or other entity more than 50 percent of whose total equity
interest, is directly or indirectly owned by such person.
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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/ WARREN F. MELAMED
---------------------------------------
Warren F. Melamed, D.D.S., President
DR. HEHLI
/s/ DAVID L. HEHLI
------------------------------------------------
David L. Hehli, D.D.S.
ADVANCE DENTAL MANAGEMENT, INC.
By: /s/ DAVID L. HEHLI
---------------------------------------
David L. Hehli, D.D.S., President
MIDWEST DENTAL PLAN, LTD.
By: /s/ YVONNE MAYBERRY
---------------------------------------
Yvonne Mayberry, Vice President
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EXHIBIT 10.24
FORM OF
INDEMNIFICATION AGREEMENT
This Agreement made and entered into as of ______________________ _____,
________ ("Agreement"), by and between Monarch Dental Corporation (the
"Company," which term shall include any Entity (as hereinafter defined),
directly or indirectly, controlled by or affiliated with the Company) and
______ ________________________ ("Indemnitee"):
WHEREAS, it is essential to the Company that it be able to retain and
attract as directors the most capable persons available;
WHEREAS, increased corporate litigation has subjected directors and
officers to litigation risks and expenses, and the limitations on the
availability of directors and officers liability insurance have made it
increasingly difficult for the Company to attract and retain such persons;
WHEREAS, its by-laws require the Company to indemnify their directors
and officers to the fullest extent permitted by law and permit it to make other
indemnification arrangements and agreements;
WHEREAS, the Company desires to provide Indemnitee with specific
contractual assurance of Indemnitee's rights to full indemnification against
litigation risks and expenses (regardless, among other things, of any amendment
to or revocation of such by-laws or any change in the ownership of the Company
or the composition of its Boards of Directors), which indemnification is
intended to be greater than that which is afforded by the Company's charter,
by-laws and, to the extent insurance is available, the coverage of Indemnitee
under the Company's directors and officers liability insurance policies; and
WHEREAS, Indemnitee is relying upon the rights afforded under this
Agreement in entering and continuing in Indemnitee's position as a director and
officer of the Company:
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. DEFINITIONS.
(a) "Corporate Status" describes the status of a person who is
serving or has served (i) as a director and/or officer of
the Company, any Subsidiary of the Company, (ii) in any
capacity with respect to any employee benefit plan of the
Company or any Subsidiary of the Company, or (iii) as a
director, partner, trustee, officer, employee, agent or
owner of any other Entity at the request of the Company.
(b) "Entity" shall mean any corporation, partnership,
professional corporation, joint venture, trust,
foundation, association, organization or
<PAGE> 2
other legal entity or any group or division of the Company
or any of its Subsidiaries.
(c) "Expenses" shall mean all reasonable fees, costs and
expenses incurred in connection with any Proceeding (as
defined below), including, without limitation, attorneys'
fees, disbursements and retainers (including, without
limitation, any such fees, disbursements and retainers
incurred by Indemnitee pursuant to Section 10 of this
Agreement), fees and disbursements of expert witnesses,
private investigators and professional advisors
(including, without limitation, accountants and investment
bankers), court costs, transcript costs, fees of experts,
travel expenses, duplicating, printing and binding costs,
telephone and fax transmission charges, postage, delivery
services, secretarial services, and other disbursements
and expenses.
(d) "Indemnifiable Expenses," "Indemnifiable Liabilities" and
"Indemnifiable Amounts" shall have the meanings ascribed
to those terms in Section 3(a) below.
(e) "Liabilities" shall mean judgments, damages, liabilities,
losses, penalties, excise taxes, fines and amounts paid in
settlement.
(f) "Proceeding" shall mean any threatened, pending or
completed claim, action, suit, arbitration, alternate
dispute resolution process, investigation, administrative
hearing, appeal, or any other proceeding, whether civil,
criminal, administrative or investigative, whether formal
or informal, including a proceeding initiated by
Indemnitee pursuant to Section 10 of this Agreement to
enforce Indemnitee's rights hereunder.
(g) "Subsidiary" shall mean (i) any Entity that is directly or
indirectly wholly-owned or controlled by the Company and
(ii) any Entity that is a professional corporation that
provides dental services to the Company or any of its
Subsidiaries described in clause (i) hereof.
2. SERVICES OF INDEMNITEE. In consideration of the Company's
covenants and commitments hereunder, Indemnitee agrees to serve or continue to
serve as a director and officer of the Company. However, this Agreement shall
not impose any obligation on Indemnitee or the Company to continue Indemnitee's
service to the Company or any other Entity beyond any period otherwise required
by law or by other agreements or commitments of the parties, if any, and
subject to the foregoing, Indemnitee shall be free to resign from any position
he holds at any time.
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<PAGE> 3
3. AGREEMENT TO INDEMNIFY. The Company agrees to indemnify
Indemnitee as follows:
(a) Subject to the exceptions contained in Section 4(a) below,
if Indemnitee was or is a party or is threatened to be
made a party to any Proceeding (other than an action by or
in the right of the Company) by reason of Indemnitee's
Corporate Status, Indemnitee shall be indemnified by the
Company against all Expenses and Liabilities incurred or
paid by Indemnitee in connection with such Proceeding
(referred to herein as "Indemnifiable Expenses" and
"Indemnifiable Liabilities," respectively, and
collectively as "Indemnifiable Amounts").
(b) Subject to the exceptions contained in Section 4(b) below,
if Indemnitee was or is a party or is threatened to be
made a party to any Proceeding by or in the right of the
Company to procure a judgment in its favor by reason of
Indemnitee's Corporate Status, Indemnitee shall be
indemnified by the Company against all Indemnifiable
Expenses.
4. EXCEPTIONS TO INDEMNIFICATION. Indemnitee shall be entitled to
indemnification under Sections 3(a) and 3(b) above in all circumstances other
than the following:
(a) If indemnification is requested under Section 3(a) and it
has been adjudicated finally by a court of competent
jurisdiction that, in connection with the subject of the
Proceeding out of which the claim for indemnification has
arisen, Indemnitee failed to act in good faith and in a
manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company or the
relevant Entity, or, with respect to any criminal action
or proceeding, Indemnitee had reasonable cause to believe
that Indemnitee's conduct was unlawful, Indemnitee shall
not be entitled to payment of Indemnifiable Amounts
hereunder.
(b) If indemnification is requested under Section 3(b) and
(i) it has been adjudicated finally by a court
of competent jurisdiction that, in
connection with the subject of the
Proceeding out of which the claim for
indemnification has arisen, Indemnitee
failed to act in good faith and in a manner
Indemnitee reasonably believed to be in or
not opposed to the best interests of the
Company or the relevant Entity, Indemnitee
shall not be entitled to payment of
Indemnifiable Expenses hereunder; or
(ii) it has been adjudicated finally by a court
of competent jurisdiction that Indemnitee is
liable to the Company or
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<PAGE> 4
the relevant Entity with respect to any
claim, issue or matter involved in the
Proceeding out of which the claim for
indemnification has arisen, including,
without limitation, a claim that Indemnitee
received an improper personal benefit, no
Indemnifiable Expenses shall be paid with
respect to such claim, issue or matter
unless the Court of Chancery or another
court in which such Proceeding was brought
shall determine upon application that,
despite the adjudication of liability, but
in view of all the circumstances of the
case, Indemnitee is fairly and reasonably
entitled to indemnity for such Indemnifiable
Expenses which such court shall deem proper.
(c) If indemnification is requested under Section 3(a) or 3(b)
and the Indemnitee (or any Entity, directly or indirectly,
majority-owned or controlled by the Indemnitee):
(i) is required to indemnify the Company (or any
Subsidiary) with respect to the subject of the
Proceeding out of which the claim for
indemnification has arisen pursuant to the terms of
any agreement entered into by the Indemnitee (or
any Entity, directly or indirectly, majority-owned
or controlled by the Indemnitee at the time it
enters into any such agreement); or
(ii) has on or prior to the date hereof executed a
release with respect to the subject of the
Proceeding out of which the claim for
indemnification has arisen.
5. PROCEDURE FOR PAYMENT OF INDEMNIFIABLE AMOUNTS. Indemnitee shall
submit to the Company a written request specifying the Indemnifiable Amounts
for which Indemnitee seeks payment under Section 3 of this Agreement and the
basis for the claim. The Company shall pay such Indemnifiable Amounts to
Indemnitee within twenty (20) calendar days of receipt of the request. At the
request of the Company, Indemnitee shall furnish such documentation and
information as are reasonably available to Indemnitee and necessary to
establish that Indemnitee is entitled to indemnification hereunder.
6. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY
SUCCESSFUL. Notwithstanding any other provision of this Agreement, and without
limiting any such provision, to the extent that Indemnitee is, by reason of
Indemnitee's Corporate Status, a party to and is successful, on the merits or
otherwise, in any Proceeding, Indemnitee shall be indemnified against all
Expenses reasonably incurred by Indemnitee or on Indemnitee's behalf in
connection therewith. If Indemnitee is not wholly successful in such
Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall
indemnify Indemnitee against all Expenses
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<PAGE> 5
reasonably incurred by Indemnitee or on Indemnitee's behalf in connection with
each successfully resolved claim, issue or matter. For purposes of this
Agreement, the termination of any claim, issue or matter in such a Proceeding
by dismissal, with or without prejudice, shall be deemed to be a successful
result as to such claim, issue or matter.
7. EFFECT OF CERTAIN RESOLUTIONS. Neither the settlement or
termination of any Proceeding nor the failure of the Company to award
indemnification or to determine that indemnification is payable shall create an
adverse presumption that Indemnitee is not entitled to indemnification
hereunder. In addition, the termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not create a presumption that Indemnitee did not act in good faith and in
a manner which Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company or, with respect to any criminal action or
proceeding, had reasonable cause to believe that Indemnitee's action was
unlawful.
8. AGREEMENT TO ADVANCE INTERIM EXPENSES; CONDITIONS. Except with
respect to any claim for indemnification made solely by the Company against the
Indemnitee with respect to any matter described in Section 4(c) hereof, the
Company shall advance to Indemnitee all Indemnifiable Expenses incurred by
Indemnitee in connection with any Proceeding, including a Proceeding by or in
the right of the Company, in advance of the final disposition of such
Proceeding, if Indemnitee furnishes the Company with a written undertaking to
repay the amount of such Indemnifiable Expenses advanced to Indemnitee if it is
finally determined by a court of competent jurisdiction that Indemnitee is not
entitled under this Agreement to indemnification with respect to such Expenses.
Such undertaking shall be an unlimited general obligation of Indemnitee, shall
be accepted by the Company without regard to the financial ability of
Indemnitee to make repayment, and in no event shall be required to be secured.
9. PROCEDURE FOR PAYMENT OF INTERIM EXPENSES. Indemnitee shall
submit to the Company a written request specifying the Indemnifiable Expenses
for which Indemnitee seeks an advancement under Section 8 of this Agreement,
together with documentation evidencing that Indemnitee has incurred such
Indemnifiable Expenses. Payment of Indemnifiable Expenses under Section 8
shall be made no later than twenty (20) calendar days after the Company's
receipt of such request and the undertaking required by Section 8.
10. REMEDIES OF INDEMNITEE.
(a) Right to Petition Court. In the event that Indemnitee
makes a request for payment of Indemnifiable Amounts under
Sections 3 and 5 above or a request for an advancement of
Indemnifiable Expenses under Sections 8 and 9 above and
the Company fails to make such payment or advancement in a
timely manner pursuant to the terms of this Agreement,
Indemnitee may petition the Court of Chancery to enforce
the Company's obligations under this Agreement.
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(b) Burden of Proof. In any judicial proceeding brought under
Section 10(a) above, the Company shall have the burden of
proving that Indemnitee is not entitled to payment of
Indemnifiable Amounts hereunder.
(c) Expenses. The Company agrees to reimburse Indemnitee in
full for any Expenses incurred by Indemnitee in connection
with investigating, preparing for, litigating, defending
or settling any action brought by Indemnitee under Section
10(a) above, or in connection with any claim or
counterclaim brought by the Company in connection
therewith, but only if and to the extent Indemnitee
prevails therein. If it shall be determined in such
action that Indemnitee is entitled to receive part but not
all of the advancement or indemnification sought, the
expenses incurred by Indemnitee in connection with such
action shall be appropriately prorated.
(d) Validity of Agreement. The Company shall be precluded
from asserting in any Proceeding, including, without
limitation, an action under Section 10(a) above, that the
provisions of this Agreement are not valid, binding and
enforceable, that there is insufficient consideration for
this Agreement or that this Agreement and the actions of
the Company's board of directors in approving this
Agreement constituted a breach of their fiduciary
obligations and shall stipulate in court that the Company
is bound by all the provisions of this Agreement.
(e) Failure to Act Not a Defense. The failure of the Company
(including its Board of Directors or any committee
thereof, independent legal counsel, or shareholders) to
make a determination concerning the permissibility of the
payment of Indemnifiable Amounts or the advancement of
Indemnifiable Expenses under this Agreement shall not be a
defense in any action brought under Section 10(a) above,
and shall not create a presumption that such payment or
advancement is not permissible.
11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Indemnitee as follows:
(a) Authority. The Company has all necessary power and
authority to enter into, and be bound by the terms of,
this Agreement, and the execution, delivery and
performance of the undertakings contemplated by this
Agreement have been duly authorized by the Company.
(b) Enforceability. This Agreement, when executed and
delivered by the Company in accordance with the provisions
hereof, shall be a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance
with its terms, except as such enforceability
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may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting the
enforcement of creditors' rights generally.
12. INSURANCE. The Company will use its commercially reasonable
efforts to obtain and maintain a policy or policies of insurance with a
reputable insurance company or companies providing the Indemnitee with coverage
for losses from wrongful acts, and to ensure the Company's performance of its
indemnification obligations under this Agreement. In all policies of director
and officer liability insurance, Indemnitee shall be named as an insured in
such a manner as to provide Indemnitee at least the same rights and benefits as
are accorded to the most favorably insured of the Company's officers and
directors. Notwithstanding the foregoing, if the Company, after employing
commercially reasonable efforts as provided in the immediately preceding
sentence, determines in good faith that such insurance is not available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, or if the coverage provided by such insurance is limited by
exclusions so as to provide an insufficient benefit, the Company shall use its
commercially reasonable efforts to obtain and maintain a policy or policies of
insurance with coverage having features as similar as practicable to those
described above.
13. CONTRACT RIGHTS NOT EXCLUSIVE. The rights to payment of
Indemnifiable Amounts and advancement of Indemnifiable Expenses provided by
this Agreement shall be in addition to, but not exclusive of, any other rights
which Indemnitee may have at any time under applicable law, the Company's
by-laws or charter, or any other agreement, vote of shareholders or directors,
or otherwise, both as to action in Indemnitee's official capacity and as to
action in any other capacity as a result of Indemnitee's serving as a director
or officer of the Company.
14. SUCCESSORS. This Agreement shall be (a) binding upon all
successors and assigns of the Company (including any transferee of all or a
substantial portion of the business, stock and/or assets of the Company and any
direct or indirect successor by merger or consolidation or otherwise by
operation of law) and (b) binding on and shall inure to the benefit of the
heirs, personal representatives, executors and administrators of Indemnitee.
This Agreement shall continue for the benefit of Indemnitee and such heirs,
personal representatives, executors and administrators after Indemnitee has
ceased to have Corporate Status.
15. SUBROGATION. In the event of any payment of Indemnifiable
Amounts under this Agreement, the Company shall be subrogated to the extent of
such payment to all of the rights of contribution or recovery of Indemnitee
against other persons, and Indemnitee shall take, at the request of the
Company, all reasonable action necessary to secure such rights, including the
execution of such documents as are necessary to enable the Company to bring
suit to enforce such rights.
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<PAGE> 8
16. CHANGE IN LAW. To the extent that a change in applicable law
(whether by statute or judicial decision) shall permit broader indemnification
than is provided under the terms of the by-laws of the Company and this
Agreement, Indemnitee shall be entitled to such broader indemnification and
this Agreement shall be deemed to be amended to such extent.
17. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Agreement, or any clause
thereof, shall be determined by a court of competent jurisdiction to be
illegal, invalid or unenforceable, in whole or in part, such provision or
clause shall be limited or modified in its application to the minimum extent
necessary to make such provision or clause valid, legal and enforceable, and
the remaining provisions and clauses of this Agreement shall remain fully
enforceable and binding on the parties.
18. INDEMNITEE AS PLAINTIFF. Except as provided in Section 10(c) of
this Agreement and in the next sentence or in connection with any
indemnification claim under any acquisition or investment agreement of even
date, Indemnitee shall not be entitled to payment of Indemnifiable Amounts or
advancement of Indemnifiable Expenses with respect to any Proceeding brought by
Indemnitee against the Company, any Subsidiary or any Entity which the Company
directly or indirectly controls or is affiliated with, any director or officer
thereof, or any third party, unless the Company has consented to the initiation
of such Proceeding. This Section shall not apply to counterclaims or
affirmative defenses asserted by Indemnitee in an action brought against
Indemnitee.
19. MODIFICATIONS AND WAIVER. Except as provided in Section 16 above
with respect to changes in applicable law which broaden the right of Indemnitee
to be indemnified by the Company, no supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by each of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions of this Agreement
(whether or not similar), nor shall such waiver constitute a continuing waiver.
20. GENERAL NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (a) when delivered by hand, (b) when transmitted by facsimile and
receipt is acknowledged, or (c) if mailed by certified or registered mail with
postage prepaid, on the third business day after the date on which it is so
mailed:
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<PAGE> 9
(i) If to Indemnitee, to:
[____________________________________________]
c/o Monarch Dental Corporation
4201 Spring Valley Road, Suite 320
Dallas, TX 75244
Fax: (972) 702-7446
(ii) If to the Company, to:
Monarch Dental Corporation
4201 Spring Valley Road, Suite 320
Dallas, TX 75244
FAX: (972) 702-7446
or to such other address or telefax number as may have been furnished in the
same manner by any party to the others.
21. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced under the laws of the jurisdiction in which Monarch Dental
Corporation or its successor is incorporated from time to time (the
"Jurisdiction") without giving effect to the provisions thereof relating to
conflicts of law.
22. CONSENT TO JURISDICTION. The Company hereby irrevocably and
unconditionally consents to the jurisdiction of the courts of the Jurisdiction
and the United States District Court in the Jurisdiction. The Company hereby
irrevocably and unconditionally waives any objection to the laying of venue of
any Proceeding arising out of or relating to this Agreement in the courts of
the Jurisdiction or the United States District Court for the District of the
Jurisdiction, and hereby irrevocably and unconditionally waives and agrees not
to plead or claim that any such Proceeding brought in any such court has been
brought in an inconvenient forum.
23. AGREEMENT GOVERNS. This Agreement is to be deemed consistent
wherever possible with relevant provisions of the Company's by-laws and
charter; however, in the event of a conflict between this Agreement and such
provisions, the provisions of this Agreement shall control.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MONARCH DENTAL CORPORATION
By:
------------------------------------
Its: President
INDEMNITEE
---------------------------------------
10
<PAGE> 1
EXHIBIT 10.25
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT is made and entered into effective as of the
7th day of March, l996, by and between Old American County Mutual Fire
Insurance Company (hereinafter referred to as "Sublessor") and Oral Health
Concepts, Inc. (hereinafter referred to as "Sublessee").
W I T N E S S E T H:
For and in consideration of the rents, covenants, agreements and
conditions herein contained, Sublessor and Sublessee hereby agree as follows:
1. Demised Premises. Sublessor hereby subleases to Sublessee, and
Sublessee hereby subleases from Sublessor, for the term and upon the conditions
hereinafter set forth, that portion of the Third floor of the building
(hereinafter referred to as the "Building") at 4201 Spring Valley Road, which
is outlined in red on the floor plan attached hereto as Exhibit A and
incorporated herein by this reference (hereinafter referred to as the
"Subleased Premises"). The parties believe the net rentable area covered by
this Sublease to be 12,968 RSF.
2. Prime Lease. Reference is made to the Lease Agreement and
subsequent amendments, modifications, ratifications, and extensions attached
hereto as Exhibit B and incorporated herein by reference, hereinafter referred
to as the "Prime Lease" dated January 21, 1985, between Government Employees
Insurance Company (hereinafter referred to as "Lessor") and Sublessor, as
Lessee, pursuant to which Sublessor has leased the Subleased Premises from
Lessor. Except as otherwise expressly provided herein, (a) this Sublease is
subject to and made upon all of the terms, covenants and conditions of the
Prime Lease (except paragraphs as noted in Attachment "A" (I)) to the extent
the same relate to the Subleased Premises, with the same force and effect as if
such terms, covenants and conditions were fully set forth herein, (b) all of
the terms, covenants and conditions which Sublessor is bound to comply with
under the Prime Lease shall be binding upon Sublessee hereunder to the extent
the same relate to the Subleased Premises and Sublessee shall perform all
obligations of Sublessor under the Prime Lease relating to the Subleased
Premises during the term of this Sublease. The Sublessee agrees to be bound to
the Sublessor by all the terms of the Lease and to assume toward Sublessor and
to perform all of the obligations and responsibilities that Sublessor, by the
Lease, assumes toward the Landlord under the Lease with respect to the
Premises. The relationship between Sublessee and Sublessor under the Sublease
shall be the same as between the Sublessor and Landlord under the Lease.
Notwithstanding anything to the contrary contained in the Lease or contained in
this Sublease, Sublessor alone shall be entitled to exercise those rights and
privileges, shall continue to be solely responsible for, and shall timely
discharge or otherwise satisfy, all of the obligations and responsibilities of
the "Tenant" pursuant to the terms, provisions and conditions of the Prime
Lease, and (c) all of the rights and privileges of Sublessor under the Prime
Lease, except those specifically excluded pursuant to paragraph 2(A) above,
shall inure to the benefit of Sublessee via Sublessor to the extent the same
relate to the Subleased Premises. It is the intention of the parties hereto
that, except as otherwise expressly provided in this Sublease, the relationship
between Sublessor and Sublessee shall be governed by the provisions of the
Prime Lease as if they had been typed out in full in this Sublease and
Sublessor were the party named as "Lessor" under the Prime Lease and Sublessee
were the party named as "Lessee" under the Prime Lease. Thus, for example, in
the event that Sublessee fails to make timely payment of any monthly
installment of rent when due and payable hereunder, or fails to perform or
violates any of the other conditions, covenants or agreements herein made by
Sublessee, the respective rights and duties of Sublessor and Sublessee
hereunder shall be determined by the Prime Lease, with the terms "Sublessor"
substituted for the term "Lessor" or "Landlord" wherever those terms appear in
said paragraphs and the term "Sublessee" substituted for the term "Lessee" or
"Tenant" wherever those terms appear in said Prime Lease.
3. Rents. Sublessee shall pay to Sublessor, as monthly basic rent
for the Subleased Premises during the Term of this Sublease (as hereinafter
defined), $12,697.83, the first full monthly payment to be made upon the
execution of this Sublease and all subsequent monthly payments to be made in
advance, on or before the first day of each calendar month. During any portion
of the Term
1
<PAGE> 2
hereof which is for less than one (1) month Sublessee's rental obligation shall
be a pro rata portion of the monthly payment provided for herein. All payments
hereunder shall be paid at the office Sublessor, or to such other party or at
such other address as Sublessor may designate from time to time by written
notice to Sublessee, without demand and without deduction, setoff or
counterclaim. If Sublessor shall at any time accept such rent after it shall
become due and payable, such acceptance shall not excuse delay upon subsequent
occasions or constitute or be construed as a waiver of any or all of
Sublessor's rights hereunder.
4. Adjustments of Basic Rent.
(a) In the event that the operating expenses payable by
Sublessor to Lessor under the Prime Lease are increased pursuant to the Prime
Lease, Sublessee shall pay Sublessee's proportionate share of such increase to
Sublessor as additional rent hereunder. Sublessor and Sublessee agree that, for
purposes of this Section 4(a), Sublessee's proportionate share of such increase
shall be that portion of such increase that bears the same proportion to the
total increase in operating expense payable by Sublessor as the net rentable
area then subject to this Sublease bears to the total net rentable area then
subject to the Prime Lease.
(b) All additional amounts Payable by Sublessee to
Sublessor pursuant to this Article 4 shall be paid to Sublessor within five (5)
days after Sublessor submits to Sublessee a notice that such amount is due
hereunder.
5. Security Deposit. Upon execution of this Sublease, Sublessee
shall deposit with Sublessor the sum of twelve thousand six hundred ninety
seven and 83/100 Dollars, ($12,697.83) as a security deposit hereunder for the
full and faithful performance by Sublessee of all of its obligations hereunder.
In the event of any default by Sublessee in the performance of any of its
obligations under this Sublease, Sublessor shall have the right to appropriate
all or any portion of the security deposit as may be necessary to compensate
Sublessor for any unpaid rent or other amounts or damages due hereunder. Upon
such application of the security deposit by Sublessor, Sublessee shall, within
five (5) days after written notice thereof by Sublessor, pay to Sublessor such
amount as is necessary to restore the deposit to its original amount, and
Sublessee's failure to do so shall be a default under this Sublease. Within ten
(10) days after the expiration or termination of the term of this Sublease,
Sublessor shall return to Sublessee, without payment of interest, the security
deposit less such portion thereof as Sublessor shall have appropriated on
account of any default by Sublessee hereunder.
6. Term. The term of this Sublease shall be for a period of 4
years, and 0 months, commencing on April 1, 1996 (the "commencement date") and
terminating on December 21, 1999.
7. Condition of Subleased Premises. Sublessee hereby agrees to accept
the Premises in "AS IS" condition as of the Commencement Date of the Term of
this Sublease. (See Attachment A(2).)
8. Use. Sublessee agrees to use the Premises solely for general
office purposes and consistent with any restriction contained in the Prime
Lease.
9. Attornment. In the event of cancellation or termination of the
Lease before the expiration date of this Sublease or any extensions or renewals
hereof, or in the event of the surrender of the Lease, whether voluntarily,
involuntarily or by operation of law, the Sublessee, at the option of the
Landlord exercisable in Landlord's sole and absolute discretion, shall make
full and complete attornment to the Landlord for the balance of the Term of
this Sublease, including any extensions and renewals hereof, based on the same
covenants and conditions of this Sublease, so as to establish, direct privity of
estate and contract between the Landlord and the Sublessee, with the same force
and effect as though this Sublease was originally made directly between the
Landlord and the Sublessee. The Sublessee shall thereafter make all rent
payments directly to the Landlord. The Landlord will only then become the
Sublessor under this Sublease.
10. No Duty on Part of Landlord. Sublessee expressly recognizes,
acknowledges and agrees that Landlord shall have no direct duty towards
Sublessee with regard to the performance of any covenant to be performed by
Landlord under the Lease.
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<PAGE> 3
11. Lease Provisions. Sublessor shall not be liable for and
Sublessee will indemnify and save harmless Sublessor of and from all fines,
suits, claims, demands, losses and actions (including attorneys fees) for any
injury to person or damage to or loss of property on or about the subleased
premises caused by any actual or alleged act, omission, negligence or
misconduct or breach of this lease by Sublessee, its agents, employees,
subtenants, invitees or by any other person entering the building, subleased
premises, or related facilities under the express or implied invitation of
Sublessee, or arising out of Sublessee's use of the building, the subleased
premises, or related facilities. Sublessor shall not be liable or responsible
for any loss or damage to any property or death or injury to any person
occasioned by theft, fire, act of God, public enemy, criminal conduct of
third parties, injunction, riot, strike, insurrection, war, court order,
requisition, or order of any governmental body or authority, by other tenants
of the building or related facilities or any other matter beyond control of
Sublessor, or for any injury or damage or inconvenience which may arise through
repair or alteration of any part of the building, the subleased premises, or
related facilities, or failure to inspect, maintain or make repairs to the
subleased premises.
Further, Sublessee agrees and acknowledges that Sublessor has no duty
to inspect, maintain, or repair the subleased premises.
However, Sublessor will actively communicate to Government Employees
Insurance Company (GEICO) any issues regarding repairs or maintenance to the
subleased premises which are applicable to GEICO as duties and responsibilities
of the owner of the building under the Prime Lease.
12. Assignment and Subletting. Sublessee shall neither assign the
Sublease or the Lease, nor sublease all or any part of the Premises without the
prior written consent of Sublessor and Landlord, whose consent shall not be
unreasonably withheld. The Lease and Landlord's rights thereunder may be
assigned, in whole or in part, by Landlord.
13. Miscellaneous Provisions.
(a) Sublessee shall indemnify and hold Sublessor and
Landlord harmless from and against any and all loss, liability, cost or expense
(including attorney's fees) incurred by Sublessor by reason of any failure of
Sublessee to perform its obligations hereunder.
(b) Sublessee acknowledges receipt and acceptance of a
true copy of the Prime Lease.
(c) Notwithstanding to the contrary contained in this
Sublease, Sublessor shall in all events remain fully and completely liable
under the Lease and shall be relieved of no liability whatsoever hereby.
(d) This Sublease shall be governed by and construed in
accordance with the laws of the State of Texas stipulated in the Prime Lease.
(e) This Sublease shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
(f) This Sublease constitutes the entire agreement between
the parties with respect to the Sublease of the Subleased Premises.
(g) This Sublease is expressly subject to and conditioned
upon Sublessor securing the written consent of Lessor under the Prime Lease, to
this Sublease.
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Sublease Agreement
as of the day and year first above written.
SUBLESSOR: /s/ ROBERT C. REINARZ SUBLESSEE: /s/ WARREN F. MELAMED
--------------------- ---------------------
Robert C. Reinarz Warren F. Melamed
/s/ R.F. TROSIN /s/ CHRISTOPHER C. LEIGHTON
- -------------------------------- --------------------------------
WITNESS: R.F. Trosin WITNESS: Christopher C. Leighton
/s/ THOMAS A. MCCALL /s/ ROY D. SMITH
- -------------------------------- --------------------------------
WITNESS: Thomas A. McCall WITNESS: Roy D. Smith
The undersigned Lessor under the Prime Lease dated January 21, 1985 between
Lessor and Sublessor hereby consents to the subletting of the Subleased
Premises described herein on the terms and conditions contained in this
Sublease Agreement. This consent shall apply only to this Sublease and shall
not be deemed to be consent to any other Sublease.
CONSENTED TO:
LANDLORD: /s/ STEPHEN J. MARTZ
--------------------
Stephen J. Martz
/s/ JUDITY M. ERTTER 3/22/96
- ---------------------------- -----------------
WITNESS: Judity M. Ertter DATE:
- ----------------------------
WITNESS:
4
<PAGE> 5
ATTACHMENT 'A'
1. Exclusions: Sublessor or Landlord shall not extend to, nor is Sublessee
entitled to, any rights and privileges contained in the Prime Lease which
includes subsequent amendments, modifications, ratifications, and extensions
which deal with renewal options, expansion options, finish allowance (other
than contained in this Sublease Agreement), parking privileges (other than
contained in this Sublease Agreement), or building signage provisions. Other
rights and privileges granted Sublessor by Landlord not pertaining to this
Sublease do not inure to the benefit of the Sublessee.
2. Retrofit Allowance: Sublessor will, at his cost and expense, patch the
carpet, paint where needed, repair the ceiling grid and generally clean the
3,773 R.S.F. portion of the Subleased Premises outlined on Attachment "B".
3. Right to Sublet: Sublessee shall have the right to sublet any or all
portions of the premises. Sublessor's and landlord's consent not unreasonably
withheld.
4. Free Rent: The first three (3) months rent shall be abated on the 3,773
R.S.F. portion of the Subleased Premises outlined on Attachment "B".
5. Furniture: Sublease shall have the first right to buy or lease any or
all of the systems furniture that is currently on site (per separate agreement).
6. Parking: Sublessee shall receive eighteen (18) covered reserved parking
spaces at no cost for the remainder of the sublease term.
7. Commissions: Sublessor shall pay a four and one half (4.5%) percent
commission based on the total base rental due over the sublease term. Payment
shall be made to Cawley International at their offices in Dallas, Texas as
follows: 100% paid on April 1, 1996, or physical occupancy, whichever is later.
8. Possession: Sublessor shall make every reasonable effort to vacate
premises no later than Sunday, March 24, 1996, to allow Sublessee to begin
retrofit.
9. Voluntary Termination: Sublessor agrees not to voluntarily terminate
that portion of the space covered in this Sublease Agreement and outlined in
the attached Exhibit "A" prior to the end of the Prime Lease Term for reasons
other than force majeure, condemnation, fire and elements out of the control of
the Sublessor.
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<PAGE> 6
ATTACHMENT "B"
RETROFIT AREA
[MAP]
<PAGE> 7
EXHIBIT "A"
[MAP]
<PAGE> 8
EXHIBIT "B"
The attached items which comprise this Exhibit "B" constitute and
define the Prime Lease as referenced in paragraph 2 of this Sublease Agreement:
A. Tenant and Midway Development company ("Midway") entered into
that certain Office Lease Agreement (the "Original Lease") dated as of January
21, 1985, in connection with approximately 15,229 square feet of office space
in what was then known as the Metropolitan Building, which is now known as the
GEICO Building, 4201 Spring Valley Road, Suite 1200, Dallas, Texas, and
hereinafter referred to as the "Building".
B. On or about January 21, 1988, Tenant and Midway entered into
one certain Amendment ("Amendment"), which was an amendment to the Original
Lease.
C. On or about November 21, 1989, the Tenant and Midway entered
into one certain Second Amendment (the "Second Amendment"), which was a further
amendment to the Original Lease.
D. On or about March 28, 1990, the Tenant and Landlord entered
into one certain third Amendment (the "Third Amendment"), which was a further
amendment to the Original Lease.
E. On or about September 25, 1990, the Tenant and Landlord entered
into one certain Modification and Ratification (the "Modification and
Ratification"), which was a further amendment to the Original Lease.
F. At the time of or subsequent to the Modification and
Ratification dated September 25, 1990, the Tenant and Landlord entered into one
certain Amendment Four ("Amendment Four"), which was a further amendment to the
Original Lease.
G. In August of 1991, Tenant and Landlord entered into that
certain Modification and Extension of Lease Agreement ("First Extension"),
which was an extension and further amendment to the Original Lease.
H. In October of 1992, Tenant and Landlord entered into that
certain Modification and Extension of Lease Agreement ("Second Extension"),
which was an extension and further amendment to the Original Lease.
I. The Original Lease, as modified by the Amendment, the Second
Amendment, the Third Amendment, the Modification and Ratification, Amendment
Four, the First Extension and the Second Extension, shall be hereinafter
referred to as the "Lease".
J. Landlord is the successor in interest to all of the rights and
obligations of Midway pursuant to the Lease.
6
<PAGE> 9
EXHIBIT "C"
In consideration of Sublessor Old American Fire Insurance Company entering
into that certain office sublease agreement ("the sublease") dated the 8 day of
March, 1996, by and between Sublessor and Oral Health Concepts Inc.
("Sublessee") and the benefits to be derived by Sublessee Oral Health Concepts,
Inc. and the undersigned Monarch Dental Corporation ("Guarantor"). Guarantor
hereby unconditionally guarantees to Sublessor the absolute, complete and
punctual performance of the agreements of Sublessee of the agreements of
Sublessee contained in the Sublease, including without limitation, the timely
payment of all rent and all other sums now or hereafter owed by Sublessee to
Sublessor thereunder. The obligation of Guarantor hereunder is an absolute,
unconditional, continuing guarantee of payment and performance by Sublessee and
will not terminate until Sublessee has paid in full all amounts owing to
Sublessor and performed all of Sublessee's obligations under the Sublease.
Sublessee hereby acknowledges and agrees that Sublessor required, as a
condition to Sublessor's execution of the Sublease, that Guarantor execute this
Guaranty, and Guarantor, by virtue of Guarantor's interest in and relationship
with Sublessee, hereby deems it to be in Guarantor's best interested (based on
sound business judgment and fact that valuable, direct benefits will be derived
by Guarantor by virtue of the sublease), to execute and deliver to Sublessor
this guaranty.
Guarantor hereby acknowledges and agrees that Guarantor's liability
hereunder will not be released, reduced, impaired or effected by the occurrence
of any event save Sublessee's full performance, including anyone or more of the
following events: Sublessor's obtaining collateral from Sublessee or any other
person to secure payment or performance under the Sublease; the assumption of
liability by any other person (whether as guarantor or otherwise) for payment or
performances under the Sublease; the subordination, relinquishment or discharge
of Sublessor's rights relating to the Sublease or any collateral described
therein; a full or partial release from liability of Sublessee or any other
person now or hereafter liable for payment or performance under the Sublease;
the death, insolvency, bankruptcy, reorganization, disability, discharge, waiver
or other exoneration of Sublessee or any other person now or hereafter liable
for payment or performance under the Sublease; the assignment of Sublessor,
renewal extension, modification or amendment from the time to time of the
Sublease or any one or more of the terms of the Sublease; the failure, delay,
waiver or refusal by Sublessor to exercise any right or remedy held by Sublessor
under the Sublease or by law; the sale, encumbrance, transfer or other
modification of Sublessee's interest under the Sublease; the invalidity,
unenforceability or insufficiency of the entirety of or any one or more of the
timers of the Sublease or any collateral securing payment or performance
thereunder; or the failure of Guarantor to receive notice of any one or more of
the foregoing action or events.
<PAGE> 10
Guarantor waives diligence, presentment, protest, notice or dishonor,
demand for payment, notice of non-payment or non-performance, notice of
acceptance of this Guaranty and all other notices of any nature in connection
with the exercise of Sublessor's right under the Sublease or this Guaranty.
Guarantor waives all rights to setoffs and counterclaims against Sublessor and
agrees that any rights which Guarantor might now or hereafter hold against
Sublessee will be subordinate, junior and inferior to all rights which
Sublessor might now or hereafter hold against Sublessee.
If Sublessor employs an attorney to represent, enforce or defend any of
Sublessor's rights or remedies under this Guaranty, Guarantor shall pay all
reasonable attorney's fees incurred by Sublessor in connection with such action.
This Guaranty is an irrevocable, absolute, continuing guarantee of
payment and not a guarantee of collection. This Guaranty may not be revoked by
Guarantor and shall continue to be effective with respect to same due under the
Sublease arising after any attempted revocation by Guarantor.
The Guaranty is binding on Guarantor and all heirs, personal
representatives, executors, successors and assigns of Guarantor and will inure
to the benefits of Sublessor and all heirs, personal representatives,
executors, successors and assigns of Sublessor. Guarantor consents to the
assignment of all or any portion of the rights of Sublessor under the Subleases
without notice to Guarantor.
IN WITNESS WHEREOF, Guarantor has duly executed this Guarantee this 8
day of March, 1996.
"Guarantor"
/s/ WARREN F. MELAMED
---------------------------------
Monarch Dental Corporation
<PAGE> 1
EXHIBIT 10.26
OFFICE LEASE AGREEMENT
STATE OF TEXAS
COUNTY OF DALLAS
This LEASE AGREEMENT, made and entered into as of the 6th day of
September, 1996, by and between the Landlord and Tenant hereinafter named.
W I T N E S S E T H:
1. DEFINITIONS AND BASIC PROVISIONS. The following definitions and
basic provisions shall be used in conjunction with and limited by the reference
thereto in the provisions of this Lease:
(a) "Landlord": Government Employees Insurance Company
(b) "Tenant": Monarch Dental Associated, L.P., a Texas limited
partnership
(c) "Building": "The GEICO Building"
(d) "Premises": 4201 Spring Valley Road, Suite 320
Dallas, Texas 75244
as generally outlined in the plan attached hereto as Exhibit "A," which is
located on the real property described in Exhibit "A-1" attached thereto. On
each floor of the Building on which the entire space rentable to tenants is or
will be leased to one (1) tenant the term "Rental Area" to such floor shall be
computed by measuring to the inside face of the glass in the permanent outer
walls of the Building and adding a pro rata portion of the areas located within
the lobby on the ground floor of the Building. No deductions shall be made for
elevator lobbies, corridors, restrooms, mechanical rooms, electric rooms,
telephone closets, all vertical penetrations of the floor that are included for
the special use of Tenant, columns, projections and other structural portions of
the Building, and other similar facilities for the use of all tenants
(hereinafter sometimes called "Common Areas"). On each floor of the Building on
which the entire space referable to tenants is or will be leased to more than
one (1) tenant the term "rentable area" shall be the sum of (i) the entire area
included within the leased premises, being the area bounded by the interior of
the exterior wall or walls of the Building, the exterior of all walls separating
the leased premises from any public corridors or other public areas, and the
centerline of all walls separating the leased premises from other areas leased
or to be leased to other tenants, (ii) a pro rata portion of the area covered by
the elevator lobbies, corridors, restrooms, mechanical rooms, electric rooms,
columns and telephone closets situated on such floor, and (iii) a pro rata
portion of the area located within the lobby on the ground floor of the
Building. The Rentable area within the leased premises shall be the number of
square feet set below. The Rentable Area in the Premises has been calculated on
the basis of the foregoing definition and be hereby stipulated for all purposes
hereof to be 4145 square feet, which includes Tenant's occupied space plus
Tenant's portion of Common Areas. Such stipulation of the rentable square feet
comprising the Premises shall govern the Lease for all purposes, notwithstanding
that the same should be more or less as a result of a minor variations resulting
from actual construction and completion of the Premises for occupancy so long as
such work is done in accordance with the terms and provisions hereof.
Notwithstanding the inclusion of Common Areas in the calculation of rentable
square feet, it is understood that certain areas, such as mechanical rooms and
janitor closets, may be intended solely for use by Landlord and the building
manager in the operation of the Building. The total rentable area of the
Building shall be 244,585 square feet.
(e) "Lease term": A period of 39 months, commencing on October 1,
1996, (the "Commencement Date") and ending on December 31, 1999.
(f) "Basic Annual Rental": $ * , subject to escalation as
described in Paragraph 4 hereinbelow.
(g) "Monthly Rental Installment": $ * .
(h) "Operating Expense Adjustment": $ 1996 Base Year, subject
to escalation as described in Paragraph 4 hereinbelow.
(i) "Security Deposit": $5181.25 deposited with Landlord on the
date hereof.
* Months 1 - 24 at $15.00 psf or $5181.25 monthly
Months 25 - 39 at $15.50 psf or $5353.96 monthly
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(j) "Permitted use": The Premises are to be used and occupied by
Tenant solely for general office and for no other purpose or use without the
prior consent of Landlord.
2. LEASE GRANT. Landlord, in consideration of the rent to be paid
and the other covenants and agreements to be performed by Tenant and upon the
terms and conditions hereinafter stated, does hereby lease, demise and let unto
Tenant the Premises (as defined in paragraph 1(d) hereof) commencing on the
Commencement Date (as defined in paragraph 1(e) hereof or as adjusted as
hereinafter provided) and ending on the last day of the Lease term, unless
sooner terminated as herein provided. In the event the Premises are occupied by
Tenant prior to the stated date, the Commencement Date shall be the date such
occupancy commenced. If this Lease is executed before the Premises become
vacant, or otherwise available and ready for occupancy, or if any present
tenant or occupant of the Premises holds over, and Landlord cannot acquire
possession of the Premises prior to the Commencement Date of the Lease,
Landlord shall not be deemed to be in default hereunder, the Tenant agrees to
accept possession of the Premises at such time as Landlord is able to tender
the same and such date shall be deemed to be the Commencement Date and this
Lease shall continue for the Lease term described in paragraph 1(e) hereof. By
occupying the Premises, Tenant shall be deemed to have accepted the same as
suitable for the purpose herein intended and to have acknowledged that the same
comply fully with Landlord's covenants and obligations, except for punchlist
items.
3. RENT. In consideration of this Lease, Tenant promises and agrees
to pay Landlord, as an independent covenant the Basic Annual Rental (as defined
in paragraph 1(f) hereof) and which is subject to escalation as hereinafter
described, without deduction or set off, including the Operating Expense
Adjustment as described in Paragraph 1(g) hereinabove. It is agreed that
notwithstanding anything to the contrary, the Premises herein are leased for the
Basic Annual Rental for the lease term hereof, payable at the time of the making
of the Lease and that the provisions herein contained for the payment of such
rent in Monthly Rental Installments (as defined in paragraph 1(g) hereof) are
for the convenience of the Tenant only, and that if Tenant defaults in the
payment of a Monthly Rental Installment three times during the term of this
Lease, the rental payment schedule shall be adjusted, at Landlord's option, so
that rental hereunder shall be payable quarterly, in advance. A Monthly Rental
installment for any fractional month at the beginning or the end of the lease
term shall be prorated. Without impairing any of Landlord's rights or remedies
herein for the late payments of rent, if any Monthly Rental Installment is not
received by the Landlord on or before the 5th day of the month for which said
Monthly Rental Installment is not received by the Landlord on or before the 5th
day of the month for which said Monthly Rental Installment is due, a service
charge of 10% of the Monthly Rental Installment owed shall become due and
payable in addition to the Monthly Rental Installment owed. Said service charge
is for purpose of reimbursing Landlord for the extra costs and expenses incurred
in connection with the handling and processing of late Monthly Rental
Installment payments.
4. OPERATING EXPENSE ADJUSTMENT.
The Basic Annual Rental payable under paragraph 1(f) hereof is based,
in part, on operating expenses existing during the calendar year in which the
lease commences ("Base Year"). For the purpose of rental escalations under the
terms of the Lease, operating expenses are defined as and limited to: (i) ad
valorem taxes, for which Landlord is liable, assessed against the Land,
Building and improvements and in and upon which the Premises are located,
together with any special assessments and other real estate costs in the nature
of taxes or assessments for which Landlord is responsible; (ii) expenses of
operation, maintenance and repair of the Land, Building, sidewalks and courts
adjacent thereto in a manner deemed reasonable and appropriate and for the
best interest of the occupants; (iii) actual expenses incurred for employees
(as hereinafter defined), such as wages, fringe benefits, taxes, unemployment
and disability insurance, workmen's compensation insurance, social security
benefits and any other experience incurred in connection with such employees;
(iv) actual cost of materials and supplies used and consumed for the benefit of
the Building and the occupants; (v) full contract cost of third-party
contractors for all of the foregoing, including rubbish removal, elevator
maintenance, maintenances of air conditioning, heating and verification
equipment, management services, uniform supply, pest control and security
services; (vi) all utility services; and (vii) actual cost of insurance,
including fire and extended coverage and general liability insurance, but no
charge for insurance is included that reflects premiums due to an act or
omission of any tenant of the Building for which Landlord would be entitled to
reimbursement from such tenant. The term "employees" includes employees such as
superintendents, engineers, electricians, clerks, mechanics, helpers, security
officers, porters, cleaners, and window washers, as well as contract laborers
performing services for the Building and other persons, firms or corporations
providing services for the benefit of the Building.
Said operating expenses shall not include administrative salaries and
wages of persons not involved in the day-to-day operations of the Building,
state or federal income taxes or periodic alterations of improvements to the
construction of the Building, and in no case shall Tenant be charged additional
rent for any operating expense such as painting, repainting, redecorating,
special cleaning service or special security service which can be directly
related to the sole advantage of Landlord or any other particular occupant of
the Building other than Tenant. Operating expenses shall not include cost of
any repair or replacement which is or should be capitalized on Landlord's books
under generally accepted accounting principles, or other expenses which are not
customarily treated as operating expenses by the owners of similar buildings in
the general area.
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In the event that during the lease term said operating expenses for
1997 or any succeeding calendar year exceed the Actual 1996 Expenses per square
foot per year ("Base Expense Rate") for the total Rentable Area of the Building
(as defined in Paragraph 1(d) hereof), Tenant, within thirty (30) days after
written notification of the foregoing by Landlord, shall:
(a) Pay to the Landlord Tenant's proportionate share (1.7%) of such
increase for the year in question, said proportionate share being defined to
mean a fraction, the numerator of which is the square footage of the Premises
set out in Paragraph 1(d), and the denominator of which is the total rentable
area of the Building set out in Paragraph 1(d). The product resulting from the
application of such fraction to the increase shall constitute the amount of
additional rent Tenant shall pay.
(b) Additionally, Tenant shall pay to Landlord with the payment of
Monthly Rental Installments for the months following the month during which
the notice of escalated rents is given, a monthly escalation reserve on the
first day of each month for the remainder of the calendar year. The monthly
escalation reserve shall be equal to the total of Tenant's proportionate share
of such operating expense increase for the previous calendar year divided by
the number of months remaining in the then current calendar year subsequent to
the month in which the notice of escalated rent is given. Landlord shall apply
the total of the monthly escalation reserves paid by the Tenant to any increase
over the base expense rate for the calendar year in which the monthly
escalation reserves are paid. After the end of every calendar year Landlord
will deliver to Tenant a statement which sets forth (i) the previous year's
operating expenses, (ii) Tenant's proportionate share of any increases, (iii)
the adjustment, if any, reflecting the monthly escalation reserves paid, and
(iv) the net amount due Landlord or due to be reimbursed to Tenant, provided,
however, in no event shall the basic rent or the Monthly Rental Installments
ever be less than the amounts specified in Paragraph 1(f) and 1(g),
respectively.
Notwithstanding any expiration or termination of Tenant's right to
occupy the Premises or termination of this Lease prior to the lease expiration
date (except in the case of a consolidation by mutual agreement and except as
expressly set forth in Paragraph 22(d) hereof) Tenant's obligation to pay any
and all additional rent under this Lease shall continue and shall cover all
periods up to the lease expiration or termination date. Tenant's obligation to
pay any and all additional rent under this Lease and Landlord's and Tenant's
obligation to make the adjustments referred to in this Lease shall survive any
expiration or termination of this Lease.
If any amounts which become due by reason of escalation of rent are not
paid by the fifth day following the day on which they are due, a service charge
of 10% of such rental escalation amount shall become due and payable in
addition to such rental escalation. Said service charge is for the purpose or
reimbursing Landlord for the extra costs and expenses incurred in connection
with the handling and processing of late rental escalation payments.
5. SERVICES.
(a) Landlord agrees to furnish Tenant while occupying the Premises,
at Landlord's sole cost and expense: (i) hot and cold water at the points of
supply provided for general use of tenantry; (ii) electrical current for
Tenant's use and occupancy of the Premises to the extent reasonably deemed to
be standard by the Landlord, provided, however, that at costs for extraordinary
or unusual demand for electrical service shall be borne by Tenant; (iii)
heating and air conditioning at such times as Landlord normally furnishes such
services to all tenants of the Project and at such temperatures and in such
amounts as are reasonably considered by Landlord to be standard; (iv) periodic
janitor services; (v) replacement of proper standard light bulbs and tubes; and
(vi) elevator service in common with other tenants in the Building for ingress
and egress to and from the floor of the Premises during normal business hours
on generally accepted business days.
(b) Landlord does not warrant that any of said specified services
will be free from interruption or stoppage, but nevertheless Landlord shall use
reasonable diligence to resume any such interrupted or stopped service.
Anything to the contrary notwithstanding, no failure, to any extent, to furnish
such services or any stoppage or interruption of these defined services shall
render Landlord liable in any respect for damages to any other person, property
or business, nor shall any such failure, interruption or stoppage of such
services be deemed or construed as an eviction, actual or constructive, of
Tenant nor work an abatement of rent nor release Tenant from the obligation to
fulfill any covenant or agreement contained in this Lease.
6. LEASEHOLD IMPROVEMENTS. Landlord agrees to install at
Landlord's cost and expense, except as otherwise stated herein, the
improvements described in Exhibit "B" attached hereto. Landlord has made no
representations as to the condition of the Premises or the Building or to
remodel, repair or decorate, except as expressly set forth herein.
7. USE. Tenant shall use the Premises only for the permitted uses
(as defined in paragraph l(j) hereof). Tenant will not occupy or use the
Premises, or permit any portion of the Premises to be occupied or used for any
business purpose other than the permitted use or for any use or purpose which
is unlawful in part or in whole or deemed to be disreputable in any manner or
extra hazardous on account of fire, nor permit anything to be done which will
in any way increase the rate of fire insurance on the Building or contents; and
in the event that, by reason of acts of Tenant, there shall be any increase in
the rate of insurance on the Building or contents created by Tenant's act or
conduct of business then such acts of Tenant shall be deemed to be an
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event of default hereunder and Tenant hereby agrees to pay to Landlord the
amount of such increase on demand and acceptance of such payment shall not
consist of a waiver of any of Landlord's other rights provided herein. Tenant
will conduct its business and control its agents, employees and invitees in such
a manner as not to create any nuisance, nor interfere with, annoy or disturb
other tenants or Landlord in management of the Building, or carry on or permit
any operation which might emit offensive odors or conditions into other
portions of the Building or use any apparatus which might make undue noise or
set up vibrations in the Building. Tenant will maintain the Premises in a
clean, healthful and safe condition and will comply with all law, ordinances,
orders, rules and regulations, states, federal, municipal and other agencies or
bodies having any jurisdiction thereof) with references to use, condition or
occupancy of premises. Tenant will not without the prior written consent of
Landlord, paint, install lighting, window covering or decoration, or install any
signs, window or door lettering or advertising media of any type on or about the
Premises or any part thereof. Should Landlord agree in writing to any of the
foregoing items in the preceding sentence, Tenant will maintain such permitted
items in good condition and repair at all times.
8. ENVIRONMENTAL OBLIGATIONS.
(a) Tenant covenants that no hazardous or toxic materials shall be
brought onto, stored, or used at the Premises by the Tenant or any of its
employees, agents, independent contractors, licensees, subtenants or
invitees, except such materials as are typically found at first-class suburban
office complexes similar to the Premises, and that no substances shall be
placed into the plumbing and waste treatment systems of the Premises other than
substances such systems are designed to treat and discharge appropriately under
the Laws. The Tenant shall hold harmless, indemnify and defend the Landlord, to
the extent that the Landlord shall have any liability to any of the following:
its respective directors, officers, shareholders or partners, employees,
successors and assigns (collectively, the "Indemnified Persons") from and
against any direct (but not indirect or consequential) Environmental Damages,
resulting from events occurring during the Term, except for Environmental
Damages arising from the acts or omissions of the Indemnified Persons.
(b) "Environmental Damages" shall mean all claims, judgments,
damages (including punitive damages), losses, penalties, free, liabilities
(including strict liability), encumbrances, liens, costs and expenses of
investigation and defense of any claim, or any directive of any governmental or
quasi-governmental agency, department, commission, board, or bureau, whether
or not such is ultimately defeated, and of any settlement or judgement, for
which the Tenant or an Indemnified Person is liable under Environmental Laws
and which are required to be incurred under the Laws applicable to Hazardous
Material, including reasonable attorneys' fees and disbursements and
consultants' fees, any of which are incurred as a result of the existence or
related of Hazardous Material upon, about or beneath the Premises or migrating
from the Premises, or the existence of a violation of such Laws pertaining to
the Premises.
(c) "Hazardous Material" shall mean any hazardous or toxic
substance, material or waste (including constituents thereof) which is or
becomes regulated by one or more Governmental Authorities (hereinafter or
defined). The words "Hazardous Material" include any material or substance
which is (i) listed or defined as a "hazardous waste," extremely hazardous
waste,"" restricted hazardous wastes" "hazardous substance" or "toxic
substance" under any Laws, (ii) petroleum and its by products, (iii) asbestos,
(iv) polychlorinated biphenyl, (v) designated as a "hazardous substances"
pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C.
1317), (vi) defined as a "hazardous wastes" pursuant to Section 1004 of the
Federal Resource Conservation and Recovery Act, (42 U.S.C. 6903), (vii) defined
as "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responses, Compensation and Liability Act (42 U.S.C. 9601 et
seq.), or (viii) defined as a toxic substance in the Toxic Substance Control
Act (15 U.S.C. 2601 et seq.).
9. REPAIRS AND MAINTENANCE.
(a) BY LANDLORD: Landlord shall at its expense maintain only the
roof, foundations, heating and air conditioning systems, common areas, plumbing,
elevators, the structural soundness of the exterior walls, the paving outside
the Buildings, and the landscaping in good repair and condition, except for
reasonable wear and tear. Landlord shall be responsible for pest eradication.
Tenant shall give immediate written notice to Landlord of the need for repairs
or corrections and Landlord shall proceed promptly to make such repairs or
corrections. Landlord's liability hereunder shall be limited to the cost of
such repairs or corrections.
(b) BY TENANT: Tenant shall at its expense and risk maintain the
Premises in good repair and condition, including, but not limited to repairs
(including all necessary replacements) to the windows, window glass, plate
glass, doors and the interior of the Premises in general. Tenant will not in
any manner deface or injure the Building, the Premises or related facilities
and will pay the cost of repairing any damage or injury done by Tenant or
Tenant's agents, employees or invitees. Tenant shall throughout the term of this
Lease take good care of the Premises and related facilities and keep them free
from waste and nuisance of any kind. If Tenant shall fail to make any repair
required hereunder (including all necessary replacements) within fifteen (15)
days after written notification to do so, Landlord may at the option make such
repair, and Tenant shall, upon demand therefor, pay Landlord for the cost
thereof together with interest on any such cost which remains unpaid following
such demand at the rate of ten percent (10%) per annum until paid.
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10. ALTERATIONS AND IMPROVEMENTS. At the end or other termination
of this Lease, Tenant shall deliver up the Premises with all improvements
located thereon (except as otherwise herein provided) in good repair and
condition, reasonable wear and tear excepted, and shall deliver to Landlord all
keys to the Premises. The cost and expense of any repairs necessary to restore
the condition of the Premises to said condition in which they are to be
delivered to Landlord shall be borne by Tenant. Tenant will not make or allow
to be made any alterations or physical additions in or to the Premises without
the prior written consent of the Landlord. All permanent alterations,
additions, or improvements made in or upon the Premises, either by Landlord or
Tenant, shall be the Landlord's property on termination of the Lease and shall
remain on the Premises, without compensation to the Tenant. All furniture,
movable trade fixtures and equipment installed by Tenant may be removed by
Tenant at the termination of the Lease if Tenant so elects, and shall be so
removed if required by Landlord, or if not so removed shall, at the option of
the Landlord, become the property of Landlord. All such installations, removals
and restoration shall be accomplished in good and workmanlike manner so as not
to damage the Premises or the primary structure or structural qualities of the
Building or the plumbing, electrical lines or other utilities.
11. COMMON AREAS. The use and occupation by Tenant of the Premises
shall include the use in common with others entitled thereto of the Common
Areas, parking areas, service roads, loading facilities, sidewalks, and other
facilities as may be designated from time to time by Landlord, subject,
however, to the terms and conditions of this Lease and to reasonable rules and
regulations for the use thereof as prescribed from time to time by Landlord.
All common areas described above shall at all times be subjected to the
exclusive control and management conformance of Landlord, and Landlord shall
have the right from time to time to establish, modify and enforce reasonable
rules and regulations with respect to all facilities and areas mentioned in
this Article. Landlord shall have the right to construct, maintain, and operate
lighting facilities on all areas and improvements; to police same; from time to
time to change the area, level, location and arrangement of parking areas and
other facilities hereinabove referred to (provided that no such changes in the
common areas shall material, adversely and permanently affect Tenant's use or
enjoyment of the Premises), and to restrict parking by tenants, their officers,
agents and employees to employee parking areas.
All areas and facilities not within the Premises, which Tenant may be
permitted to use and occupy, are to be used and occupied under a revocable
license, and if the amount of such areas is to be diminished, Landlord shall
not be subject to liability nor shall Tenant be entitled to any compensation or
diminution or abatement of rent, nor shall such diminution of such areas be
deemed constructive or actual eviction.
12. ASSIGNMENT AND SUBLETTING.
(a) Except as specified herein, Tenant shall not, without the prior
written consent of Landlord, which may be withheld in Landlord's reasonable
discretion, (i) assign or in any manner transfer this Lease or any estate or
interest therein, (ii) permit any assignment of this Lease or any estate or
interest therein by operation of law, (iii) sublease the Premises or any part
thereof, (iv) grant any license, concession or other right of occupancy of any
portion of the Premises, or (v) permit the use of the Premises by any parties
other than Tenant, its agents and employees. Any such consent, transfer,
sublease, grant or permit made without Landlord's prior written consent shall
be absolutely void. Consent by Landlord to one or more assignments or subleases
shall not operate as a waiver of Landlord's right as to any subsequent
assignments and sublessee. Notwithstanding any assignment or subleasing, Tenant
and any guarantor of Tenant's obligations under this Lease shall, at all times,
remain fully responsible and liable for the payment of the rent herein
specified and for compliance with all the Tenant's other obligations under this
Lease. Moreover, in the event that the rental due and payable under any sublease
(or a combination of the rental payable under any sublease plus any bonus or
other consideration therefor or incidental thereto) exceeds the rental payable
under this Lease, or if with respect to a permitted assignment, permitted
license or other transfer by Tenant permitted by Landlord, the consideration
payable to Tenant exceeds the rental payable under this Lease, then Tenant
shall be bound and obligated to pay Landlord all such excess rental and other
excess consideration within ten (10) days following receipt thereof by Tenant
from such sublessee, assignee, licensee or other transferee, as the case may
be.
(b) If Tenant is a general partnership or joint venture and there
shall be any change in the membership of such partnership or joint venture
subsequent to the execution of this Lease, such change in membership shall be
deemed an assignment of this Lease for purposes of Section 12(a) hereof. If
Tenant is a limited partnership and there shall be any change in the general
partner subsequent to the execution of this Lease, such change in the general
partner shall be deemed an assignment of this Lease for purposes of Section
12(a) hereof. If Tenant is a corporation and there shall be any change in the
control of the corporation subsequent to the execution of this Lease, such
change in control shall be deemed an assignment of this Lease, for purpose of
Section 12(a) hereof. This Section 12(b) shall not apply, however, if Tenant is
a corporation which has outstanding voting trust listed on a recognized
security exchange.
(c) Notwithstanding anything to the contrary set forth herein,
Tenant may sublease all or any portion of the Premises or assign its rights
under this Lease to an Affiliate without Landlord's prior written consent, but
Tenant shall remain primarily liable for payment of all rent and the
performance of all Tenant's
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obligations under this Lease. For purposes hereof, an "Affiliate" shall mean a
corporation, partnership, limited liability company or other entity which either
(i) has at least fifty-one percent (51%) of its outstanding ownership interests
owned, directly or indirectly, by Tenant, the current shareholders of Tenant,
any family members of the current shareholders of Tenant and/or any partnership,
corporation, limited liability company or other entity which is owned by Tenant,
the current shareholders of Tenant and/or the family members of the current
shareholders of Tenant, or (ii) is publicly traded on a nationally recognized
stock exchange. If Tenant desires to sublease all or any portion of the
Premises or to assign this Lease to an Affiliate, Tenant shall so notify
Landlord at least fifteen (15) days in advance of the date on which Tenant
desires to make such sublease or assignment. Tenant shall reasonably cooperate
with Landlord to provide Landlord with such information as Landlord may
reasonably request concerning the Affiliate which is to be a sublessee or
assignee.
13. INDEMNITY. Landlord shall not be liable for any injury to person
or damage to or loss of property on or about the Premises, caused by any actual
or alleged act, omission, negligence or misconduct from any cause, INCLUDING
LANDLORD'S NEGLIGENCE, or breach of this Lease by Tenant, its agents,
employees, subtenants, invitees, or by any other person entering the Building,
the Premises, or related facilities. Landlord shall not be liable or
responsible for any loss or damage to any property or death or injury to any
person occasioned by theft, fire, act of God, public enemy, criminal conduct of
third parties injunction, riot, strike, insurrection, war, court order,
requisition or order of any governmental body or authority, by other tenants of
the Building or related facilities or any other matter, or for any injury or
damage or inconvenience which may arise through repair or alteration of any
part of the Building, the Premises or related facilities, or failure to make
repairs or from any cause whatsoever. Tenant will indemnify and save harmless
Landlord of and from all fines, suits, claims, demands, losses and actions
(including attorney's fees) for any injury to person or damage to or loss of
property on or about the Premises caused by any actual or alleged act,
omission, negligence or misconduct from any cause, INCLUDING LANDLORD'S
NEGLIGENCE, or breach of this Lease by Tenant, its agents, employees,
subtenants, invitees.
14. MORTGAGES. Tenant accepts this Lease subject to any deeds of trust,
security interests or mortgages which might now or hereafter constitute a lien
upon the Building or improvements therein, the Premises, or related facilities
and to zoning ordinances and other building and fire ordinances and governmental
regulations relating to the use of the property. Tenant shall at any time
hereafter, on demand, execute any instruments or related or other documents that
may be required by any mortgage for the purpose of subjecting and subordinating
this Lease of any such deed of trust, security interest of mortgage. With
respect to any deed of trust, security interest or mortgage hereafter
constituting a lien on the Building or improvements therein, the Premises or
related facilities, Landlord, at its sole option, shall have the right to waive
the applicability of this paragraph 14 so that this Lease will not be subject
and subordinate to any such deed of trust, security interest or mortgage.
Landlord shall use reasonable efforts to obtain a nondisturbance agreement from
the entity which holds a deed of trust on the Building on the date of execution
of this Lease.
15. CASUALTY INSURANCE.
(a) Landlord shall, at all times during the term of this Lease maintain
a policy or policies of insurance with the premiums thereon fully paid in
advance, issued by and binding upon some solvent insurance company, insuring the
Building against losses or damage by fire, explosion, or other hazards and
contingencies for the full insurable value thereof; provided that Landlord shall
not be obligated to insure any furniture, equipment, machinery, goods or
supplies not covered by the Lease which Tenant may bring or obtain upon the
Premises, or any additional improvements which Tenant may construct thereon.
(b) Tenant shall maintain, at its sole expense, fire and extended
coverage insurance in an amount nor less than eighty percent (80%) of the full
insurable value of all its personal property, including removable trade fixtures
located on the Premises and on all additions and improvements thereto made by
Tenant. Tenant shall maintain, at its sole cost and expense, bodily injury
liability insurance in an amount of $500,000.00 bodily injury or death per
person, $1,000,000 bodily injury or death in the aggregate and property damage
liability insurance in an amount of $500,000.00. Such insurance shall
specifically make reference to the indemnity provision of Section 13 of this
Lease and shall name Landlord as an additional insured.
(c) All policies of insurance provided for herein to be carried by
Tenant shall be issued by insurance companies reasonably acceptable to Landlord
and certified to do business by the State of Texas and its insurance regulatory
bodies and shall be issued in the names of both Landlord and Tenant as named
insureds (without any liability on the part of the Landlord for premiums).
Executed copies of such policies of insurance or certificates thereof shall be
delivered to Landlord within ten (10) days before delivery of possession of the
Premises, and thereafter, within thirty (30) days prior to the expiration of
such policy. As often as any such policy shall expire or terminate, renewal or
additional policies shall be procured and maintained by Tenant in like manner
and to like extent. All policies of insurance delivered to Landlord must contain
provision that the company writing said policy will give to Landlord twenty (20)
days' notice in writing in advance of any cancellation or lapse or the effective
date of any reduction in the amounts of insurance. All public liability and
property damage policies shall be written as primary policies, not contributing
with, and not in excess of, coverage which Landlord may carry, if any. If Tenant
fails to provide Landlord with such evidence of insurance, Landlord may, at its
option, obtain insurance coverage, as provided above, and change Tenant for the
cost of the same, plus a 15% administrative fee.
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16. INSPECTION. Landlord or its representatives shall have the
right to enter into and upon any and all parts of the Premises at reasonable
hours with prior notice to (a) inspect same or clean or make repairs or
alterations or additions as Landlord may deem necessary (but without any
obligation to do so, except as expressly provided for herein), or (b) show the
Premises to prospective tenants (in the last one hundred and twenty (120) days
of the term of this Lease), purchasers or lenders, and Tenant shall not be
entitled to any abatement or reduction of rent by reasons thereof, nor shall
such be deemed to be an actual or constructive eviction.
17. CONDEMNATION. If, during the term of this Lease, or any
extension or renewal thereof, all of the Premises should be taken for any
public or quasi-public use under any governmental law, ordinance or regulation
or by right of eminent domain or by private purchase in lieu thereof, this Lease
shall terminate and the rent shall be abated during the unexpired portion of
this Lease effective on the date physical possession is taken by the condemning
authority, and Tenant shall have no claim against Landlord for the value of any
unexpired term of this Lease.
In the event a portion but not all of the Premises shall be taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right or eminent domain or by private sale in lieu thereof and
the partial taking or condemnation shall render the Premises unsuitable for
Tenant's business, then Landlord shall have the option, in its sole discretion,
of terminating this Lease, or, at Landlord's sole risk and expense, restricting
and reconstructing the Premises to the extent necessary to make some reasonably
tenantable. Should Landlord elect to restore, the Lease shall continue in full
force and effect with the rent payable during the unexpired portion of this
Lease adjusted to such an extent as may be fair and reasonable under the
circumstances, and Tenant shall have no claim against Landlord for the value of
any interrupted portion of this Lease.
In the event any condemnation or taking, total or partial, Tenant shall
not be entitled to any part of the award or price paid in lieu thereof, and
Landlord shall receive the full amount of such award or price, Tenant hereby
expressly waiving any right or claim to any part thereof. Tenant shall have the
right to seek to recover from the condemning party (but not from Landlord) such
compensation as may be awarded to Tenant on account of moving and relocation
expenses and depreciation to and removal of Tenant's personal property.
18. FIRE OR OTHER CASUALTY. If the Premises or any part thereof
shall be damaged by fire or other casualty, Tenant shall give prompt written
notice thereof to Landlord. In case the Building shall be so damaged by fire or
other casualty that substantial alteration or reconstruction of the Building
shall, in Landlord's sole option, be required (whether or not the Premises
shall been damaged by such fire or other casualty), or in the event any
mortgagee under a first mortgage or first deed of trust covering the Building
should require that the insurance proceeds payable as a result of said fire or
other casualty be used to retire the mortgage debt Landlord may, at its option,
terminate this Lease and the term and estate hereby granted by notifying Tenant
in writing of such termination within sixty (60) days after the date of such
damage or determination. If Landlord does not thus elect to terminate this
Lease, Landlord shall within sixty (60) days after the date of such damage
commence to repair and restore the Building and shall proceed with reasonable
diligence to restore the Building (except that Landlord shall not be
responsible for delays outside its control and the time period with which
Landlord is obligated to commence and/or complete such repairs shall be
extended by a period equal to such delay) to substantially the same condition
in which it was immediately prior to the happening of the fire or other
casualty, except that Landlord shall not be required to rebuild, repair, or
replace any part of Tenant's furniture or furnishings or fixture and equipment
removable by Tenant under the provisions of this Lease or any additions or
improvements to the Diminished Premises made by Tenant at Tenant's expense, but
such work shall to exceed the scope of the work done by Landlord at Landlord's
expense in originally improving the Building nor shall Landlord in any event be
required to spend for such work an amount in excess of the insurance proceeds
actually received by Landlord as result of the fire or other casualty plus any
deductible amount in excess of the insurance proceeds actually received by
Landlord as a result of the fire or other casualty plus any deductible amounts
thereunder. In addition, in the event of the occurrence of a casualty which is
not insured under the casualty insurance requirements to be carried by Landlord
pursuant to the terms hereof, Landlord shall have the option to terminate this
Lease. Landlord shall not be liable for any inconvenience or annoyance to
Tenant or injury to the business of Tenant resulting in any way from such
damage or the repair thereof, except that, subject to the provisions of the
next sentence, Landlord shall allow Tenant a fair diminution of rent during the
time and to the extent the Premises are unfit for occupancy. If the Premises or
any other portion of the Building be damaged by fire or other casualty
resulting from the fault or negligence of Tenant or any of Tenant's agents,
servants employees, licensees, or invitees, the rent hereunder shall not be
diminished during the repair of such damage, and Tenant shall be liable to
Landlord for the cost and expense of the repair and restoration of the Building
caused thereby to the extent such cost and expense is not covered by insurance
proceeds. Any insurance which may be carried by Landlord or Tenant against loss
or damage to the Building or the Premises shall be for the sole benefit of the
party carrying such insurance and under its sole control.
19. HOLDING OVER. Should Tenant or any of its successors in
interest hold over the Premises, or any part thereof, after the expiration of
the term of this Lease or of any renewal or expiration thereof, unless
otherwise agreed in writing, such holding over may constitute and may be
construed, at Landlord's sole option, as a tenancy from month to month only at
a rental equal to the Monthly Rental Installment, and the Operating
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Expense Adjustment as described in paragraph hereof, plus fifty percent (50%)
of such amount. The inclusion of the preceding sentence shall not be construed
as Landlord's consent for the Tenant to hold over.
20. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all
taxes levied or assessed against personal property, furniture or fixtures
placed by Tenant in the Premises. If any such taxes for which Tenant is liable
are levied or assessed against Landlord's property and if Landlord elects to
pay the same or if the assessed value of the Landlord's property is increased
by inclusion of personal property, furniture or fixtures placed by Tenant in
the Premises, and Landlord elects to pay the taxes based on such increase, the
Tenant shall pay to Landlord upon demand that part of such taxes for which
Tenant is primarily liable hereunder.
21. EVENTS OF DEFAULT. The following events shall be deemed to be
events of default by Tenant under this Lease:
(a) Tenant shall fail to pay any Monthly Rental Installment, or any
portion of the Basic Rental hereby reserved, any portion of the Operating
Expense Adjustment, or any other sum owing under the terms of this Lease when
due and Tenant fails to make such payment within ten (10) days after written
notice thereof (a "Payment Default Notice") to Tenant; provided, however, that
Landlord shall be required to send only two Payment Default Notices during any
twelve (12) month period and no more than four Payment Default Notices during
the term of this Lease;
(b) Tenant shall fail to comply with any term, provision or
covenant of this Lease, other than the payment of rent, and shall not cure such
failure within ten (10) days after written notice thereof to Tenant, or, if
such failure cannot be completed within ten (10) days, then Tenant shall
commence to cure such failure within ten (10) days after written notice thereof;
(c) Tenant shall make an assignment for the benefit of creditors;
(d) Tenant shall file a petition under any section or chapter of
the National Bankruptcy Act, as amended, or under any similar law or statute of
the United States or any State thereof, or Tenant shall be adjudged bankrupt or
insolvent in any proceeding filed against Tenant thereunder and such
adjudication shall not be vacated or set aside within sixty (60) days;
(e) A receiver or Trustee shall be appointed for all or
substantially all of the assets of Tenant and such receivership shall not be
terminated or stayed within sixty (60) days;
(f) Tenant shall desert or vacate any substantial portion of the
Premises for a period of five (5) or more days; or
(g) Tenant makes an assignment or enters into a sublease in
violation of Paragraph 12 hereof.
22. REMEDIES. Upon the occurrence of any event of default specified
in Paragraph 21 hereof, Landlord shall have the option to pursue any one or
more of the following remedies without any notice or demand whatsoever:
(a) Terminate this Lease in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and peaceably take possession and expel or
remove Tenant and any other person who may be occupying said Premises or any
part thereof without being liable for prosecution or any claim of damages
thereof. Tenant agrees to pay to Landlord on demand the amount of all loss and
damage which Landlord may suffer by reason of such termination, whether through
inability to relet the Premises on satisfactory terms or otherwise.
(b) Enter upon and peaceably take possession of the Premises and
expel or remove Tenant and any other person who may be occupying the Premises
or any part thereof without being liable for prosecution or any claim for
damages therefor, and if Landlord so elects, relet the Premises on such terms
as Landlord shall deem advisable and receive the rent thereof. Tenant agrees to
pay to Landlord on demand any deficiency in basic rental that may arise by
reason of such reletting; and
(c) Enter upon the Premises, without being liable for prosecution or
any claim for damage therefor, and do whatever Tenant is obligated to do under
the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for
any expenses which Landlord may incur in thus effecting compliance with Tenant's
obligations under this Lease, and Tenant further agrees that Landlord shall not
be liable for any damages as resulting to the Tenant from such action, unless
caused by Landlord's gross negligence or willful misconduct.
(d) Notwithstanding anything expressed or implied herein, in the
event of the occurrence of the Event of Default specified in paragraph 21(f)
(vacation of the Premises for a period of five or more days) and if Tenant is
not otherwise in default, Landlord may as Landlord's sole remedy, terminate the
Lease, in which event Tenant shall immediately surrender the Premises to
Landlord and Tenants liability shall thereafter cease except for the payment of
rent that was outstanding on the termination date.
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No re-entry or taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention be given to Tenant. Notwithstanding any such
reletting or re-entry or taking possession, Landlord may at any time thereafter
elect to terminate this Lease for a previous default. Pursuit of any of the
foregoing remedies shall not preclude pursuit of any remedy herein provided,
constitute a forfeiture or waiver of any rent due to Landlord hereunder or of
any damages accruing to Landlord by reason of the violation of any of the
terms, provisions and covenants herein contained. Landlord's acceptance of rent
following an event of default hereunder shall not be construed as Landlord's
waiver of such event default. No waiver by Landlord of any violation or breach
of any of the terms, provisions and covenants herein contained shall be deemed
or construed to constitute a waiver of any other violation or breach of any of
the terms, provisions and covenants herein contained. Forbearance by Landlord
to enforce one or more of the remedies herein provided upon an event of default
shall not be deemed or construed to constitute a waiver of any other violation
or default. The loss or damage that Landlord may suffer by reason of
termination of the Lease or the deficiency from any reletting as provided for
above shall include the expense of repossession and any repairs or remodeling
undertaken by Landlord following possession. Should Landlord at any time
terminate this Lease for any default, in addition to any other remedy Landlord
may have, Landlord may recover from Tenant all damages Landlord may incur by
reason of such default, including the cost of recovering the premises and the
loss of the basic rental then remaining unpaid.
23. SURRENDER OF PREMISES. No act or thing done by the Landlord or
its agents during the term hereby granted shall be deemed as acceptance of a
surrender of the Premises, and no agreement to accept a surrender of the
Premises shall be valid unless the same be made in writing and subscribed by
the Landlord.
24. ATTORNEY'S FEES. In case it should be necessary or proper for
Landlord to consult or place this Lease, or any amount payable by Tenant
hereunder, with an attorney concerning or for the enforcement of any of
Landlord's rights hereunder, then Tenant agrees in each and any such case to
pay to Landlord on demand a reasonable attorney's fee. In the event of any
legal action or proceeding brought by either party against the other arising
out of this Lease, the prevailing party shall be entitled to recover reasonable
attorney's fees and costs incurred in such action and such amount shall be
included in any judgment rendered in such proceeding.
25. LANDLORD'S LIENS. In addition to the statutory Landlord's lien,
Landlord shall have at all times, a valid security interest to secure payment
of all rentals and other sums of money becoming due hereunder from Tenant, and
to secure payment of any damages or less which Landlord may suffer by reason of
the breach by Tenant of any covenant, agreement or condition presently or
which may hereafter be situated on the Premises and all proceeds therefrom, and
such property shall not be removed therefrom without the consent of Landlord
until all arrears in rent as well as any and all other sums of money then due
to Landlord hereunder, shall first have been paid and discharged and all the
covenants, agreements and conditions hereof have been fully complied with and
performed by Tenant. Upon the occurrence of an event of default by Tenant,
Landlord may, in addition to any other remedies provided herein, enter upon
the Premises and take possession of any and all goods, wares, equipment,
fixtures, furniture, improvements and other personal property of Tenant
situated on the Premises, without liability for trespasses or conversion, and
sell the same as public or private sale, without having such property at the
sale, after giving Tenant reasonable notice of the time and place of any public
sale or of the time after which any private sale is to be made, at which sales
the Landlord or its assigns may purchase unless otherwise prohibited by law.
Unless otherwise provided by law, and without intending to exclude any other
manner of giving Tenant reasonable notice, the requirement of reasonable notice
shall be met if such notice is given in the manner prescribed in paragraph 28
of this Lease at least five (5) days before the time of sale. The proceeds
from any such disposition (less any and all expenses) shall be applied as a
credit against the indebtedness secured by the security interest granted in this
paragraph 25. Any surplus shall be paid to Tenant or as otherwise required by
law, and the Tenant shall pay any deficiencies forthwith. Upon request by
Landlord, Tenant agrees to execute and deliver to Landlord a financing
statement in form sufficient to perfect the security interest of Landlord in
the aforementioned property and proceeds thereof under the provisions of the
Uniform Commercial Code in force in the State of Texas. The statutory lien for
rent is not hereby waived, the security interest herein granted being in
addition and supplementary thereto. Notwithstanding anything contained herein
to the contrary, Landlord hereby covenants and agrees to subordinate all of
Landlord's liens covering any property that is now or hereafter owned by Tenant
to the liens and/or security interests of any third party lender which has
heretofore made or hereafter makes a loan to Tenant and which loan is to be
secured, in whole or in part, by any of the property that is owned by Tenant
and is now or hereafter situated on the Premises. In connection therewith,
Landlord shall execute and deliver to Tenant, within fifteen (15) business days
after Tenant's request therefor, a Subordination Agreement satisfying the terms
and provisions of the preceding sentence.
26. MECHANIC'S LIEN. Tenant will not permit any mechanic's lien or
liens to be placed upon the Premises or the Building or Improvements thereon
during the term hereof caused by resulting from any work performed, materials
furnished or obligations incurred by or at the request of Tenant, and in the
case of the filing of such lien Tenant will promptly either (a) pay same, or
(b) provide a bond or other security satisfactory to Landlord in Landlord's
sole discretion. If neither of the foregoing has been done within twenty (20)
days after written notice thereof from Landlord to Tenant, the Landlord shall
the right and privilege at Landlord's option of paying the same or any portion
thereof without inquiry as to the validity thereof and any amounts so paid,
including expenses and interest, shall be so much additional indebtedness
hereunder due from Tenant to
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<PAGE> 10
Landlord and shall be repaid to Landlord immediately on rendition of bill
therefor, together with interest at ten percent (10%) per annum until repaid.
27. WAIVER OF SUBROGATION. Anything in the Lease to the contrary
notwithstanding, the parties hereto hereby waive any and all rights of
recovery, claim, action or cause of action against each other, their agents,
officers, and employees, for any loss or damage that may occur to the Premises
hereby demised, or any improvements thereto, or said Building of which the
Premises are a part of any improvements thereto, or related facilities, by
reason of the fire, the elements, or any other cause which could be insured
against under the terms of standard fire and extend coverage insurance
policies, regardless of cause or origin, including negligence of the parties
hereto, their agents, officers and employees.
28. NOTICES. Each provision of this Agreement, or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing or delivery of any notice, or with reference
to the making of any payment by Tenant to Landlord, shall be deemed to be
complied with when and if the following steps are taken:
(a) All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord in Dallas County, Texas, at the
address hereinbelow set forth, or at such other address as Landlord may
specify from time to time by written notice delivered in accordance herewith;
(b) Any notice or document required to be delivered hereunder shall
be deemed to be delivered if actually received and whether or not received when
deposited in the United States mail, postage prepaid, certified or registered
mail (with or without return receipt requested) addressed to the parties,
hereto at the respective addresses set out opposite their names below, or at
such other address as they have heretofore specified by written notice
delivered in accordance herewith:
LANDLORD:
Government Employees Insurance Company
---------------------------------------
4201 Spring Valley Road, Suite 200
---------------------------------------
Dallas, Texas 75244
---------------------------------------
TENANT:
Monarch Dental Associated, L.P.
---------------------------------------
4201 Spring Valley Road, Suite 320
---------------------------------------
Dallas, Texas 75244
---------------------------------------
Each of the above-listed addressees may change its address for notice purposes
pursuant to this paragraph 28, by delivering to the other addressee a written
notice of change of address, in a manner specified in this paragraph 28.
However, no such change of address shall be effective against another addressee
until written notice of such change is actually received by such addressee.
29. FORCE MAJEURE. Whenever a period of time is herein prescribed
for action to be taken by Landlord, the Landlord shall not be liable or
responsible for, and there shall be excluded from the computation of any such
period of time, any delays due to strikes, riots, acts of God, shortages of
labor, materials, war, governmental laws, regulations or restrictions or any
other causes of any kind whatsoever which are beyond the control of Landlord.
Whenever a period of time is herein prescribed for action to be taken by
Tenant, other than the payment of money by Tenant, Tenant shall not be liable
or responsible for, and there shall be excluded from the computation of any
such period of time, any delays due to strikes, riots, acts of God, shortages
of labor, materials, war, governmental laws, regulations or restrictions or any
other causes of any kind whatsoever which are beyond the control of Tenant.
30. SEVERABILITY. If any clause or provision of this Lease is
illegal, invalid or unenforceable under present or future laws effective during
the term of this Lease, then and in the event, it is the intention of the
parties hereto that the remainder of this Lease shall not be affected thereby,
and it is also the intention of the parties to this Lease that in lieu of each
clause or provision of this Lease that is illegal, invalid, or unenforceable,
there be added as a part of the Lease a clause or provision as similar in terms
to such illegal, invalid or uneforceable clause or provision as may be possible
and be legal, valid and enforceable.
31. ENTIRE AGREEMENT; AMENDMENTS; BINDING EFFECT. This Lease
contains the entire agreement between parties and may not be altered, changed or
amended, except by instrument in writing signed by both parties hereto. No
provision of this Lease shall be deemed to have been waived by Landlord unless
such waiver be in writing signed by Landlord and addressed to tenant, nor shall
any custom or practice which may grow up between the parties in the
administration of the terms hereof be construed to waive or lessen the right of
Landlord to insist upon the performance by Tenant in strict accordance with the
terms hereof. The terms, provisions, covenants and conditions contained in this
Lease shall apply to, inure to the benefit of, and be binding upon the parties
hereto, and upon their respective successors in interest and legal
representatives, except as otherwise expressly provided.
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<PAGE> 11
32. QUIET ENJOYMENT. Provided Tenant has performed all of the
terms, covenants, agreements and conditions of this Lease, including the
payment of rent, to be performed by Tenant, Tenant shall peaceably and quietly
hold and enjoy the Premises for the term hereof, without hindrance from
Landlord, subject to the terms and conditions of this Lease.
33. RULES AND REGULATIONS. Tenant and Tenant's agents, employees,
and invitees will comply fully with all requirements of the rules and
regulations of the Project and related facilities which are attached hereto as
Exhibit "C", and made a part hereof as though fully set out herein. Landlord
shall at all times have the right to change such rules and regulations or to
promulgate other rules and regulations in such reasonable manner as may be
deemed advisable for safety, care, or cleanliness of the Building, the
Premises, or related facilities, and for preservation of good order therein,
all of which rules and regulations, changes and amendments will be forwarded to
Tenant in writing and shall be carried out and observed by Tenant. Tenant
shall further be responsible for the compliance with such rules and regulations
by the employees, servants, agents, visitors and invitees of Tenant.
34. BROKER'S OR AGENT'S COMMISSION. Tenant represents and warrants
that there are no claims for brokerage commissions or finder's fees in
connection with the execution of this Lease, except as listed below, and Tenant
agrees to indemnify and hold harmless Landlord against all liabilities and
costs and arising from such claims, including without limitation attorney's
fees in connection therewith. Landlord shall pay a commission of four and one
half percent (4 1/2%) to Cawley International per a separate agreement with
Cawley International.
35. GENDER. Words of any gender used in this Lease shall be held
and construed to include any other gender, and words in the singular number
shall be held to include the plural, unless the contract otherwise requires.
36. GUARANTY, JOINT AND SEVERAL LIABILITY. If there be more than
one Tenant, the obligations hereunder imposed upon Tenant shall be joint and
several. If there be a guarantor of Tenant's obligations hereunder, any
obligations hereunder imposed upon Tenant shall be the joint and several
obligations of Tenant and such guarantor, and Landlord need not first proceed
against the Tenant hereunder before proceeding against such guarantor, nor
shall any such guarantor be released from its guaranty for any reasons
whatsoever, including without limitation, in case of any amendments hereto,
waivers hereof or failure to give such guarantor any notice hereunder.
37. TRANSFER OF LANDLORD'S RIGHTS. Landlord shall have the right
to transfer and assign, in whole or in part, all and every feature of its
rights and obligations hereunder, and in the Building and other property
referred to herein, provided that such assignee assumes all obligations of
Landlord under this Lease which accrued after the date of such assignment.
Tenant agrees that, in the event of such assignment, Landlord's will be relieved
of all obligations and liability under this Lease as to such assignment.
38. SECURITY DEPOSIT. Upon the occurrence of any event of default
by Tenant, Landlord may, from time to time without prejudice to any other
remedy, use the security deposit paid to Landlord by Tenant as herein provided
to the extent necessary to make good any arrears of rent and any other damages,
injury, expenses of liability caused to Landlord by such event of default. Any
remaining balance of such security deposit to be returned by Landlord to Tenant
upon termination of the Lease. Such security deposit shall not be considered
an advance payment of rent or a measure of Landlord's damages in case of
default by Tenant. In the event Landlord so uses the security deposit, Tenant
shall, upon demand, restore the same.
39. LANDLORD'S RIGHT OF INSPECTION. Tenant agrees to permit
Landlord and the authorized representative of Landlord to enter the Premises at
all reasonable hours for the purpose of inspecting the same and making any
necessary repairs to Premises with reasonable notice or to the Building and
performing any work therein that may be necessary to comply with any laws,
ordinances, rules, regulations or requirements of any public authority or of
the Board of Fire Underwriters or any similar body. Nothing herein shall imply
any duty upon the part of Landlord to do any such work which, under any
provision of this Lease Tenant may be required to perform and the performance
thereof by Landlord shall not constitute a waiver of Tenant's default in
failing to perform the same. Landlord may, during the progress of any work in
the Premises, keep and store upon the Premises all necessary materials, tools
and equipment. Landlord shall not in any event be liable for inconvenience,
annoyance, disturbance, loss of business or other damage of Tenant by reason of
making repairs or the performance of any work on the Premises, or on account of
bringing materials, supplies and equipment into or through the Premises during
the course thereof, and the obligations of Tenant under this Lease shall not
thereby be affected in any manner whatsoever. Tenant agrees to permit Landlord
and the authorized representatives of Landlord to enter the Premises at all
times during usual business hours during the final one hundred twenty (120)
days of the Term for purposes of showing the Premises to prospective tenants or
purchasers.
40. ESTOPPEL CERTIFICATE. Tenant will, at any time and from time
to time, upon request by Landlord, execute, acknowledge, and deliver to
Landlord a statement in writing executed by Tenant certifying that Tenant is in
possession of the Demised Premises under the terms of this Lease, that this
Lease is unmodified and in full effect (or, if there have been modifications,
that the Lease is in full effect as modified,
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<PAGE> 12
and setting forth such modifications), stating the dates to which the rent has
been paid, and either stating that to the knowledge of Tenant no default exists
hereunder, or specifying each such default of which Tenant may have knowledge,
and such other matters as may be reasonably requested by Landlord, it being
intended that any such statement by Tenant may be relied upon by prospective
purchaser or mortgagee of the Building. Landlord will, at any time and from
time to time, upon request by Tenant, execute, acknowledge and deliver to
Tenant a statement in writing executed by Landlord certifying that this Lease
is unmodified and in full effect (or, if there have been modifications, that
the Lease is in full effect as modified, and setting forth such modifications),
stating the dates to which the Rent has been paid, and either stating that to
the knowledge of Landlord no default exists hereunder, or specifying each such
default of which landlord may have such knowledge.
41. CAPTIONS. The captions contained in this Lease are for
convenience of reference only, and in no way limit or enlarge the terms and
conditions of this Lease.
42. PLACE OF PERFORMANCE. Tenant shall perform all covenants,
conditions and agreements contained herein, including but not limited to
payment of rent, in Dallas County, Texas. Any suit arising from or relating to
this agreement shall be brought in Dallas County, Texas.
43. SPECIAL PROVISIONS.
(a) Landlord shall pay to a contractor which has been
approved in accordance herewith, up to $8.00 per square foot for tenant
improvements (the "Allowance"). Tenant will have a space planner prepare a
space plan (the "Space Plan") for the Premises and submit same for Landlord for
approval. The Space Plan may be paid for out of the Allowance, up to $1.00 per
square foot. Tenant's Space Plan and all plans and specifications for tenant
improvements must be approved in advance by Landlord. Tenant may submit the
name of a contractor to be included in the bidding process, and Landlord shall
invite such contractor, together with at least two other contractors, to bid
for the opportunity to be the general contractor for the tenant improvements.
Landlord shall select the successful bidder to be the general contractor to
perform the work. Landlord shall pay the approved contractor for the
improvements actually performed, up to the amount of $8.00 per square foot
(less the amount, up to $1.00 per square foot, expended for the Space Plan)
within thirty (30) days after a Certificate of Occupancy is obtained for the
Premises.
(b) Landlord will permit Tenant to use zero (0) covered
parking spaces. Such spaces will initially be reserved, but Landlord reserves
the right to relocate the spaces within the covered parking area at any time.
EXECUTED as of the date first written above.
LANDLORD:
GOVERNMENT EMPLOYEES INSURANCE COMPANY
By: STEPHEN J. MARTZ
-------------------------------------------
Title: Asst. Vice President
----------------------------------------
TENANT:
MONARCH DENTAL ASSOCIATED, L.P.
By: /s/ WARREN F. MELAMED, DDS
-------------------------------------------
Title: President
----------------------------------------
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<PAGE> 13
EXHIBIT A
[FLOORPLAN]
FLOOR PLAN (LEVEL 3)
<PAGE> 14
EXHIBIT "A-1"
BEING a tract of land situated in the Elisha Fike Survey, Abstract No.
478 in Dallas County, Texas and also being the Metropolitan Building, Lot 2,
Block "6", A REPLAT OF METROPOLITAN BUSINESS PARK, SECTION FIVE, an addition to
the City of Farmers Branch as recorded in Volume 84020, Page 5267 of the Deed
Records of Dallas County, Texas and being more particularly described as
follows:
BEGINNING at an iron pin for corner at the intersection of the east
line of Midway Road (a 100 foot right-of-way) with the north line of Spring
Valley Road (a 100 foot right-of-way);
THENCE NORTH, 73.28 feet along the said east line of Midway Road to an
iron pin for corner;
THENCE EAST, 345.00 feet leaving the said east line of Midway Road to
an iron pin for corner;
THENCE SOUTH, 454.00 feet to an iron pin for corner;
THENCE EAST, 240.00 feet to an iron pin for corner on the west line of
Proton Road (a 60 foot right-of-way);
THENCE SOUTH, 219.28 feet along the said west line of Proton Road to an
iron pin for corner at the intersection of the said west line of Proton Road
with the said line of Proton Road with the said north line of Spring Valley
Road;
THENCE WEST, 585.00 feet along the said north line of Spring Valley
Road to the Point of Beginning and containing 6.541 acres (284,909 square feet)
of land.
<PAGE> 15
EXHIBIT "B"
LEASEHOLD IMPROVEMENTS
[to be attached when complete]
<PAGE> 16
EXHIBIT "C"
RULES AND REGULATIONS
1. Landlord shall provide all locks for doors in each Tenant's
leased premises, at the cost of such Tenant, and no Tenant shall place any
additional lock or locks on any door in its leased area without Landlord's
prior written consent. A reasonable number of keys to the locks on the doors
in each Tenant's leased premises shall be furnished by Landlord to each Tenant,
at the cost of such Tenant, and the Tenants shall not have any duplicate keys
made.
2. Movement in or out of the Building of furniture or office
equipment, or dispatch or receipt by Tenant of any merchandise or materials
which requires use of elevators or stairways, or movement through Building
entrances or lobby shall be restricted to hours designated by Landlord. All
such movement shall be under supervision of Landlord and in the manner agreed
between Tenant and Landlord by prearrangement before performance. Such
prearrangements initiated by Tenant will include determination by Landlord and
be subject to its decision and control of the time, method and routing of
movement, and limitations imposed by safety or other concerns which may
prohibit any article, equipment or any other item from being brought into the
Building. Tenant is to assume all risk as to damage to articles moved and
injury to persons or public engaged or not engaged in such movement, including
equipment, property and personnel of Landlord if damaged or injured as a result
of acts in connection with carrying out this service for Tenant from time of
entering the Land on which the Building stands to completion of work; and
Landlord shall not be liable for acts of any person engaged in, or any damage or
loss to any of said property or persons resulting from any act in connection
with such service performed by Tenant.
3. No signs will be allowed in any form on the exterior of the
Building or on the inside or outside of the windows of the Building and no
signs except in uniform location and uniform styles fixed by Landlord will be
permitted in the public corridors or on corridor doors or entrances to Tenant's
space. All signs will be contracted for by Landlord for Tenant at the rate
fixed by Landlord from time to time, and Tenant will be billed and shall pay
for such service accordingly. Tenant's name shall be displayed on any
directory of the Building.
4. No draperies, shutters, or other window coverings shall be
installed on exterior windows or walls or windows and doors facing public
corridors without Landlord's prior written approval.
5. No portion of the Premises or any other part of Building shall
at any time be used as occupied as sleeping or lodging quarters.
6. Tenant shall not place, install or operate on the Premises in
any part of the Building any engine, stove, or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the Premises
any explosives, gasoline, kerosene, oil, acids, caustics, or any other
inflammable explosive, or hazardous materials without written consent of
Landlord, provided, however, that Tenant may provide a microwave oven in the
Premises for use of its employees.
7. Landlord will not be responsible for lost or stolen personal
property, equipment, money or jewelry from the Premises or public rooms
regardless of whether such loss occurs when the Building and/or the Premises
are locked against entry or not.
8. No birds or animals shall be brought into or kept in or about
the Building.
9. Employees of Landlord shall not receive or carry messages for
or to Tenant or other persons, nor contract with or tender free or paid
services to Tenant or Tenant's agents, employees, or invitees.
10. Landlord will not permit entrance to the Premises by use of
pass keys controlled by Landlord, to any person at any time without written
permission by Tenant, except employees, contractors, or service personnel
directly supervised by Landlord and employees of the United States Postal
Service.
11. None of the entries, passages, doors, elevator doors, hallways,
or stairways shall be blocked or obstructed, or any rubbish, litter, trash, or
material of any nature placed, emptied or thrown into these areas, nor shall
such areas be used at any time except for ingress by Tenant, Tenant's agents,
employees, or invitees.
12. Tenant and its employees, agents and invitees shall observe and
comply with the driving and parking signs and markers on the Premises
surrounding the Building. Landlord shall not be responsible for any damage to
any vehicle towed because of non-compliance with parking regulations.
13. Landlord shall have the right to prescribe the weight and
position of safes, computers and other heavy equipment which shall, in all
cases, in order to distribute their weight, stand on supporting devices
approved by Landlord.
<PAGE> 17
14. To insure orderly operation of the Building no ice, mineral
water or other beverages, food, towels, newspapers, etc., shall be delivered to
the Premises except by persons and at times approved by Landlord in writing.
15. Should a Tenant require telegraphic, telephonic, annunciator or
other communication service, Landlord will direct an electrician where and how
wires are to be introduced and placed and none shall be introduced or placed
except as Landlord shall direct. Electrical current shall not be used for power
or heating without Landlord's written permission.
16. Without Landlord's prior approval, Tenant shall not install any
radio or television antenna, loudspeaker, music system or other device on the
roof or exterior walls of the Building or on common walls with adjacent tenants.
17. No hand trucks or other vehicles of any kind shall be used in
or brought into the Building on the Premises by Tenant or others unless such
vehicle shall have been inspected and approved in writing by the Landlord.
18. Tenant shall store all its trash and garbage within its
Premises. No material shall be placed in the trash boxes or receptacles if such
material is of such nature that it may not be disposed of in the customary
manner of removing and disposing of trash and garbage and without being in
violation or any law or ordinance governing such disposal. All garbage and
refuse disposal shall be made only through entryways and elevators provided for
such purposes and at such times as Landlord shall designate.
19. These Rules and Regulations are in addition to, and shall not
be construed to in any way, modify, alter or amend, in whole or in part, the
terms, covenants, agreements and conditions of any lease covering premises in
the Building.
20. Landlord reserves the right to make such other reasonable rules
and regulations as in its judgment may from time to time be needed for the
safety, care and cleanliness of the Building, and for the preservation of good
order therein.
21. Corridor doors, when not is use, shall be kept closed.
22. Tenant shall not employ any person or persons other than the
janitor of Landlord for the purpose of cleaning the premises unless otherwise
agreed to by Landlord. Except with the written consent of Landlord no person or
persons other than approved by Landlord shall be permitted to enter the
Building for the purpose of cleaning the same. Tenant shall not cause any
unnecessary labor by reason of Tenant's carelessness or indifference in the
preservation of good order and cleanliness. Landlord shall not be responsible
to any Tenant for any loss of Property on the premises, however occurring, or
for any damage done to the effects of any Tenant by the janitor or any employee
or any other person. Janitor service shall include ordinary dusting and
cleaning by the janitor assigned to such work and shall not include beating of
carpets or rugs or moving of furniture. Service will not be furnished to areas
which are occupied after 9:30 p.m. Window cleaning shall be done only by
Landlord, and only between 6:00 a.m. and 5:00 p.m.
23. Tenants shall not make or permit any improper, objectionable or
unpleasant noises or odors in the Building or otherwise interfere in any way
with other Tenants or persons having business with them.
24. No vending machine or machines of any description shall be
installed, maintained or operated upon the Premises without the written consent
of the Landlord.
25. On Saturdays, Sundays, and legal holidays, and on other days
between the hours of 6:00 p.m. and 8:00 a.m., the following day, access to the
Building, or to the halls, corridors, elevators or stairways in the Building,
or to the Premises may be refused unless the person seeking access is known to
the person or employee of the Building charge and has a pass or is properly
identified. The Landlord shall in no case be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person.
Landlord further, in case of invasion, mob, riot, public excitement, or other
commotion, reserves the right to prevent access to the Building during the
continuance of the same by closing doors or otherwise, for the safety of the
Tenants and protection of the property in the Building and the Building.
Landlord further reserves the right to close and keep locked all entrances and
exit doors of the Building on Saturdays, Sundays and legal holidays and on
other days between the hours of 6:00 p.m. and 8:00 a.m. of the following day,
and during such further hours as Landlord may deem advisable for the adequate
protection of said Building and the property of its Tenants.
26. Tenant expressly acknowledges that smoking is prohibited in the
Premises and the Common Areas of the Building. Tenant shall advise its
employees and guests of this rule, and Tenant shall be responsible for the
compliance with said rule by its employees, servants, agents, visitors, and
invitees.
<PAGE> 1
EXHIBIT 11.1
MONARCH DENTAL CORPORATION, INC. AND SUBSIDIARIES
UNAUDITED NET INCOME PER COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Primary and fully diluted earnings per
share
Net income.............................. $ 674,654 $ 232,523
========== ==========
Shares:
Weighted average common shares
issued............................. 3,456,458 3,456,458
Assuming exercise of options, reduced
by the number of common shares
which could have been purchased
with the proceeds from exercised of
such options....................... 23,282 23,282
Assuming conversion of Convertible
Participating Preferred Stock...... 2,400,000 2,400,000
Assuming conversion of Series A
preferred stock.................... 852,275 852,275
---------- ----------
Weighted average number of common
shares outstanding, as adjusted.... 6,732,015 6,732,015
========== ==========
Net income per common share............. $ 0.10 $ 0.03
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
MONARCH DENTAL CORPORATION AND AFFILIATES
Monarch Dental Corporation
Partners Dental Corporation
Monarch Dental Associates, L.P.
MacGregor Dental Associates, L.P.
Monarch Dental Management, Inc.
Modern Dental Professionals, P.C.
Midwest Dental Care, Mondovi, Inc
Midwest Dental Care, Sheboygan, Inc.
Midwest Dental Management, Inc.
Convenient Dental Care, Inc.
Modern Dental Professionals - Girlinghouse, P.A.
Arkansas Dental Health Associates, Inc.
Modern Dental Professionals - Beavers, P.A.
United Dental Care, Inc.
<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
May 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-31-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 DEC-31-1996
<CASH> 446,294 1,059,337
<SECURITIES> 0 0
<RECEIVABLES> 6,582,184 5,107,114
<ALLOWANCES> 2,239,000 1,676,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,006,020 4,682,373
<PP&E> 8,337,142 7,423,040
<DEPRECIATION> 3,100,236 2,741,097
<TOTAL-ASSETS> 36,353,469 32,905,823
<CURRENT-LIABILITIES> 8,884,311 8,677,014
<BONDS> 0 0
9,313,315 9,313,315
0 0
<COMMON> 32,138 62,675
<OTHER-SE> (2,903,732) (5,471,000)
<TOTAL-LIABILITY-AND-EQUITY> 36,353,469 32,905,823
<SALES> 0 0
<TOTAL-REVENUES> 14,475,561 35,980,260
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 8,484,906 21,391,886
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 579,384 1,686,392
<INCOME-PRETAX> 382,806 1,100,120
<INCOME-TAX> 150,283 425,466
<INCOME-CONTINUING> 232,523 674,654
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 232,523 674,654
<EPS-PRIMARY> .03 .05
<EPS-DILUTED> .00 0
</TABLE>
