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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER: 0-22835
MONARCH DENTAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0363560
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MONARCH DENTAL CORPORATION
4201 SPRING VALLEY ROAD, SUITE 320
DALLAS, TX 75244
(Address of principal executive offices)
(972) 702-7446
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of the shares of the Registrant's Common Stock held
by non-affiliates of the Registrant on March 20, 2000 was approximately
$22,453,990 based upon the closing price per share of the Registrant's Common
Stock as reported on the Nasdaq SmallCap Market on March 20, 2000. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of March 20, 2000,
there were 12,839,881 outstanding shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Parts
of this Report on Form 10-K indicated below:
(1) The Annual Report to Stockholders for fiscal year ended December 31,
1999 (Part II).
(2) The Company's definitive proxy statement dated April 13, 2000 for the
Annual Meeting of Stockholders to be held on May 9, 2000 (Part III).
STATEMENTS MADE OR INCORPORATED INTO THIS ANNUAL REPORT INCLUDE A
NUMBER OF FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
FORWARD LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING
THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND WORDS OF
SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENT
REGARDING THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, AMONG OTHERS, RISKS ASSOCIATED
WITH THE COMPANY'S ACQUISITION STRATEGY AND EXPANSION WITHIN EXISTING MARKETS,
MANAGEMENT OF GROWTH AND COMPETITION AND PURSUIT OF STRATEGIC ALTERNATIVES.
THESE AND OTHER FACTORS ARE DESCRIBED IN ITEM 7 OF PART II OF THIS FORM 10-K
UNDER THE CAPTION "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS."
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MONARCH DENTAL CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page No.
<S> <C> <C> <C>
Part I.
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data *
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations *
Item 8. Financial Statements and Supplementary Data *
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
Part III.
Item 10. Directors and Executive Officers of the Registrant **
Item 11. Executive Compensation **
Item 12. Security Ownership of Certain Beneficial Owners and Management **
Item 13. Certain Relationships and Related Transactions **
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports Filed on Form 8-K 18
Signatures 20
</TABLE>
* Incorporated by reference to the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1999.
** Incorporated by reference to the Company's definitive proxy statement dated
April 13, 2000 for the Annual Meeting of Stockholders to be held on May 9,
2000.
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PART I
ITEM 1. BUSINESS
The information contained in this report is provided as of December
31, 1999, unless otherwise indicated.
The Company manages dental group practices in selected markets,
located in Texas, Wisconsin, Pennsylvania, Virginia, Ohio, Arkansas, Utah,
Colorado, Georgia, New Jersey, Florida, Indiana, Arizona and New Mexico at
December 31, 1999. Dentists practicing at the Company's dental offices (the
"Dental Offices") provide general dentistry services such as examinations,
cleanings, fillings, bonding, placing crowns and fitting and placing fixed or
removable prostheses. At many of the Company's Dental Offices, dentists also
provide specialty dental services such as orthodontics, oral surgery,
endodontics, periodontics and pediatric dentistry. The Company seeks to build
geographically dense networks of dental providers by expanding within its
existing markets and entering new markets through acquisition. At December 31,
1999, the Company owned and managed 190 Dental Offices, of which 28 were
internally developed and 173 were acquired (eleven of these offices were
subsequently closed) by the Company. At December 31, 1999, 444 full-time
dentists practiced at the Company's Dental Offices. The Company was incorporated
under the laws of Delaware on December 28, 1994.
DENTAL SERVICES
Dentists practicing at the Dental Offices provide general dentistry
services such as examinations, cleanings, fillings, bonding, placing crowns and
fitting and placing fixed or removable prostheses. At many of the Company's
Dental Offices, dentists also provide specialty dental services such as
orthodontics, oral surgery, endodontics, periodontics and pediatric dentistry.
Specialty dental services are typically offered by teams which rotate through
several Dental Offices in a particular market. This enables the dental
professional corporations managed by the Company (the "P.C.s") or the Company,
as applicable, to capture revenue from services that would otherwise be referred
to independent specialists.
Except with respect to Dental Offices located in states in which the
ownership of dental practices by non-dentists is permitted, dental services
provided at the Dental Offices are provided by or under the supervision of
licensed dentists employed by or under independent contracts with the P.C.s. In
states in which the Company operates and in which the ownership of dental
practices by non-dentists is permitted (currently Wisconsin), dental services
provided at the Dental Offices are provided by or under the supervision of
licensed dentists employed by or under independent contracts with the Company.
The Company owns or leases all of the operating assets of each of the Dental
Offices, including inventory, equipment, leases and leasehold improvements. The
Company typically equips its Dental Offices with state-of-the-art clinical and
diagnostic equipment such as fiber optic handpieces, intraoral video cameras and
panoramic and cephalometric X-ray equipment.
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The following table shows the principal areas in which the Company
owns and manages Dental Offices, the number of Dental Offices and dentists in
each area at December 31, 1999, the year that each practice was established and
the effective date of each practice's affiliation with the Company:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
DENTAL GROUP PRACTICE / MARKET DENTAL OFFICES DENTISTS (1) FOUNDED OF ACQUISITION
- ------------------------------ -------------- ------------ ------- --------------
<S> <C> <C> <C> <C>
Monarch, Dallas-Fort Worth 30 84 1983 N/A
MacGregor Dental Centers, Houston 16 51 1962 February 1996
Midwest Dental Care, Wisconsin 26 46 1975 September 1996
Convenient Dental Care, Arkansas 1 5 1982 November 1996
Arkansas Dental Health, Arkansas 2 5 1984 January 1997
United Dental Care, Arkansas 8 12 1990 April 1997
Dental Centers of Indiana, Indiana 14 17 1980 August 1997
J.B. Hays, Arkansas 1 3 1994 October 1997
Three Peaks Dental Health, Colorado 6 10 1990 November 1997
Press Family Dental, San Antonio 7 20 1971 November 1997
Dental America, Midland - Odessa 3 6 1994 December 1997
Dental Care One, Ohio 8 12 1979 March 1998
Managed Dental Care Centers, New Mexico 4 6 1995 June 1998
Valley Forge Dental Associates, Various 54 141 1995 September 1998
Talbert Dental, Arizona and Utah 10 26 1973 September 1998
</TABLE>
(1) Includes full-time general dentists and specialists employed by or under
contract with the Company (in the case of Midwest) or the applicable P.C.
(in the case of each dental group practice other than Midwest).
The attributes of the Dental Offices vary from market to market. In
urban and suburban areas a Dental Office may have, for example, 15 or more
single-chair operatories, a multi-chair specialty bay, several full-time general
dentists, several dental hygienists and dental assistants, a business manager
and a receptionist. In more rural markets, a Dental Office may have, for
example, only three or four single chair operatories, and be staffed by one
general dentist, one hygienist or dental assistant and a receptionist. One
general dentist, designated as the Dental Director, oversees professional
matters at each Dental Office.
ADVERTISING AND MARKETING
The Company seeks to increase patient volume at the Dental Offices
through television, radio and print advertising and other marketing techniques.
The Company has developed these techniques over the past 15 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 "ProDent(SM)" in Philadelphia 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
this market. 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.
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PAYOR MIX
Third-party payment arrangements from which the Company derives
revenue directly or through the P.C.s include indemnity insurance, preferred
provider plans and capitated managed dental care plans. Under indemnity
insurance plans, the patient or the patient's employer pays insurance premiums
and the insurance company reimburses the dentist for all or a portion of the
dentist's usual and customary fee, with the patient paying the portion not
covered by insurance. Under preferred provider plans, dentists agree to provide
dental services to plan members on a discounted fee-for-service basis. Capitated
managed dental care plans typically pay dental group practices that agree to
provide services to plan members a fixed monthly amount for each plan member
covered for a specified schedule of services regardless of the quantity or cost
of services to the participating dental group practice obligated to provide
them. This arrangement shifts the risk of utilization to the dental group
practice that provides the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Dental Offices (other than compensation and benefits of dentists and
hygienists), the risk of over-utilization of dental services at the Dental
Offices under capitated managed dental care plans is effectively shifted to the
Company. In addition, members of capitated managed dental care plans pay the
P.C.s or the Company, as applicable, additional amounts as co-payments for more
complex procedures. The relative size of capitation payments and co-payments
varies in accordance with the level of benefits provided and plan design.
The Company seeks to optimize the revenue mix at the Dental Offices
between revenue from fee-for-service business and revenue from capitated managed
dental care plans. The Company focuses on fee-for-service business, which
includes fees paid by indemnity insurers, fees from preferred provider plans and
direct patient billings. The Company seeks to increase fee-for-service business
by expanding its operations within existing markets, entering new markets and
advertising.
The Company seeks to supplement fee-for-service business with revenue
derived from contracts with capitated managed dental care plans. Capitated
managed dental care relationships with the Company and the P.C.s increase
dentist productivity and facility utilization. These relationships also provide
increased co-payment revenue, referrals of additional fee-for-service patients
and opportunities for dentists practicing at the Dental Offices to educate
patients about the benefits of elective dental procedures that may not be
covered by the patients' capitated managed dental care plans.
The following table sets forth information regarding the sources of
revenue of the Company for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -------------------------
PERCENT PERCENT PERCENT
REVENUE SOURCE REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
- -------------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fee-for-Service(1) $118,981 58.3% $ 77,453 59.8% $ 42,506 62.0%
Managed Dental Care:
Capitation 63,954 31.3% 34,764 26.8% 15,728 22.9%
Co-payment 21,135 10.4% 17,384 13.4% 10,385 15.1%
-------- -------- -------- -------- -------- --------
Total $204,070 100.0% $129,601 100.0% $ 68,619 100.0%
======== ======== ======== ======== ======== ========
</TABLE>
(1) Constitutes Revenue derived from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third
party payor.
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OPERATIONS
The Company seeks to achieve 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. 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, 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 utilizes a centralized management information system in
the Dallas-Fort Worth call center to schedule patient appointments. The Dental
Offices generally offer extended office hours and Saturday appointments. The
Company sends patients to the Dental Office that is most convenient for the
patient in terms of timing and location. The Company's centralized scheduling
systems provide the Company with better control over patient scheduling,
resulting in increased productivity, as well as the ability to analyze and
control the revenue mix at the Dental Offices by balancing fee-for-service and
capitated managed dental care patients. This also enables the staff at each
Dental Office to focus on patient care and customer service by eliminating a
significant number of incoming calls.
Purchasing
The integration of the Dental Offices enables the Company to take
advantage of economies of scale that are generally not available to solo or
smaller group practices. The Company is able to purchase dental supplies,
laboratory services, insurance, office furniture, equipment, information systems
and advertising at reduced costs. The Company
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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. The majority of the Dental
Offices are currently utilizing this information system. The Company uses the
information system to track data related to each Dental Office's operations and
financial performance. The information system can provide each of the Dental
Offices with data such as patient and practitioner scheduling information,
insurance coverage information, clinical record-keeping and revenue and
collection data (including credit history). Within each market, the Company uses
the information system to manage billing and collections, including electronic
insurance claims processing. In addition, the Company uses the information
system to provide information for case management and outcome related research.
Quality Assurance
The Company requires the dentists and hygienists at each of its
Dental Offices to develop and implement clinical management procedures and
treatment protocols, as well as uniform business and administrative standards
under which dental services are provided. These procedures, protocols and
standards vary from region to region and are determined by the Dental Directors
in each region in consultation with and under the guidance of a committee of the
Regional Dental Directors. The protocols include treatment planning, diagnostic
screening, radiographic records, record keeping, specialty referrals and dental
hygiene protocols. State licensing authorities require dentists to undergo
annual training. The dentists and hygienists practicing at the Dental Offices
can obtain some of the required continuing education training through the
Company's internal training programs in each regional market, certain of which
have been accredited by the Academy of General Dentistry.
AFFILIATION STRUCTURE
Relationship with P.C.s
In states in which the ownership of dental practices by non-dentists
is prohibited, the Company derives all of its revenue from its Management
Agreements with the P.C.s. Under each of the Management Agreements, the Company
receives a management fee equal to the Company's costs plus the lower of (i) 30%
of the P.C.'s net revenues or (ii) the P.C.'s net pre-tax income. The Company's
costs include all direct and indirect costs, overhead and expenses relating to
the Company's provision of services to the P.C.s under the Management
Agreements, such that substantially all costs associated with the provision of
dental services at the Dental Offices are borne by the Company, other than the
compensation and benefits of the dentists and hygienists who are employed by or
are independent contractors of the P.C.s. Under the Management Agreements, the
Company provides the P.C.s with, among other things, the facilities,
administrative personnel and supplies, as well as numerous services, including
administrative, accounting, cash management, financial statements and reports,
budgeting including capital expenditures, recruiting, insurance, litigation
management, negotiation of managed dental care contracts (which are entered into
by the Company and the P.C.s (except in Wisconsin)), management information
systems, billing and collection services. Each Management Agreement is for a
term of 40 years, with automatic renewal thereafter. Further, each Management
Agreement generally may be terminated by the P.C. only for cause, which includes
an uncured breach of the agreement by the Company, or upon the P.C.'s bankruptcy
or voluntary dissolution and may be terminated by the Company as of any
anniversary date of the Management Agreement upon 90 days' prior written notice.
In addition to the Management Agreements, the Company has a contractual right to
designate or approve the licensed dentists who own each P.C.'s capital stock.
Because the Company establishes a "controlling financial interest" under the
Management Agreements, the Company consolidates the dental group practices. In
states in which non-dentists are permitted to own dental practices, such as
Wisconsin, there is no need for this structure and the dentists are employed
directly by or are independent contractors of the Company.
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Employment Agreements
All dentists practicing at the Dental Offices have entered into
employment agreements, or independent contractor agreements through their
professional corporations, with the P.C.s or, in the case of dentists practicing
in dental offices located in states (currently Wisconsin) in which the ownership
of dental practices by the Company is permitted, the Company. Such agreements
typically contain a non-competition agreement for up to three years following
their termination within a specified geographic area, usually a specified number
of miles from the relevant Dental Office. The employment agreements with
dentists who have sold their practices to the Company generally are for a
specified initial term of up to five years. Under each agreement, the dentist
assigns billing and collection rights to the P.C., in the case of states in
which non-dentists are permitted to own dental practices, or to the P.C. in
other states, with the P.C. in turn assigning such rights to the Company under
the terms of the applicable Management Agreement. In return, the dentist
receives either a fixed salary or collections-based compensation, which may have
a minimum guarantee, and a package of benefits which varies from region to
region. The dentists' compensation and benefits are paid by the entity, either
the Company or the relevant P.C., with whom the dentist has entered into an
employment agreement.
CURRENT EVENTS
The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, the Company may not have
sufficient cash from operations to fund interest expense and certain
non-recurring and contingency payments aggregating approximately $3.5 million
during the second quarter of 2000. In addition, the Company does not expect to
generate sufficient cash from operations to repay its obligations under its
short-term note, due June 30, 2000 under the Credit Facility, which the Company
expects will approximate $10.0 million at that time. Failure to make the
required principal payment would constitute a default under the Credit Facility.
The Company is currently discussing with its lenders an extension of this
short-term note and the extension of additional credit to cover the potential
cash shortfall in the second quarter. However, the Company can provide no
assurance that its lenders will extend the maturity of this short-term note or
that additional credit will be available to meet the potential cash shortfall in
the second quarter. Assuming that the Company can obtain additional financing in
the second quarter to meet any cash shortfall, the Company believes that cash
from operations will be sufficient in the third and fourth quarters of 2000 to
meet its obligations.
In order to meet its short-term and long-term liquidity needs, the
Company may issue additional equity and debt securities, subject to market and
other conditions. In addition, the Company is also in the process of contacting
potential acquirors in order to determine if a sale of the Company would be more
beneficial to the Company's stockholders than raising additional capital to meet
its liquidity needs. The Company expects that potential acquirors would commence
due diligence procedures in the second quarter 2000. There can be no assurance
that any such sale will be available on terms acceptable to the Company. In the
event a sale transaction is not consummated, the Company would pursue the
issuance of debt securities and has signed an engagement letter with an
investment bank to pursue the issuance of these securities. Although there can
be no assurance that this financing will be available on terms acceptable to the
Company, the Company believes that additional sources of liquidity are available
at rates that would increase the Company's interest obligations. The failure to
raise the funds necessary to finance its future cash requirements could
adversely affect the Company's operations in future periods.
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
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Dental Offices on terms acceptable to the Company. If the Company seeks to
expand its operations into new markets, it is likely to face competition from
dental practice management companies which already have established a strong
business presence in such locations.
The business of providing general dental, orthodontic and other
specialty dental services is highly competitive in the markets in which the
Company operates. The Company believes it competes with other providers of
dental and specialty services on the basis of factors such as brand name
recognition, convenience, cost and the quality and range of services provided.
Competition may include practitioners who have more established practices and
reputations. The Company's affiliated dental practices also compete in the
retention and recruitment of general dentists, specialists and clinical staff.
If the availability of dentists begins to decline in the Company's markets, it
may become more difficult to attract qualified dentists to staff the Dental
Offices sufficiently or to expand them. The Dental Offices may not be able to
compete effectively against other existing practices or against new single or
multi-specialty dental practices that enter its markets, or to compete against
such other practices in the recruitment of qualified dentists.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal
levels. There can be no assurance that the regulatory environment in which the
Company or P.C.s operate will not change significantly in the future. The laws
and regulations of all states in which the Company operates impact the Company's
operations but do not currently materially restrict the Company's operations in
those states. In addition, state and federal laws regulate health maintenance
organizations and other managed care organizations for which dentists may be
providers. In general, regulation of health care-related companies is
increasing. In connection with its operations in existing markets and expansion
into new markets, the Company may become subject to additional laws, regulations
and interpretations or enforcement actions. The ability of the Company to
operate profitably will depend in part upon the ability of the Company and the
P.C.s to operate in compliance with applicable health care regulations.
State Regulation
The laws of many states, including all states in which the Company
currently operates, except Wisconsin, permit a dentist to conduct a dental
practice only as an individual, a member of a partnership or an employee of a
professional corporation, limited liability company or limited liability
partnership. These laws typically prohibit, either by specific provision or as a
matter of general policy, non-dental entities, such as the Company, from
practicing dentistry, from employing dentists and, in certain circumstances,
hygienists or dental assistants, or from otherwise exercising control over the
provision of dental services. Because under the Management Agreements the
Company bears all costs associated with the provision of dental services by the
P.C.s at the Dental Offices other than compensation and benefits of dentists and
hygienists and determines annual budgets for the P.C.s, the Company is
effectively able to manage the profitability of the Dental Offices. Under the
Management Agreements, however, the P.C.s control all clinical aspects of the
practice of dentistry and the provision of dental services at the Dental
Offices, including the exercise of independent professional judgment regarding
the diagnosis or treatment of any dental disease, disorder or physical
condition. Under the Management Agreements, persons to whom dental services are
provided at the Dental Offices are patients of the P.C.s and not of the Company
and the Company does not have or exercise any control or direction over the
manner or methods in which dental services are performed nor does the Company
interfere in any way with the exercise of professional judgment by the dentists
who are employees or independent contractors of the P.C.s.
Many states in which the Company's Dental Offices presently are
located have fraud and abuse laws which are similar to the federal fraud and
abuse law described below, and which in many cases apply to referrals for items
or services reimbursable by any insurer, not just by Medicare and Medicaid. A
number of states, including all of the states in which Dental Offices are
currently located, also impose significant penalties for submitting false claims
for dental services. Many states, including all of the states in which the
Dental Offices are currently located, either prohibit or require disclosure of
self-referral arrangements and impose penalties for the violation of these laws.
Many states also prohibit dentists from splitting fees with non-dentists.
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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. Some states (none in which the Company currently
operates) prohibit the advertising of dental services under a trade or corporate
name. Some states, including Arkansas, require all advertisements to be in the
name of the dentist. A number of states also regulate the content of
advertisements of dental services and the use of promotional gift items. In
addition, many states impose limits on the tasks that may be delegated by
dentists to hygienists and dental assistants. Some states (none in which the
Company currently operates) require entities designated as "clinics" to be
licensed, and may define clinics to include dental practices that are owned or
controlled in whole or in part by non-dentists. These laws and their
interpretations vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care contracts. The
application of state insurance laws to third-party payor arrangements, other
than fee-for-service arrangements, is an unsettled area of law with little
guidance available. As the Company or the P.C.s contract with third-party
payors, on a capitation or other basis under which the Company or the relevant
P.C. assumes financial risk, the Company or the P.C.s may become subject to
state insurance laws. Specifically, in some states, regulators may determine
that the Company or the P.C.s are engaged in the business of insurance,
particularly if they contract on a financial-risk basis directly with
self-insured employers or other entities that are not licensed to engage in the
business of insurance. To the extent that the Company or the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's revenue may be materially and adversely affected.
Federal Regulation
Many of the federal laws regulating the provision of dental care
apply only to dental services which are reimbursed under the Medicare or
Medicaid programs. Because very little dental care is currently provided by
Medicare and Medicaid, the Company derives very little revenue from these
programs. Therefore, the current impact of these laws is negligible. However,
there can be no assurance that the reach of these laws will not be expanded in
the future to cover services reimbursable by any payor. If these laws were to be
expanded in such a manner, they could have a material adverse effect upon the
Company.
The federal fraud and abuse statute prohibits, subject to certain
safe harbors, the payment, offer, solicitation or receipt of any form of
remuneration in return for, or in order to induce, (i) the referral 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 reflects 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
11
<PAGE> 12
for services rendered following prohibited referrals. Noncompliance with, or
violation of, Stark II can result in exclusion from the Medicare and Medicaid
programs and civil and criminal penalties. The Company believes that its
operations as presently conducted do not pose a material risk under Stark II,
primarily because the Company does not provide "designated health services."
Even if the Company were deemed to provide "designated health services," the
Company believes its activities would be protected under the employment and
group practice exceptions to Stark II. Nevertheless, there can be no assurance
that Stark II will not be interpreted or hereafter amended in a manner that has
a material adverse effect on the Company's operations as presently conducted.
Proposed federal regulations also govern physician incentive plans
associated with certain managed care organizations that offer risk-based
Medicare or Medicaid contracts. These regulations define physician incentive
plans to include any compensation arrangement (such as capitation arrangements,
bonuses and withholds) that may directly or indirectly have the effect of
reducing or limiting services furnished to patients covered by the Medicare or
Medicaid programs. Direct monetary compensation which is paid by a managed care
plan, dental group or intermediary to a dentist for services rendered to
individuals covered by the Medicare or Medicaid programs is subject to these
regulations, if the compensation arrangement places the dentist at substantial
financial risk. When applicable, the regulations generally require disclosure to
the federal government or, upon request, to a Medicare beneficiary or Medicaid
recipient regarding such financial incentives, and require the dentist to obtain
stop-loss insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.
The Company may be subject to Medicare rules governing billing
agents. These rules prohibit a billing agent from receiving a fee based on a
percentage of Medicare collections and may require Medicare payments for the
services of dentists to be made directly to the dentist providing the services
or to a lock box account opened in the name of the applicable P.C.
Federal regulations also allow state licensing boards to revoke or
restrict a dentist's license in the event such dentist defaults in the payment
of a government-guaranteed student loan, and further allow the Medicare program
to offset such overdue loan payments against Medicare income due to the
defaulting dentist's employer. The Company cannot assure compliance by dentists
with the payment terms of their student loans, if any.
Revenues of the P.C.s or the Company from all insurers, including
governmental insurers, are subject to significant regulation. Some payors limit
the extent to which dentists may assign their revenues from services rendered to
beneficiaries. Under these "reassignment" rules, the Company may not be able to
require dentists to assign their third-party payor revenues unless certain
conditions are met such as acceptance by dentists of assignment of the payor
receivables from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided "incident to" a dentist's
services. Under these "incident to" rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Dental Office staff unless certain conditions are met such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Dental Office
staff must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its Revenue under such programs.
The operations of the Dental Offices are also subject to compliance
with regulations promulgated by the Occupational Safety and Health
Administration ("OSHA"), relating to such matters as heat sterilization of
dental instruments and the usage of barrier techniques such as masks, goggles
and gloves. The Company incurs expenses on an ongoing basis relating to OSHA
monitoring and compliance.
Although the Company believes its operations as currently conducted
are in material compliance with existing applicable laws, there can be no
assurance that the Company's contractual arrangements will not be successfully
12
<PAGE> 13
challenged as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
INSURANCE
The Company maintains professional malpractice and general liability
insurance for itself and maintains professional liability insurance covering
dentists, hygienists and dental assistants at the Dental Offices. The Company
generally is a named insured under such policies and is named as an additional
insured on each individual dentist's policy. The Company maintains $1.0 million
per occurrence and $2.0 million in the aggregate for general liability coverage
with $9.0 million umbrella coverage. The Company maintains malpractice coverage
of up to $10.0 million per occurrence and $10.0 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.
EMPLOYEES
As of December 31, 1999, the Company had approximately 2,127
employees, including 46 dentists and 55 hygienists located at Midwest but
excluding the 458 dentists and 370 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.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 4201 Spring
Valley Road, Dallas, Texas, in approximately 17,000 square feet occupied under a
lease which expires on January 31, 2001.
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, 1999, the Company had lease costs of approximately $8.6
million.
13
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
On or about April 26, 1999, the Company was served with a putative
class action complaint against the Company and certain of its officers and
directors, captioned Robert O. Neibert, et al. v. Monarch Dental Corp., Warren
F. Melamed, Gary W. Cage and Roger B. Kafker, Civil No. 3-99-CV-0762-X. The
class action complaint, which was filed in the United States District Court for
the Northern District of Texas (the "District Court"), alleges that the Company
and certain of its officers and directors violated the federal securities laws
by making material misrepresentations and omissions in certain public
disclosures during the period between February 24, 1998 and December 22, 1998.
The public disclosures relate to, among other things, acquired dental practices,
the Company's internal growth and growth prospects, and the Company's past and
future financial performance. Following the announcement of the filing of this
class action lawsuit, the Company was served with two similar putative class
actions in the District Court, which encompass the same class period and cover
almost identical allegations. On May 24, 1999, the District Court consolidated
these three class action complaints into a single action. The Company was
subsequently served on September 10, 1999 with a consolidated amended class
action complaint which contained substantially the same allegations as were
encompassed in the prior separate class action complaints. The Company and all
of the defendants named in the amended class action complaint filed motions to
dismiss all of the claims set forth in this complaint in October 1999.
After the motions to dismiss were filed but before the District Court
decided on them, the parties reached agreement on the terms of a potential
settlement of the action. Accordingly, the parties entered into a Memorandum of
Understanding dated January 31, 2000, which sets forth the principal bases of a
settlement of the action, subject to approval by the District Court. The
Memorandum of Understanding and the proposed settlement will be contingent upon
(i) the parties' execution of an appropriate Stipulation of Settlement
("Stipulation"); (ii) conditional certification of the Class for purposes of the
Settlement; (iii) Court approval of the Settlement; and (iv) dismissal of the
Action with prejudice.
In the Stipulation, the parties will request that the District Court
certify, for purposes of settlement, a class of all persons (exclusive of
Defendants and their affiliates) who purchased or otherwise acquired shares of
the Company during the period between February 24, 1998 and December 22, 1998,
and their successors in interest and transferees, immediate and remote (the
"Class"); that the District Court approve the settlement, including the release
of all claims by Class members against the Defendants; and that the Court enter
final judgment dismissing with prejudice all claims of the plaintiffs and the
Class against the Defendants. As part of the settlement, the Company will pay
$3.5 million into a settlement fund which will, among other things, be used to
pay authorized members of the Class. The entire settlement amount will be funded
by Monarch's directors & officers liability insurance carrier. No cash
contribution is required of Monarch or any of the other defendants. The parties
are currently negotiating the Stipulation and related settlement documentation.
The Company also settled a dispute with the sellers of an affiliated
dental practice regarding the original purchase price and future obligations to
the sellers based on earnings of the practice.
In accordance with generally accepted accounting principles, the
difference between the obligations terminated and the total consideration was
reflected in the Company's fourth quarter 1999 financial statements as a special
income item of $2.9 million, net of related legal expenses, or approximately
$0.23 per share.
In addition to the matters discussed above, the Company is engaged in
various legal proceedings incidental to its business activities. Management does
not believe the resolution of such matters will have a material adverse effect
on the Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1999.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Company is traded on the Nasdaq SmallCap
Market under the symbol "MDDS". Prior to September 14, 1999 the Common Stock of
the Company was traded on the Nasdaq National Market. The following table sets
forth the high and low sale prices for the Common Stock during the periods
indicated.
<TABLE>
<CAPTION>
PERIOD HIGH ($) LOW ($)
---------------------------------------------- -------- -------
<S> <C> <C>
1998
First Quarter............................ 17.750 11.000
Second Quarter........................... 19.750 12.000
Third Quarter............................ 16.875 9.375
Fourth Quarter........................... 14.375 3.625
1999
First Quarter............................ 4.813 2.875
Second Quarter........................... 4.313 2.375
Third Quarter............................ 4.000 2.188
Fourth Quarter........................... 2.531 1.500
</TABLE>
As of March 20, 2000, the closing price of the Common Stock was
$2.7188.
HOLDERS
The number of record holders of the Company's Common Stock as of
March 20, 2000 was 448. The Company believes the number of beneficial owners of
the Company's Common Stock at that date was substantially greater.
DIVIDENDS
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 Company's senior credit facility, the payment
of cash dividends is currently prohibited without the consent of the lender.
CHANGES IN SECURITIES AND USE OF PROCEEDS
In November 1999, pursuant to a Stock Purchase Agreement, the Company
issued 16,897 shares of Common Stock to various affiliated dentists as
consideration for achieving specified financial performance goals in reliance
upon the exemption from registration under Regulation D promulgated under the
Securities Act.
In December 1999, pursuant to a Stock Purchase Agreement, the Company
issued 1,753 shares of Common
15
<PAGE> 16
Stock to various affiliated dentists as consideration for achieving specified
financial performance goals in reliance upon the exemption from registration
under Regulation D promulgated under the Securities Act.
In December 1999, pursuant to stock option agreements, the Company
granted options to purchase 217,000 shares of Common Stock at an exercise price
of $1.6875 per share to certain of its employees in reliance upon the exemption
from registration under Regulation D promulgated under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in "Selected Consolidated Financial
Information" on pages 9 and 10 of the Annual Report to Stockholders for the
fiscal year ended December 31, 1999 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 11 through 20 of the
Annual Report to Stockholders for the fiscal year ended December 31, 1999 is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company set forth on
pages 21 through 32 of the Annual Report to Stockholders for the fiscal year
ended December 31, 1999 are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Information Regarding
Directors" and "Executive Officers" in the registrant's definitive proxy
statement dated April 13, 2000 relating to the Annual Meeting of Stockholders to
be held on May 9, 2000 is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation"
in the registrant's definitive proxy statement dated April 13, 2000 relating to
the Annual Meeting of Stockholders to be held on May 9, 2000 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal and Management
Stockholders" in the registrant's definitive proxy statement dated April 13,
2000 relating to the Annual Meeting of Stockholders to be held on May 9, 2000 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Transactions" in
the registrant's definitive proxy statement dated April 13, 2000 relating to the
Annual Meeting of Stockholders to be held on May 9, 2000 is incorporated herein
by reference.
17
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS FILED ON FORM 8-K
(a) Documents Filed as Part of this Annual Report on Form 10-K:
1. Financial Statements: The following Consolidated Financial
Statements of Monarch Dental Corporation and Report of
Independent Public Accountants, are incorporated by reference to
pages 21 through 32 of the Registrant's 1999 Annual Report to
Stockholders:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: The following financial statement
schedule for Monarch Dental Corporation is filed as part of this
Annual Report and should be read in conjunction with the
Consolidated Financial Statements of Monarch Dental Corporation:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits:
The Exhibits listed on the accompanying Exhibit Index immediately
following the financial statement schedules are filed as part of,
or incorporated by reference into, this Annual Report.
(b) Reports on Form 8-K.
Not applicable.
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<PAGE> 19
(c) Exhibits
The Company hereby files as part of this Annual Report on Form 10-K
the Exhibits listed in the attached Exhibit Index pages of this Annual
Report.
(d) Financial Statement Schedules
The Company hereby files as part of this Annual Report on Form 10-K
the financial statement schedule listed in item 14 (a) 2 as set forth
above.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MONARCH DENTAL CORPORATION
Date: March 30, 2000 By: /s/ GARY W. CAGE
------------------------------
Gary W. Cage
Chief Executive Officer
Date: March 30, 2000 By: /s/ LISA K. PETERSON
------------------------------
Lisa K. Peterson
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Warren F. Melamed and Gary W. Cage, joint
and severally, his or her attorneys-in-fact, each with the power of
substitution, for such person in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ WARREN F. MELAMED, D.D.S. Chairman of the Board March 30, 2000
- -------------------------------------- and Director
Warren F. Melamed, D.D.S.
/s/ GARY W. CAGE Chief Executive Officer, March 30, 2000
- -------------------------------------- President
Gary W. Cage and Director
/s/ LISA K. PETERSON Chief Financial Officer March 30, 2000
- -------------------------------------- (principal financial officer
Lisa K. Peterson and principal accounting officer)
/s/ GLENN E. HEMMERLE Director March 30, 2000
- --------------------------------------
Glenn E. Hemmerle
/s/ JOHN E. MAUPIN, JR., D.D.S. Director March 30, 2000
- --------------------------------------
John E. Maupin, Jr., D.D.S
/s/ W. BARGER TYGART Director March 30, 2000
- --------------------------------------
W. Barger Tygart
</TABLE>
20
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Monarch Dental Corporation:
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 thereon dated February 23,
2000. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statement schedules is presented for the purposes of complying with
the Securities and Exchange Commission's rules and is not part of the audit 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,
February 23, 2000
<PAGE> 22
SCHEDULE II
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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, 1999:
Allowance for Uncollectibles $ 9,419 $17,019 $ 630 $(14,390)(a) $12,678
Accumulated Amortization of Intangible
Assets 4,622 5,316 -- -- 9,938
------- ------- ------ -------- -------
Total Reserves and Allowances $14,041 $22,335 $ 630 $(14,390) $22,616
======= ======= ====== ======== =======
December 31, 1998:
Allowance for Uncollectibles $ 3,155 $ 5,972 $6,038 $ (5,746)(a) $ 9,419
Accumulated Amortization of Intangible
Assets 1,677 6,262 -- (3,317) 4,622
------- ------- ------ -------- -------
Total Reserves and Allowances $ 4,832 $12,234 $6,038 $ (9,063) $14,041
======= ======= ====== ======== =======
December 31, 1997:
Allowance for Uncollectibles $ 1,797 $ 1,686 $1,572 $ (1,900)(a) $ 3,155
Accumulated Amortization of Intangible
Assets 573 1,127 -- (23) 1,677
------- ------- ------ -------- -------
Total Reserves and Allowances $ 2,370 $ 2,813 $1,572 $ (1,923) $ 4,832
======= ======= ====== ======== =======
</TABLE>
This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
(a) Write-off of uncollectible receivables net of recoveries of bad debt
write-offs.
21
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
------ -------
+2.1 Stock Redemption Agreement dated as of February 5, 1996 by and
between the Registrant and Warren F. Melamed, D.D.S. (excluding
schedules, which the Registrant agrees to furnish supplementally
to the Commission upon request) (1)
2.2 Stock Purchase Agreement dated as of February 5, 1996 by and
among the Registrant and the investors named therein (excluding
schedules, which the Registrant agrees to furnish supplementally
to the Commission upon request) (1)
2.3 Asset Contribution Agreement dated as of January 31, 1996 by and
among the Registrant, Shears Vanguard Ltd., Shears Vanguard Inc.,
MDC Dental, Inc., Shears Vanguard SMI Inc., Shears Vanguard
General, Inc. and Charles G. Shears, D.D.S. (excluding schedules,
which the Registrant agrees to furnish supplementally to the
Commission upon request) (1)
2.4 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) (1)
2.5 Agreement and Plan of Merger dated as of June 19, 1997 by and
among the Registrant, Dental Centers of Indiana (Monarch), Inc.,
Dental Centers of Indiana, Inc., James W. Willis, Mark R. Johnson
and Thurman H. Brown, II (excluding exhibits, which the
Registrant agrees to furnish supplementally to the Commission
upon request) (3)
2.6 First Amendment to Agreement and Plan of Merger dated as of July
25, 1997 by and among Monarch Dental Corporation, Dental Centers
of Indiana (Monarch), Inc., Dental Centers of Indiana, Inc. and
James W. Willis, Mark R. Johnson, and Thurman H. Brown, II (4)
2.7 Asset Purchase Agreement dated as of November 12, 1997 by and
among Monarch Dental (Press) Associates, L.P., Victor Press,
B.D.S., P.C., VP Investments, Inc., Victor Press, Roger Obregon,
Edgardo A. Gonzalez, Jeffrey J. Jacobs, Campbell R. Janse, Nick
M. Higgins, Frank B. Lewis and Bruce M. Kral (excluding exhibits,
which the Registrant agrees to furnish supplementally to the
Commission upon request) (5)
2.8 Agreement and Plan of Merger, dated as of September 1, 1998, by
and among Monarch Dental Corporation, Valley Forge Dental
Associates, Inc., DFV Acquisition Corp. and certain stockholders
of Valley Forge Dental Associates, Inc. (excluding exhibits,
which the Registrant agrees to furnish supplementally to the
Commission upon request) (6)
2.9 Asset Purchase Agreement, dated as of September 1, 1998, by and
among Monarch Dental Associates (Utah), Inc., Robert Anderson,
D.D.S., Inc., James Brodahl, D.D.S., Inc., Larry Kaban, D.D.S.,
Inc., John Whitley, D.D.S., Inc., Talbert Dental Group, P.C.,
Talbert Dental Group, Inc. and Talbert Medical Management
Corporation (excluding exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request) (7)
3.1 Restated Certificate of Incorporation (8)
3.2 Second Amended and Restated By-Laws (8)
<PAGE> 24
EXHIBIT
NUMBER EXHIBIT
------ -------
4.1 Specimen certificate for Shares of Common Stock, $.01 par value,
of the Registrant (2)
+10.1 Monarch Dental Corporation 1996 Stock Option and Incentive Plan,
as amended (2)
+10.2 Monarch Dental Corporation 1997 Employee Stock Purchase Plan (1)
10.1 Monarch Dental Corporation 1996 Equity Acquisition Option Plan
(2)
10.2 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) (2)
+10.6 Amended and Restated Non-Competition Agreement dated as of July
1, 1997 by and between the Registrant and Warren F. Melamed,
D.D.S. (3)
10.7 Management Agreement by and between Modern Dental Professionals,
P.C. and Monarch Dental Associates, L.P. (2)
10.8 Management Agreement by and between Modern Dental Professionals,
P.C. and MacGregor Dental Associates, L.P. (2)
10.9 Management Agreement by and between Modern Dental Professionals -
Girlinghouse, P.A. and Convenient Dental Care, Inc. (2)
10.10 Management Agreement by and between Modern Dental Professionals -
Beavers, P.A. and Arkansas Dental Health Associates, Inc. (2)
10.11 Management Agreement by and between Modern Dental Professionals /
UDC - Girlinghouse, P.A. and United Dental Care, Inc. (2)
10.12 Management Agreement by and between William T. Harris and
Associates, a Professional Dental Corporation and United Dental
Care, Inc. (2)
10.13 Management Agreement by and between United Dental Care Tom
Harris, D.D.S. & Associates and United Dental Care, Inc. (2)
10.14 Management Agreement by and between Modern Dental Professionals -
Indiana, P.C. and Dental Centers of Indiana (Monarch), Inc. (8)
10.15 Management Agreement by and between Modern Dental Professionals -
Colorado, P.C. and Three Peaks Dental Management, Inc. (8)
<PAGE> 25
EXHIBIT
NUMBER EXHIBIT
------ -------
10.16 Primary Care Dentist Agreement effective April 1, 1997 by and
between Prudential Dental Maintenance Organization, Inc. and
Modern Dental Professionals, P.C. and Monarch Dental Associates,
L.P. (excluding certain portions which have been omitted as
indicated based upon a request for confidential treatment, but
which have been separately filed with the Commission) (2)
10.17 Dental Service Agreement dated January 1, 1995 by and between
Compcare Health Services Insurance Corporation and Advance Dental
Management, Inc. (excluding certain portions which have been
omitted as indicated based upon a request for confidential
treatment, but which have been separately filed with the
Commission) (2)
10.18 Form of Director Indemnification Agreement (1)
10.19 Sublease Agreement dated as of March 7, 1996 by and between Old
American Country Mutual Fire Insurance Company and Oral Health
Concepts Inc. (1)
10.20 Office Lease Agreement dated as of September 6, 1996 by and
between Government Employees Insurance Company and Monarch Dental
Associates, L.P. (1)
+10.21 Employment Agreement dated as of July 1, 1997 by and among the
Registrant, Monarch Dental Associates, L.P. and Mr. Gary W. Cage
(3)
+10.22 Non-Competition Agreement dated as of July 1, 1997 by and between
the Registrant and Mr. Gary W. Cage (3)
+10.23 Employment Agreement dated as of September 11, 1998 by and
between the Registrant and Joseph J. Frank (6)
10.24 Monarch Dental Corporation 1999 Stock Option and Grant Plan (9)
+10.25 Agreement dated as of March 26, 1999 by and among the Registrant,
Warren F. Melamed, D.D.S. and Modern Dental Professionals, P.C.
(9)
+10.26 Employment Agreement dated as of August 9, 1999 by and between
the Registrant and Lisa Corbett Peterson (10)
*10.27 Second Amended and Restated Loan Agreement dated as of June 30,
1999 among Monarch Dental Corporation and Bank of America, N.A
and Other Entities Designated Herein
*10.28 The First Amendment to Second Amended and Restated Loan Agreement
dated December 30, 1999 by and among Monarch Dental Corporation,
Bank of America, N.A. and Other Entities Designated Herein
*10.29 The Second Amendment to Second Amended and Restated Loan
Agreement dated March 9, 2000 by and among Monarch Dental
Corporation, Bank of America, N.A. and Other Entities Designated
Herein
*10.30 Warrant Agreement dated January 4, 2000 among Monarch Dental
Corporation, Bank of America, N.A., Fleet National Bank, and
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A.,"Rabobank
Nederland", New York Branch
<PAGE> 26
EXHIBIT
NUMBER EXHIBIT
------ -------
*11.1 Statement re: Computation of per share earnings data
*13.1 Annual Report to Stockholders for the fiscal year ended December
31, 1999 (such report, except for those portions thereof which
are expressly incorporated by reference in this filing, is
furnished for the information of the Commission and is not deemed
"filed" as part hereof)
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Arthur Andersen LLP
*24.1 Powers of Attorney (included on signature page hereto)
*27.1 Financial Data Schedule
* Filed herewith
+ Management contract or compensatory plan or arrangement
(1) Filed as an exhibit to the Registrant's Pre-Effective Amendment No. 1
to its Registration Statement on Form S-1 (File No. 333-24409) filed
with the Securities and Exchange Commission on May 20, 1997 and
incorporated herein by reference thereto.
(2) Filed as an exhibit to the Registrant's Pre-Effective Amendment No. 2
to its Registration Statement on Form S-1 (File No. 333-24409) filed
with the Securities and Exchange Commission on June 23, 1997 and
incorporated herein by reference thereto.
(3) Filed as an exhibit to the Registrant's Pre-Effective Amendment No. 3
to its Registration Statement on Form S-1 (File No. 333-24409) filed
with the Securities and Exchange Commission on July 17, 1997 and
incorporated herein by reference thereto.
(4) Filed as an exhibit to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 15, 1997
and incorporated herein by reference thereto.
(5) Filed as an exhibit to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 19, 1997
and incorporated herein by reference thereto.
(6) Filed as an exhibit to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 25,
1998 and incorporated herein by reference thereto.
(7) Filed as an exhibit to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 2, 1998
and incorporated herein by reference thereto.
(8) Filed as an exhibit to the Registrant's Current Report on Form 10-K
filed with the Securities and Exchange Commission on March 31, 1998
and incorporated herein by reference thereto.
(9) Filed as an exhibit to the Registrant's Current Report on Form 10-K
filed with the Securities and Exchange Commission on March 31, 1999
and incorporated herein by reference thereto.
(10) Filed as an exhibit to the Registrant's Current Report on Form 10-Q
filed with the Securities and Exchange Commission on November 15, 1999
and incorporated herein by reference thereto.
<PAGE> 1
EXHIBIT 10.27
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is
entered into as of (but not necessarily on) the 30th day of June, 1999, by and
among Monarch Dental Corporation, a Delaware corporation ("Borrower"), Bank of
America, N.A., a national banking association, (formerly NationsBank, N.A.,
successor in interest by merger to NationsBank of Texas, N.A.) ("Administrative
Agent") for itself and as Administrative Agent, and the lending institutions
designated as "Lenders" on Schedule I hereto (as modified from time to time).
PRELIMINARY STATEMENT
I. Administrative Agent, Borrower and certain of the Guarantors previously
executed that certain Amended and Restated Loan Agreement (as modified and
amended, the "Original Loan Agreement") dated as of November 4, 1997, wherein
Administrative Agent and Bank of America agreed to make a revolving credit
facility and a term facility available to Borrower and certain of the Guarantors
in an aggregate amount not to exceed Seventy-Five Million and No/100 Dollars
($75,000,000).
II. Borrower has requested that Administrative Agent and Lenders modify, amend
and restate the Original Loan Agreement. Upon and subject to the terms of this
Agreement and each of the other Loan Documents, Administrative Agent and Lenders
are willing to modify, amend and restate the Original Loan Agreement.
Accordingly, in consideration of the mutual covenants contained herein,
Borrower, Administrative Agent and Lenders agree as follows:
ARTICLE I
TERMS DEFINED
SECTION 1.1. Definitions. The following terms, as used herein, have
the following meanings:
Account means any and all "Accounts" as that term is defined in the
Security Agreement.
Acquisition means any transaction pursuant to which Borrower or any of
its Subsidiaries, (a) whether by means of a capital contribution or purchase or
other acquisition of stock or other securities or other equity participation or
interest, (i) acquires more than 50% of the equity interest in any Person
pursuant to a solicitation by Borrower or such Subsidiary of tenders of equity
securities of such Person, or through one or more negotiated block, market,
private or other transactions, or a combination of any of the foregoing, or (ii)
makes any corporation a Subsidiary of Borrower or such Subsidiary, or causes any
corporation, other than a Subsidiary of
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 1
<PAGE> 2
Borrower or such Subsidiary, to be merged into Borrower or such Subsidiary (or
agrees to be merged into any other corporation other than a wholly-owned
Subsidiary (excluding directors' qualifying shares) of Borrower or such
Subsidiary), or (b) purchases all or substantially all of the business or assets
of any Person or of any operating division of any Person.
Acquisition Date means, for any entity, the effective date on which
such entity was acquired by Borrower or its Subsidiaries.
Actual Taxes means, for the twelve (12) month period immediately
preceding the date of determination, the aggregate amount of Taxes paid by
Borrower and its Subsidiaries.
Additional Spread means, if Borrower has not closed the Required
Institutional Debt and made the repayments with the proceeds thereof as required
by this Agreement on or before October 1, 1999, an additional interest rate
spread equal to 0.25% per annum, which Additional Spread shall be included in
the calculation of the Adjusted LIBOR Rate and the Variable Rate from such date
until Borrower closes the Required Institutional Debt and makes the repayments
with the proceeds thereof as required by this Agreement.
Adjusted LIBOR Rate shall mean on the applicable Effective Date, with
respect to a LIBOR Rate Advance, a rate per annum equal to the sum of (a) the
quotient of (i) the LIBOR Rate on the applicable Effective Date, divided by (ii)
the remainder of 1.00 minus the LIBOR Reserve Requirement, if any, on the
applicable Effective Date, plus (b) the FDIC Percentage in effect on the
applicable Effective Date, together with any additional impositions,
assessments, fees or surcharges that may be imposed on Administrative Agent or
any Lender (expressed as a percentage), to the extent such impositions,
assessments, fees or surcharges are not reflected in the FDIC Percentage or the
LIBOR Reserve Requirement and are generally imposed on banks with capitalization
and supervisory risk factors comparable to Administrative Agent, plus (c) the
LIBOR Margin, plus (d) the Rate Enhancement Spread, plus (e) if applicable, the
Additional Spread.
Administrative Agent means Bank of America, in its capacity as
administrative agent for the Lenders hereunder, or any successor Administrative
Agent pursuant to Section 9.13 or any agreement entered into pursuant to Section
9.16.
Administrative Fee means an aggregate annual fee of Fifteen Thousand
and No/100 Dollars ($15,000.00).
Advance means an advance made by Lenders to Borrower under the Credit
Facility (including the Swingline Advances) pursuant to the terms and conditions
of this Agreement.
Affiliate means, as to any Person, any Subsidiary of such Person, or
any Person which, directly or indirectly, controls, is controlled by, or is
under common control with such Person. For the purposes of this definition,
"control" means the possession of the power to direct or cause
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 2
<PAGE> 3
the direction of management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
Agreement means this Amended and Restated Loan Agreement and all
renewals, extensions, modifications, amendments and rearrangements
thereof.
Amendment Fee has the meaning set forth in Section 2.3(d).
Applicable Environmental Laws has the meaning set forth in Section 6.7.
Applicable Rate has the meaning set forth in Section 3.3.
Assets means all of the assets of any Person, real, personal or
otherwise, which are included on a balance sheet of such Person prepared in
accordance with GAAP.
Assignment and Acceptance has the meaning set forth in Section 10.10.
Atherton Judgment means the judgment rendered against Managed Dental
Care Centers, Inc. in favor of Jeffrey S. Atherton, D.D.S. under Cause No.
97-13894 in the District Court of Travis County, Texas, 98th Judicial District.
Authorized Borrowing Officer means an Authorized Officer of Borrower.
Authorized Officer means, as to any Person that is a corporation, any
of its Chairman, Vice-Chairman, President, Executive Vice President(s), Chief
Executive Officer, Chief Financial Officer or Treasurer, or as to any other
Person, if such Person is a partnership, the partnership's general partner or
other Person authorized by appropriate action to execute the Loan Documents or
any other documents or certificates to be executed by such Person hereunder or
in connection with any Advance or Letter of Credit.
Available Commitment means the aggregate Loan Commitment Amounts
committed by the Lenders under this Agreement on the date of determination,
evidenced by promissory notes to be made by Borrower to each Lender in the
amount of such Lender's applicable Loan Commitment Amount.
Bank of America means Bank of America, N.A. (formerly NationsBank,
N.A., successor in interest by merger to NationsBank of Texas, N.A.), and its
successors.
Base Rate means, on any date of determination, the rate of interest per
annum most recently announced by Administrative Agent as its prime rate in
effect at its principal office (which, in the case of Bank of America, shall
mean its principal office in Dallas, Texas), automatically fluctuating upward
and downward until and at the time specified in each such announcement without
special notice to Borrower or any other Person, which prime rate may not
necessarily represent the lowest or best rate actually charged to a customer.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 3
<PAGE> 4
Base Rate Spread means the applicable "Base Rate Spread" as shown on,
and as determined in accordance with, Schedule II attached hereto. The Base Rate
Spread is subject to reduction or increase as provided in Schedule II.
Borrower has the meaning set forth in the introductory paragraph of
this Agreement.
Business Day means (a) for all purposes other than as covered by clause
(b) of this definition, any day of the week, other than Saturday, Sunday or
other day Administrative Agent or any Lender is required or authorized by law or
executive order to close, and (b) with respect to all requests, notices and
determinations in connection with LIBOR Rate Advances, a day which is a Business
Day described in clause (a) of this definition and which is a day for trading by
and between banks for Dollar deposits in the London interbank market.
CERCLA has the meaning set forth in Section 6.7.
Closing Date means the date that this Agreement is executed.
Code means the Internal Revenue Code of 1986, as amended.
Collateral means all property, assets and interests of any kind
securing the Credit Facility (including, without limitation, all Advances and
the Letters of Credit) pursuant to this Agreement or any of the other Loan
Documents.
Collateral Assignment of Partnership Interests means that certain
Collateral Assignment of Partnership Interests, executed by the Parent Companies
and Administrative Agent, securing the payment of the Notes and the payment and
performance of all the Obligations, and collaterally assigning to Administrative
Agent (on behalf of Lenders) all of the Parent Companies' right, title and
interest in and to all of the partnership interests of Monarch Dental and
MacGregor Dental owned by them, and all renewals, extensions, modifications,
supplements and replacements thereof, which Collateral Assignment of Partnership
Interests shall be in form acceptable to Administrative Agent.
Consequential Loss has the meaning set forth in Section 3.6(d).
Consolidated Capitalization means, as of any date, the sum of (a)
Consolidated Funded Debt plus (b) Consolidated Net Worth.
Consolidated Capital Lease Expense means for any period the lease
expense of Borrower and its Subsidiaries under all leases which are treated as
capital leases in accordance with GAAP.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 4
<PAGE> 5
Consolidated Current Maturities means, with respect to Borrower and its
Subsidiaries, on any date of calculation, the current portion of the long term
debt of Borrower and its Subsidiaries on a consolidated basis, determined in
accordance with GAAP.
Consolidated Debt of any Person means at any date, all Debt which is
required to be shown as such on the financial statements of such Person and its
Subsidiaries, on a consolidated basis, prepared in accordance with GAAP.
Consolidated Debt Service means, for any period, the sum of (a)
Consolidated Interest Expense plus (b) Consolidated Capital Lease Expense, plus
(c) Consolidated Principal Reduction.
Consolidated EBITDA means, with respect to any period, determined in
accordance with GAAP on a consolidated basis for Borrower and its Subsidiaries,
the sum of (a) Consolidated Net Income plus (b) Taxes (to the extent that such
amounts have been deducted in determining Consolidated Net Income for such
period), plus (c) Consolidated Interest Expense (to the extent that such amounts
have been deducted in determining Consolidated Net Income for such period), plus
(d) all amounts attributable to depreciation and/or amortization of intangible
and other assets of Borrower (to the extent that such amounts have been deducted
in determining Consolidated Net Income for such period), plus (or minus) (e) any
other non-cash charges to the extent deducted (or included) in determining
Consolidated Net Income for such period; provided that, in calculating
"Consolidated EBITDA, that portion of Consolidated EBITDA which is attributable
to an Acquisition which occurred less than 12 months prior to the date of
determination shall be calculated, rather than on a trailing 12 month basis as
provided above, by annualizing the actual Target Company EBITDA for the period
since the related Acquisition Date.
Consolidated Funded Debt means, as of any date, all Debt which is
evidenced by promissory notes, loan agreements, bonds, capital leases or similar
instruments, as such amount is required to be shown on the financial statements
of Borrower and its Subsidiaries, on a consolidated basis, prepared in
accordance with GAAP.
Consolidated Interest Expense means, for any period, the interest
expense which is required to be shown as such on the financial statements of
Borrower and its Subsidiaries, on a consolidated basis, prepared in accordance
with GAAP.
Consolidated Lease Expense means for any period the lease expense under
all Operating Leases for Borrower and its Subsidiaries on a consolidated basis.
Consolidated Net Income means, for any period, the net income after
Taxes of Borrower and its Subsidiaries, on a consolidated basis, determined in
accordance with GAAP.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 5
<PAGE> 6
Consolidated Net Worth means, as of any date, shareholders' equity, as
shown on a balance sheet of Borrower and its Subsidiaries, on a consolidated
basis, prepared in accordance with GAAP.
Consolidated Principal Reduction means, for any period, amounts paid in
reduction of regularly scheduled principal maturing under any Consolidated
Funded Debt, which is required to be shown as such on the financial statements
of Borrower and its Subsidiaries, on a consolidated basis, prepared in
accordance with GAAP.
Consolidated Senior Funded Debt means Borrower's Consolidated Funded
Debt minus the sum of (i) Subordinate Acquisition Debt and (ii) Permitted
Subordinate Institutional Debt.
Credit Facility means the credit facility created pursuant to this
Agreement in an amount equal to the lesser of (a) $75,000,000, or (b) the
Available Commitment.
Credit Period means the period commencing on the date of this Agreement
and ending on the Termination Date.
Debt of any Person means at any date, without duplication, (a) all
indebtedness, obligations and liabilities of such Person for borrowed money, (b)
all indebtedness, obligations and liabilities of such Person evidenced by bonds,
debentures, notes or other similar instruments, whether recourse or non-recourse
and whether secured or unsecured, (c) all other indebtedness (including
capitalized lease obligations) of such Person on which interest charges are
customarily paid or accrued, (d) all obligations for indebtedness in respect of
Guarantees by such Person, (e) the unfunded or unreimbursed portion of all
letters of credit issued for the account of such Person, and (f) all personal
liability of such Person as a general partner or joint venturer of a partnership
or joint venture for obligations of such partnership or joint venture of the
nature described in (a) through (e) preceding.
Default means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
Default Rate means the fluctuating per annum rate of interest equal to
the lesser of (a) the Variable Rate plus 2% or (b) the Maximum Lawful Rate.
Dental Practice Laws means Tex. Rev. Civ. Stat. Ann. art. 4543 et. seq.
(West 1996), as amended from time to time; any successor statute(s) thereto; all
rules and regulations promulgated thereunder and any other Law related to the
practice of dentistry in the states where the Providers are doing business.
Designated Successor Administrative Agent means, at any given time, the
Lender other than Administrative Agent which has the largest Loan Percentage;
provided, however, if two or more such Lenders have the same Loan Percentage at
such time, then the Designated Successor
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 6
<PAGE> 7
Administrative Agent shall be such of those Lenders having the same Loan
Percentage which has the largest net worth; and, provided further, that if the
Required Lenders object to the newly named Designated Successor Administrative
Agent, or if any Lender determined to be a Designated Successor Administrative
Agent declines to serve as successor Administrative Agent, in writing delivered
to the outgoing Administrative Agent within seven (7) Business Days after such
Designated Successor Administrative Agent is determined, then the Lender other
than Administrative Agent or such rejected or declining Designated Successor
Administrative Agent which has the next largest Loan Percentage shall be the
Designated Successor Administrative Agent. For each such Lender that is a member
of a bank holding company, its net worth shall be deemed to be the consolidated
net worth of its bank holding company.
Distribution by any Person, means (a) with respect to any stock issued
by such Person or any partnership or joint venture interest of such Person, the
retirement, redemption, repurchase, or other acquisition for value of such
stock, partnership or joint venture interest, (b) the declaration or payment
(without duplication) of any dividend or other distribution, whether monetary or
in kind, on or with respect to any stock, partnership or joint venture of any
Person, and (c) any other payment or distribution of assets of a similar nature
or in respect of an equity investment.
Dollars and the "$" symbol shall refer to currency of the United States
of America.
Effective Date has the meaning set forth in Section 3.5.
Eligible Assignee means (a) a Lender; (b) an Affiliate of a Lender; and
(c) any other Person approved by the Administrative Agent and, unless an Event
of Default has occurred and is continuing at the time any assignment is effected
in accordance with Section 10.10, Borrower, such approval not to be unreasonably
withheld or delayed by Borrower and such approval to be deemed given by Borrower
if no objection is received by the assigning Lender and Administrative Agent
from Borrower within two Business Days after notice of such proposed assignment
has been provided by the assigning Lender to Borrower; provided, however, that
neither Borrower nor an Affiliate of Borrower shall qualify as an Eligible
Assignee.
Employee Plan means at any time an employee benefit plan as defined in
Section 3(3) of ERISA that is now or was previously maintained, sponsored or
contributed to by Borrower or any Guarantor or by any Person that at such time
is or was an ERISA Affiliate of Borrower or any Guarantor.
ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all regulations issued pursuant
thereto.
ERISA Affiliate means any Person that is treated as a single employer
with Borrower or any Guarantor under Section 414 of the Code.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 7
<PAGE> 8
Event of Default has the meaning set forth in Section 8.1.
Exchange Act shall mean the Securities Exchange Act of 1934, as
amended.
FDIC Percentage shall mean, on any day, the net assessment rate
(expressed as a percentage rounded to the next highest 1/100 of 1%) which is in
effect on such day (under the regulations of the Federal Deposit Insurance
Corporation or any successor) for determining the assessments paid by
Administrative Agent to the Federal Deposit Insurance Corporation (or any
successor) for insuring Eurocurrency deposits made in Dollars at Administrative
Agent's principal offices (which for Bank of America shall be its offices in
Dallas, Texas). Each determination of said percentage made by Administrative
Agent shall, in the absence of manifest error, be binding and conclusive.
Federal Funds Rate means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day; provided that (a) if such day is not a Business Day, the Federal Funds Rate
for such day shall be such rate on such transactions on the next preceding
Business Day as so published on the next succeeding Business Day, and (b) if no
such rate is so published on such next succeeding Business Day, the Federal
Funds Rate for such day shall be the average rate charged to Administrative
Agent (in its individual capacity) on such day on such transactions as
determined by Administrative Agent.
Fiscal Year means any fiscal year of Borrower commencing on January 1
and ending on December 31.
Fixed Charge Coverage Ratio means, for any date of determination and
computed for the immediately preceding twelve month period, the ratio of (a) the
difference between (i) the sum of (A) Consolidated EBITDA plus (B) Consolidated
Lease Expense, less (ii) Maintenance Capital Expenditures, to (b) the sum of (i)
Consolidated Interest Expense, plus (ii) Consolidated Current Maturities, plus
(iii) Consolidated Lease Expense, plus (iv) Consolidated Capital Lease Expense,
plus (v) Actual Taxes. The amount of the Consolidated Net Income, Consolidated
Lease Expense and Consolidated Interest Expense to be included in computing the
Fixed Charge Coverage Ratio shall be the actual amount of such items incurred
during the relevant periods.
Fraud and Abuse Laws means Section 1128B(b) of the Social Security Act,
42 U.S.C. Section 1320a-7b(b), 42 U.S.C. Section 1877, and Texas Health & Safety
Code Ann ss. 161.091-161.094 (West 1996), as amended from time to time; any
successor statute(s) thereto; all rules and regulations promulgated thereunder;
and any other Law relating to the ownership of dental facilities by providers of
dental services or the referral of patients to dental facilities owned by
providers of dental services.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 8
<PAGE> 9
GAAP means generally accepted accounting principles consistently
applied as in effect at the time of application of the provisions hereof;
provided, however, that wherever in this Agreement principles of consolidation
different from those required by generally accepted accounting principles are
specified, the principles of consolidation specified in this Agreement shall
govern.
Governmental Authority means any government, any state or other
political subdivision thereof, or any Person exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
Guarantors means all of the Subsidiaries of Borrower and any other
Person now or hereafter liable for payment of any of the Obligations or
performance of any obligations of Borrower under the Loan Documents, whether one
or more, and if more than one, each one individually.
Guaranty by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or other
obligation (whether arising by virtue of partnership arrangements, by agreements
to keep-well, to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions, by "comfort letter" or other
similar undertaking of support or otherwise), or (b) entered into for the
purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the term Guaranty shall not
include endorsements for collection or deposit in the ordinary course of
business.
Hypothetical Fixed Charge Coverage Ratio means, for any date of
determination and computed for the immediately preceding twelve month period,
the ratio of (a) the total of (i) Consolidated EBITDA plus (ii) Consolidated
Lease Expense, minus (iii) Maintenance Capital Expenditures, to (b) the sum of
(i) Consolidated Interest Expense, plus (ii) Consolidated Current Maturities,
plus (iii) Implied Amortization, plus (iv) Consolidated Lease Expense, plus (v)
Consolidated Capital Lease Expense, plus (vi) Actual Taxes. The amount of the
Consolidated Net Income, Consolidated Lease Expense and Consolidated Interest
Expense to be included in computing the Hypothetical Fixed Charge Coverage Ratio
shall be the actual amount of such items incurred during the relevant periods.
Implied Amortization means, as of any date of determination, the
product of (a) one-seventh (1/7) times (b) the aggregate amount of Advances
outstanding under the Credit Facility.
Impositions means all real estate and personal property taxes; charges
for any easement, license or agreement maintained for the benefit of any of the
real property of Borrower or Guarantors, or any part thereof; and all other
taxes, charges and assessments and any interest,
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 9
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costs or penalties with respect thereto, general and special, ordinary and
extraordinary, foreseen and unforeseen, of any kind and nature whatsoever, which
at any time prior to or after the execution hereof may be assessed, levied or
imposed upon any of the real property of Borrower or Guarantors, or any part
thereof, or the ownership, use, sale, occupancy or enjoyment thereof, in each
case which, if not timely paid or otherwise discharged, would materially and
adversely affect (a) such ownership, use, sale, occupancy or enjoyment, or (b)
the financial condition of Borrower or any Guarantor.
Institutional Debt means Debt of Borrower in favor of a "qualified
institutional buyer" (as defined in 17 C.F.R. Section 230.144A).
Interest Adjustment Date shall mean the earlier of either the last day
of an Interest Period or the Termination Date.
Interest Hedge Agreements means any and all agreements, devises or
arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, including, but not limited to, interest rate cap
or collar protection agreements, interest rate swap agreements or interest rate
options, as the same may be amended or modified and in effect from time to time,
and any and all terminations or assignments of any of the foregoing.
Interest Period shall mean, with respect to a LIBOR Rate Advance, a
period selected by Borrower of 30, 90 or 180 days, commencing on the Effective
Date of any LIBOR Rate Advance; provided that any Interest Period ending on a
date later than the Termination Date shall be deemed to end on the Termination
Date.
Issuing Lender means Bank of America in its capacity as issuer of the
Letters of Credit.
Law or Laws means all applicable constitutional provisions, statutes,
codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, and requirements of all Governmental Authorities.
Legal Requirements means (a) any and all present and future judicial
decisions, Laws, rulings, permits, licenses or certificates, in any way
applicable to Borrower or any Guarantor, (b) the presently or subsequently
effective partnership agreements, bylaws, articles of incorporation and any
other form of business association agreement of Borrower or Guarantors, and (c)
any and all leases or contracts (written or oral) of any nature that relate in
any way to Borrower's or Guarantor's Assets, or to which Borrower or any
Guarantor may be bound, and in each case which, if violated, would materially
and adversely affect (i) the present or potential ownership, use, sale,
occupancy or possession of Borrower's or any Guarantor's Assets, by Borrower or
such Guarantor, or (ii) the financial condition of Borrower or any Guarantor.
Lenders means each of the financial institutions listed as a "Lender"
on Schedule I attached hereto as the same may be modified or amended from time
to time.
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Letter of Credit Exposure means the aggregate amount of the unfunded
portion of each Letter of Credit outstanding at any time.
Letter of Credit Fee has the meaning set forth in Section 2.3(b).
Letters of Credit means all letters of credit issued by the Issuing
Lender for the account of Borrower pursuant to this Agreement.
LIBOR Margin means the applicable "LIBOR Margin" as shown on, and as
determined in accordance with, Schedule II attached hereto. The LIBOR Margin is
subject to reduction or increase as provided in Schedule II.
LIBOR Rate means, for any LIBOR Rate Advance for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "LIBOR Rate" shall mean, for any LIBOR Rate
Advance for any Interest Period therefor, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page
as the London interbank offered rate for deposits in Dollars at approximately
11:00 a.m. (London time) two Business Days prior to the first day of such
Interest Period for a term comparable to such Interest Period; provided,
however, if more than one rate is specified on Reuters Screen LIBO Page, the
applicable rate shall be the arithmetic mean of all such rates (rounded upwards,
if necessary, to the nearest 1/100 of 1%).
LIBOR Rate Advance shall mean an Advance which bears interest computed
with reference to the Adjusted LIBOR Rate (including, without limitation,
Swingline Advances).
LIBOR Reserve Requirement shall mean, on any day, that percentage
(expressed as a decimal fraction) which is in effect on such date, as provided
by the Federal Reserve System for determining the maximum reserve requirements
generally applicable to financial institutions regulated by the Federal Reserve
Board comparable in size and type to Administrative Agent (including, without
limitation, basic supplemental, marginal and emergency reserves) under
Regulation D with respect to "Eurocurrency liabilities" as currently defined in
Regulation D, or under any similar or successor regulation with respect to
Eurocurrency liabilities or Eurocurrency funding (or, if reserves for
Eurocurrency liabilities are not separately stated in such regulations, the
other applicable category of liabilities which includes deposits by reference to
which the interest rate on a LIBOR Rate Advance is determined). Each
determination by Administrative Agent of the LIBOR Reserve Requirement, shall,
in the absence of manifest error, be conclusive and binding.
Lien means with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 11
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Person shall be deemed to own subject to a Lien any asset which it has acquired
or holds subject to the interest of a vendor or lessor under any conditional
sale agreement, capital lease or other title retention agreement relating to
such asset.
Loan Commitment Amount means, with respect to each Lender, the amount
indicated as such Lender's Loan Commitment Amount opposite the name of such
Lender with respect to the Credit Facility in Schedule I, as such amount (a) may
be reduced from time to time, as a result of a reduction in the Available
Commitment as provided in this Agreement, or (b) may be adjusted from time to
time to account for any assignment of a Lender's interest as provided in Section
10.10.
Loan Documents means this Agreement, the Notes, the Security Agreement,
the Letters of Credit, the LOC Applications and all other agreements,
guarantees, security agreements, assignments, statements, certificates,
documents or instruments evidencing, guaranteeing, securing or pertaining to the
Credit Facility (including the Letters of Credit) or otherwise executed and/or
delivered from time to time pursuant to or in connection with this Agreement, as
the same may be modified, amended, renewed, extended, rearranged, restated or
replaced from time to time.
Loan Percentage means, with respect to each Lender, the percentage
indicated as such Lender's Loan Percentage opposite the name of such Lender on
Schedule I, as such percentage may be adjusted from time to time to account for
any assignments of a Lender's interest as provided in Section 10.10.
LOC Application has the meaning set forth in Section 2.2(d).
MacGregor Dental means, MacGregor Dental Associates, L.P., a Texas
limited partnership.
Maintenance Capital Expenditures means, for the twelve (12) month
period immediately preceding the date of determination, the aggregate amount
paid by Borrower and its Subsidiaries for expenditures which were capitalized in
accordance with GAAP; provided, that initial capital expenditures in connection
with the opening of a new branch clinic or office (including, without
limitation, expenses for conversion of computer equipment subsequent to an
Acquisition and initial costs related to signage) shall be excluded from such
aggregate amount.
Management Services Agreements means, collectively, the Management
Services Agreements entered into by and between Modern Dental and each of
Monarch Dental and MacGregor Dental, as amended, from time to time, and any
other such agreement entered into during the Credit Period between Borrower or
any Subsidiary of Borrower and Modern Dental Professionals - Girlinghouse, P.C.,
Modern Dental Professionals - Indiana, P.C., or any other entity formed for the
purpose of employing professionals in the practice of dentistry.
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Margin Regulations mean Regulations T, U and X of the Board of
Governors of the Federal Reserve System, as in effect from time to time.
Margin Stock means "margin stock" as defined in Regulation U.
Material Adverse Effect means any event or condition which, singly or
in the aggregate with other events or conditions, materially and adversely
affects the business, operations, or financial condition of Borrower and its
Subsidiaries taken as a whole.
Maximum Lawful Rate means the maximum rate (or, if the context so
permits or requires, an amount calculated at such rate) of interest which, at
the time in question would not cause the interest charged on the Credit Facility
at such time to exceed the maximum amount which Lenders would be allowed to
contract for, charge, take, reserve, or receive under applicable federal or
state law after taking into account, to the extent required by applicable law,
any and all relevant payments, fees or charges under the Loan Documents. If and
to the extent the laws of the State of Texas are applicable for purposes of
determining the "Maximum Lawful Rate", such term shall mean the "weekly ceiling"
from time to time in effect under Chapter 303 of the Texas Finance Code, as
amended. If under federal or state law there is no legal limitation on the
amount or rate of interest that may be charged on amounts outstanding under the
Credit Facility, there shall be no Maximum Lawful Rate, notwithstanding any
reference thereto herein or in any of the Loan Documents.
Minimum Notice Requirement has the meaning set forth in Section 3.5.
Minor Acquisitions means Acquisitions in which the Total Acquisition
Price is less than or equal to Three Million and No/100 Dollars ($3,000,00.00).
Modern Dental means, Modern Dental Professionals, P.C., a Texas
professional corporation.
Monarch Dental means Monarch Dental Associates, L.P., a Texas limited
partnership.
Notes means (i) the promissory notes in the form attached hereto as
Exhibit A to be issued by Borrower to each Lender in the amount of such Lender's
Loan Commitment Amount, and (ii) the Swingline Note.
Obligations means all present and future indebtedness, obligations and
liabilities, or any part thereof, of Borrower or Guarantors now or hereafter
existing or arising under or in connection with this Agreement, the Notes or any
other of the Loan Documents (specifically including, without limitation, the
principal amount outstanding under the Notes), pursuant to the Loan Documents,
together with: (a) all interest accrued thereon; (b) all reasonable costs,
expenses, and attorneys' fees of counsel to Administrative Agent and Lenders (as
a group) and of counsel to any Lender incurred in the documentation of the Loan
Documents and any
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 13
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amendments, waivers or extensions thereof, or administration, enforcement or
collection thereof (specifically including, without limitation, any of the
foregoing incurred in connection with any bankruptcy or other insolvency
proceedings of Borrower or any Guarantor); (c) the reimbursement and payment of
all sums which might be advanced by Administrative Agent or any Lender to pay or
satisfy amounts required to be paid by Borrower or any Guarantor under this
Agreement or under any other instrument, agreement or document at any time
executed in connection with or as security for any part of the Credit Facility
(including the Letters of Credit); (d) all costs, charges, reasonable attorneys'
fees and expenses owing and to become owing in connection with the
documentation, administration, enforcement and collection of the foregoing
obligations and indebtedness; and (e) all obligations of Borrower to any Lender
pursuant to any Interest Hedge Agreement, including without limitation, under
any Short Term Debt entered into by and among Borrower and any Lender;
regardless of whether such indebtedness, obligations and liabilities are direct,
indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint
and several. The aggregate amount of costs and expenses of all Lenders (other
than Administrative Agent) incurred prior to the occurrence of and continuance
of a Default or Event of Default including, without limitation, attorneys' fees
of such Lenders, related to the Credit Facility and included in Obligations
shall not exceed $20,000.00. The Obligations shall include all renewals,
extensions, modifications, rearrangements and replacements of any of the
above-described obligations and indebtedness.
Operating Lease means any operating lease, as defined in the Financial
Accounting Standard Board Statement of Financial Accounting Standards No. 13
dated November, 1976, or otherwise in accordance with GAAP.
Original Loan Agreement has the meaning set forth on the first page of
this Agreement.
Parent Companies means Monarch Dental Management, Inc., formerly known
as Oral Health Concepts, Inc., a Texas corporation, and Partners Dental
Corporation, a Delaware corporation.
Pension Plan means any Employee Plan that is now or was previously
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code.
PBGC mean the Pension Benefit Guaranty Corporation, or its successors.
Permitted Acquisition means any Acquisition of a dental practice or
other dental practice management company which either (a) has a Total
Acquisition Price of less than $5,000,000.00 or (b) is not financed in whole or
in part with proceeds of the Credit Facility.
Permitted Encumbrances means with respect to any asset (a) minor
defects in title which do not secure the payment of money and otherwise have no
material adverse effect on the value or operation of any material asset
encumbered thereby, including, without limitation, easements, rights-of-way,
servitudes, permits, surface leases, restrictions and other similar charges,
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 14
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encumbrances or title defects, (b) mechanic's, materialman's, warehouseman's,
journeyman's, carrier's, and other similar liens arising by operation of law in
the ordinary course of business, securing obligations which are not delinquent,
(c) liens for taxes, assessments or other governmental charges not delinquent,
(d) liens (other than any lien imposed by ERISA) incurred or deposits made in
the ordinary course of business to secure (or to obtain letters of credit that
secure) the performance of tenders, statutory obligations, surety bonds, appeal
bonds, bids, leases (other than capital leases), performance bonds, purchase,
construction or sales contracts and other similar obligations, in each case not
incurred or made in connection with the borrowing of money, the obtaining of
advances on credit or the payment of the deferred purchase price of property,
(e) any attachment or judgment lien, unless the judgment it secures shall not,
within thirty (30) days after the entry thereof, have been discharged or
execution thereof stayed pending appeal, or shall not have been discharged
within thirty (30) days after the expiration of any such stay, and (f) liens
existing on the Closing Date and disclosed to Lenders.
Permitted Institutional Debt means Permitted Senior Institutional Debt
and Permitted Subordinate Institutional Debt.
Permitted Investments means (a) cash and obligations issued or
guaranteed by the United States of America, (b) obligations issued or guaranteed
by any Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America pursuant to authority granted by
the Congress of the United States, (c) certificates of deposit issued, or
banker's acceptances drawn on and accepted by, or money market accounts or time
deposits in, commercial banks which are members of the Federal Deposit Insurance
Corporation and which have a combined capital, surplus and undistributed profits
of at least $50,000,000, (d) repurchase agreements with any such commercial
bank, or with broker-dealers or other institutions, that are secured by
obligations issued or guaranteed by the United States of America or an agency or
instrumentality thereof, (e) other money market instruments, and mutual funds
substantially all of the assets of which are invested in any or all of the
investments described in clauses (a) through (d) above, and (f) commercial paper
rated P-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's
Corporation on the date of acquisition.
Permitted Senior Institutional Debt means Institutional Debt which is
(i) not Permitted Subordinate Institutional Debt, (ii) subject to an
intercreditor agreement between the Lenders and the holder of such Debt, or
which is otherwise subject to terms and conditions which satisfy the
requirements of an intercreditor agreement, which intercreditor agreement or
terms and conditions shall be acceptable to Required Lenders in their sole
discretion, and (iii) otherwise satisfies the limitations imposed by Section
7.6.
Permitted Subordinate Institutional Debt means unsecured Institutional
Debt which is (i) by its terms expressly subordinate in all respects to the
Credit Facility (including any Short Term Debt and the Swingline Advances), in
form and substance acceptable to Required Lenders in their sole discretion and
(ii) otherwise satisfies the limitations imposed by Section 7.6.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 15
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Person means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
Personal Property means all Accounts and all Chattel Paper, Contracts
(including, without limitation, the Management Services Agreements and the
Succession Agreements), Equipment, General Intangibles, Instruments and
Inventory (as each of those terms is defined in the Security Agreement) and any
and all other personal property, together with all proceeds, replacements,
products or substitutions of any of the above.
Plan Asset Regulation means a regulation promulgated by the Department
of Labor at 29 C.F.R. Section 25110.3-101, as amended from time to time.
Pledge Agreement shall mean that certain Stock Pledge Agreement (as
amended) executed by Borrower covering all of the issued and outstanding stock
of Borrower's Subsidiaries, such Pledge Agreement to be in form acceptable to
Administrative Agent.
Professional Corporation means, collectively, Modern Dental
Professionals, P.C., a Texas professional corporation, f/k/a Warren F. Melamed,
D.D.S., P.C., Modern Dental Professionals - Girlinghouse, P.C., an Arkansas
professional corporation, and Modern Dental Professionals - Indiana, P.C., an
Indiana professional corporation.
Provider means any person who performs any of the following services
with respect to a dental practice that is owned or managed by Borrower or any
Guarantor:
(a) Any dentist or dental surgeon;
(b) Any person who shall offer or undertake by any means or
methods whatsoever, to clean teeth or to remove stains, concretions or deposits
from teeth in the human mouth, or who shall undertake or offer to diagnose,
treat, operate, or prescribe by any means or methods for any disease, pain,
injury, deficiency, deformity, or physical condition of the human teeth, oral
cavity, alveolar process, gums, or jaws;
(c) Any person who shall offer or undertake in any manner to
prescribe or make, or cause to be made, an impression of any portion of the
human mouth, teeth, gums, or jaws, for the purpose of diagnosing, prescribing,
treating, or aiding in the diagnosing, prescribing or treating, any physical
condition of the human mouth, teeth, gums or jaws, or for the purpose of
constructing or aiding in the construction of any dental appliance, denture,
dental bridge, false teeth, dental plate or plates of false teeth, or any other
substitute for human teeth;
(d) Any person who shall offer or undertake to fit, adjust,
repair, or substitute in the human mouth or directly related and adjacent
masticatory structures any dental appliance, structure, prosthesis, or denture,
or who shall aid or cause to be fitted, adjusted, repaired, or
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 16
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substituted in the human mouth or directly related and adjacent masticatory
structures any dental appliance, structure, prosthesis, or denture; and
(e) Any person who makes, fabricates, processes, constructs,
produces, reproduces, duplicates, repairs, relines, or fixes any full or partial
denture, any fixed or removable dental bridge or appliance, any dental plate or
plates of false teeth, any artificial dental restoration, or any substitute or
corrective device or appliance for the human teeth, gums, jaws, mouth, alveolar
process, or any part thereof for another.
Rate Enhancement Spread means the applicable "Rate Enhancement Spread"
as shown on, and as determined in accordance with, Schedule II attached hereto.
The Rate Enhancement Spread is subject to reduction or increase as provided in
Schedule II.
Register has the meaning set forth in Section 10.10 hereof.
Regulation U means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time and shall include any
successor or other regulation or official interpretation of the Board of
Governors relating to the extension of credit by banks for the purpose of
purchasing or carrying margin stocks that is applicable to member banks of the
Federal Reserve System.
Regulatory Change shall mean the adoption of any applicable law, rule
or regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any Governmental
Authority charged with the administration thereof.
Request for Advance means a written request of an Authorized Borrowing
Officer for an Advance or a Letter of Credit, substantially in the form attached
hereto as Exhibit B, which shall (a) specify (i) the date of such an Advance or
Letter of Credit, which shall be a Business Day, (ii) what portion of such
Advance is to be a LIBOR Rate Advance or Variable Rate Advance, (iii) the
aggregate amount of such Advance or Letter of Credit, and (iv) the transfer
instructions with respect to such Advance; and (b) contain a certification of an
Authorized Borrowing Officer as of the date of such Advance or Letter of Credit
certifying (i) that the intended use of the proceeds of such Advance or Letter
of Credit does not violate the provisions of this Agreement (including, without
limitation, Section 2.1 and Section 5.15) or any other Loan Document, and (ii)
as to the matters set forth in Section 4.2(b) and (c), in the case of an
Advance, or the matters set forth in Section 4.4(c) and (d), in the case of a
Letter of Credit.
Required Institutional Debt has the meaning set forth in Section
8.1(k).
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Required Lenders means:
(a) Except as provided in clause (b) below or as expressly
stated otherwise in this Agreement or in any other Loan Document, at any time
and with respect to any matter hereunder or relating to the Credit Facility,
Lenders holding at the time in question a portion of the Credit Facility
(including participations in Letters of Credit and Swingline Advances) equal to
or greater than fifty-one percent (51%) of the sum of (i) the aggregate unpaid
principal amount of the Notes and any notes evidencing any Short Term Debt, plus
(ii) the Letter of Credit Exposure (or, if no Advances, Letters of Credit or
Short Term Debt are outstanding, then Lenders holding at the time in question
fifty-one percent (51%) of the aggregate Loan Commitment Amounts of all
Lenders); and
(b) With respect to (i) any alteration of the interest rate
applicable to the Credit Facility, or (ii) any alteration of the amount of any
fees payable to the Lenders under this Agreement, or (iii) any extension of the
maturity date of the Credit Facility or the due date of any installment of
principal or interest or any fees on the Credit Facility, or (iv) forgiveness of
any principal or interest under the Credit Facility, or (v) any increase in the
amount of the Credit Facility, or (vi) any change in the definition of Loan
Percentage, or (vii) the release of any Lenders' Liens on any Collateral, or
(viii) the release of the Guaranty of any Guarantor, or (ix) the reinstatement
of the Notes and other indebtedness pursuant to the provisions in Section 8.2(a)
hereof, or (x) any consent of Lenders required by Section 10.10(a) hereof, or
(xi) any alteration of the provisions of this definition of Required Lenders,
all the Lenders.
Rights means rights, remedies, powers, privileges and benefits.
SEC means the federal Securities and Exchange Commission, and its
successors.
Security Agreement means that certain Amended and Restated Security
Agreement of even date herewith, executed by Borrower and each Guarantor in
favor of Administrative Agent, securing the payment of the Notes and the payment
and performance of all the Obligations, and assigning to Administrative Agent
all of Borrower's and each Guarantor's right, title and interest in, to and
under the Personal Property, and all renewals, extensions, modifications,
supplements and replacements thereof, which Security Agreement shall be in form
acceptable to Administrative Agent.
Short Term Debt means Debt of Borrower existing on the date hereof
pursuant to those certain Swingline Notes dated ___________ to Bank of America,
N.A. and Fleet National Bank in the aggregate amount of Ten Million and No/100
Dollars ($10,000,000.00), which Short Term Debt is included in the Obligations
and secured by the Collateral, and ranks equally with the Credit Facility as set
forth in Section 9.6.
Subordinate Acquisition Debt means any Debt of Borrower and its
Subsidiaries which is (a) evidenced by a promissory note given as part of the
Total Acquisition Price, and (b)
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 18
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subordinate in all respects to the Obligations, provided, such subordination is
in form and substance satisfactory to Administrative Agent.
Subsidiary means, (a) for any Person other than Borrower, any
corporation or other entity of which securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other Persons performing similar functions (including that of a general partner)
are at the time directly or indirectly owned, collectively, by such Person and
any Subsidiaries of such Person, or (b) for Borrower, any present or future
corporation or other entity at least a majority of whose outstanding voting
stock, other voting securities or other ownership interests shall at the time be
owned directly or indirectly by Borrower or any other entity of which at least a
majority of the securities or other ownership interests are at the time directly
or indirectly owned, collectively, by Borrower and any Subsidiaries of Borrower.
The term Subsidiary shall include Subsidiaries of Subsidiaries (and so on).
Succession Agreements means, all succession agreements entered into
between Borrower, any Guarantor, and any professional corporation or association
for the purpose of establishing the successors to the equity interests in any
such professional corporation or association upon the occurrence of certain
events, including, without limitation, that certain succession agreement, dated
as of February 5, 1996, by and between Warren F. Melamed, D.D.S., P.C., Dr.
Warren F. Melamed, D.D.S. and Borrower, together with all modifications,
amendments or replacements of the foregoing.
Swingline Advances means any Swingline Advance made by Swingline Lender
to Borrower pursuant to Section 2.2.
Swingline Commitment means $2,000,000.00.
Swingline Lender means Bank of America.
Swingline Note means the Swingline Note made by Borrower payable to the
order of Swingline Lender, substantially in the form as Exhibit A-2, evidencing
the Swingline Advances, and any amendments and modifications thereto, any
substitutions therefor, and any replacements, restatements, renewals or
extension thereof, in whole or in part.
Target Company EBITDA means, for any Person, with respect to any
period, determined in accordance with GAAP and as approved by Administrative
Agent, the sum of (a) such Person's net income, plus (b) Taxes (to the extent
that such amounts have been deducted in determining such Person's net income for
such period), plus (c) interest expense (to the extent that such amounts have
been deducted in determining such Person's net income for such period), plus (d)
all amounts attributable to depreciation and/or amortization of intangible and
other assets of such Person (to the extent that such amounts have been deducted
in determining such Person's net income for such period), plus (e) all
non-recurring expenditures that (i) were incurred prior to the closing of the
acquisition of such Person by Borrower or any Subsidiary of
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 19
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Borrower, and (ii) have been verified by an independent certified public
accountant or other Person approved by Administrative Agent (to the extent that
such amounts have been deducted in determining such Person's net income for such
period).
Taxes means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or other charges of any
nature whatsoever, from time to time or at any time imposed by law or any
federal, state or local governmental agency. "Tax" means any one of the
foregoing.
Telerate Screen means the display designated as Screen 3750 on the
Telerate System or such other screen on the Telerate System as shall display the
London interbank offered rates for deposits in Dollars quoted by selected banks.
Termination Date means June 30, 2001, or such earlier date on which the
Credit Facility is terminated and/or the Notes are accelerated.
Total Acquisition Price means, in connection with any Acquisition, the
sum of all cash to be paid at closing or in installments plus the value of any
stock given by Borrower or any Subsidiary of Borrower in connection with such
Acquisition which value is determined in accordance with GAAP plus any other
amounts paid or to be paid by Borrower or any Subsidiary of Borrower as part of
the purchase price in connection with such Acquisition, provided, that all such
amounts are approved by Administrative Agent plus all Debt assumed by Borrower
or any Subsidiary of Borrower in connection with such Acquisition.
UCC means the Uniform Commercial Code in effect under the laws of the
State of Texas, as amended, or, if stated with reference to another
jurisdiction, the Uniform Commercial Code as adopted in the relevant
jurisdiction.
Unused Fee shall mean the non-refundable fee equal to the product of
(a) the applicable "Unused Fee Percentage" as shown on, and as determined in
accordance with, Schedule II attached hereto, and (b) the average daily unused
portion of the Credit Facility during the calendar quarter immediately preceding
the date on which such fee is to be paid; provided that the amount of any
Swingline Advances shall be considered "unused" for purposes of the above
calculation. The percentage to be used in clause (a) shall be subject to
reduction or increase, as set forth on Schedule II.
U.S. Government Securities means (a) securities that are (i) direct
obligations of the United States of America for the full and timely payment of
which the full faith and credit of the United States of America is pledged or
(ii) obligations of a Person controlled or supervised by and acting as an agency
or instrumentality of the United States of America, the full and timely payment
of which is unconditionally guaranteed as a full faith and credit obligation of
the United States of America, which in either case are not callable or
redeemable at the option of the issuer
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 20
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thereof or (b) any depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933) as custodian with respect to any U.S.
Government Securities specified in clause (a) or a specific payment of principal
of or interest on any U.S. Government Securities specified in clause (a) held by
such bank for the account of the holder of such depository receipt, provided
that (except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Securities or the specific payment of principal of or interest on the U.S.
Government Securities evidenced by such depository receipt.
Variable Rate means a fluctuating rate of interest equal to the sum of
(a) the Base Rate, plus (b) the Base Rate Spread, plus (c) the Rate Enhancement
Spread, plus (d) if applicable, the Additional Spread; provided, that the
Variable Rate is subject to adjustment as provided in Section 3.3 hereof.
Variable Rate Advance means an Advance which will bear interest
computed with reference to the Variable Rate.
Working Capital Advance has the meaning set forth in Section 2.1(a).
Working Capital Facility means the credit facility established under
the Original Loan Agreement for working capital purposes.
SECTION 1.2. Singular and Plural of Definitions . Each term defined in
the singular form in Section 1.1 shall mean the plural thereof when the plural
form of such term is used in this Agreement, and each term defined in the plural
form in Section 1.1 shall mean the singular thereof when the singular form of
such term is used in this Agreement.
SECTION 1.3. Substantive Definitions. The terms, provisions and
agreements set forth in the definitions contained in Section 1.1 shall be
substantive terms of this Agreement and fully binding on the parties hereto.
SECTION 1.4. Money. Unless stipulated otherwise, all references herein
or in any of the Loan Documents to "Dollars," "$," "money", "cash", "payments"
or other similar financial or monetary terms are references to lawful money of
the United States of America.
SECTION 1.5. Captions; References. The captions in this Agreement and
in the table of contents hereof are for convenience of reference only and shall
not define, affect or limit any of the terms or provisions hereof. All
references herein to Articles and Sections are, unless specified otherwise,
references to articles and sections of this Agreement. Unless specifically
indicated otherwise, all references herein to an "Exhibit," "Annex" or
"Schedule" are references to exhibits, annexes or schedules attached hereto, all
of which are incorporated herein and made a part hereof for all purposes, the
same as if set forth fully herein, it being understood that if any exhibit,
annex or schedule attached hereto which is to be executed and delivered contains
blanks,
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the same shall be completed correctly and in accordance with this Agreement
prior to or at the time of the execution and delivery thereof. The words
"herein," "hereof," "hereunder" and other similar compounds of the word "here"
when used in this Agreement shall refer to the entire Agreement and not to any
particular provision or section unless specifically indicated otherwise.
SECTION 1.6. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP.
ARTICLE II
COMMITMENT
SECTION 2.1. Credit Facility Commitment. Each Lender severally agrees,
subject to and upon the terms, covenants and conditions of this Agreement, to
make Advances to Borrower, or, with respect to Letters of Credit, to cause the
Issuing Lender to issue Letters of Credit for the account of Borrower, and
Borrower shall be entitled to obtain the following Advances and Letters of
Credit in the manner set forth in Section 2.2:
(a) Advances. One or more Advances for (i) the general working
capital purposes of Borrower (a "Working Capital Advance"), (ii) future
Acquisitions as approved by Lenders, if necessary, and (iii) purchase of fixed
assets; provided, that, (A) each such Advance must occur on a Business Day prior
to the Termination Date, (B) each such Advance must be in an amount not less
than the limitations provided in Section 2.2, (C) if such Advance is to be a
Working Capital Advance, the Letter of Credit Exposure plus the aggregate
outstanding balance of Working Capital Advances will not, after giving effect to
such Advance, exceed Ten Million and No/100 Dollars ($10,000,000.00), and (D) on
any date of determination, the aggregate outstanding balance of Advances
(including the Swingline Advances) plus the Letter of Credit Exposure shall
never exceed the Available Commitment. Borrower may borrow, repay and reborrow
under this Agreement. The Available Commitment under the Credit Facility shall
be in the maximum amount of Seventy-Five Million and No/100 Dollars
($75,000,000.00). Other than Swingline Advances, Borrower shall be entitled,
subject to the terms of this Agreement, to receive not more than five Advances
per month in amounts equal to or in excess of One Hundred Thousand and No/100
Dollars ($100,000.00).
(b) Letters of Credit. Letters of Credit may be issued by the
Issuing Lender for the account of Borrower for any of the purposes for which
Borrower can obtain an Advance; provided, that, (i) each such Letter of Credit
shall be issued on a Business Day occurring prior to the Termination Date, (ii)
after the issuance of any such Letter of Credit, (A) the Letter of Credit
Exposure plus the aggregate outstanding balance of Working Capital Advances
shall not exceed Ten Million and No/100 Dollars ($10,000,000.00), (B) the Letter
of Credit Exposure plus the
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outstanding balance of the Advances must be less than or equal to the Available
Commitment, and (C) the Letter of Credit Exposure shall not exceed One Million
and No/100 Dollars ($1,000,000.00), and (iii) each such Letter of Credit must
have an expiration date no later than the earlier of (i) one (1) year after the
issuance thereof or (ii) the Termination Date. To the extent that funds are ever
drawn under any of the Letters of Credit, each such draw will be paid by the
Issuing Lender, and each of the Lenders will make an Advance in the amount of
such Lender's Loan Percentage of the amount so paid by the Issuing Lender to
reimburse the Issuing Lender for such draw.
(c) Swingline Commitment. Subject to the terms and conditions
of this Agreement, Swingline Lender agrees to make Swingline Advances to
Borrower from time to time through the Termination Date; provided, that the
aggregate principal amount of all outstanding Swingline Advances (after giving
effect to any amount requested), shall not exceed the lesser of (i) the
Available Commitment less the sum of all outstanding Advances under the Credit
Facility and the Letter of Credit Exposure and (ii) the Swingline Commitment.
In no event shall any Lender be required to make any Advances in excess
of such Lender's Loan Percentage of the amount required to be advanced by the
Lenders under the above provisions of this Section 2.1 or which would cause any
Lender to have made Advances in excess of such Lender's Loan Commitment Amount.
SECTION 2.2. Method of Borrowing. Subject to the terms and conditions
of this Agreement, Borrower shall be entitled to obtain Advances and Letters of
Credit from Lenders and Swingline Advances from the Swingline Lender pursuant to
Section 2.1 in the following manner:
(a) Variable Rate Advances; Swingline Advances. In the case of
any Variable Rate Advance, Borrower, through an Authorized Borrowing Officer,
shall give Administrative Agent prior to 10:00 a.m., Dallas, Texas time, on the
date of any such proposed Advance, a Request for Advance specifying their
intention to borrow or reborrow such Variable Rate Advance hereunder. In the
case of any Swingline Advance, Borrower, through an Authorized Borrowing
Officer, shall give Administrative Agent prior to 1:00 p.m., Dallas, Texas time,
on the date of any such proposed Advance, a Request for Advance specifying their
intention to borrow or reborrow such Swingline Advance hereunder. Such Requests
for Advance shall be accompanied by the documents required to be delivered
pursuant to Article IV.
(b) LIBOR Rate Advances. In the case of LIBOR Rate Advances,
Borrower, through an Authorized Borrowing Officer, shall give Administrative
Agent at least three Business Days prior to the date of such Advance an
irrevocable Request for Advance specifying its intention to borrow or reborrow
such Advance hereunder. Notice shall be given to Administrative Agent prior to
10:00 a.m., Dallas, Texas time, in order for such Business Day to count toward
the minimum number of Business Days required. LIBOR Rate Advances shall in all
cases be subject to availability and to the provisions of Section 3.5 hereof.
For LIBOR Rate
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Advances, the Request for Advance shall specify the requested funding date,
which shall be a Business Day, the amount of the proposed LIBOR Rate Advance to
be made by Lenders, the Interest Period selected (provided that no such Interest
Period shall extend past the applicable Termination Date) and shall be
accompanied by the documents required to be delivered pursuant to Article IV.
Such LIBOR Rate Advance shall be in an amount not less than Two Million and
No/100 Dollars ($2,000,000.00) or greater whole multiples of One Hundred
Thousand and No/100 Dollars ($100,000.00).
(c) Notice To Lenders. Administrative Agent shall promptly
notify Lenders or Swingline Lender, as applicable, of each notice received from
an Authorized Borrowing Officer pursuant to this Section 2.2. Each Lender, or
Swingline Lender, as applicable, shall, not later than noon, Dallas, Texas time,
on the date of any such Advance, deliver to Administrative Agent, at its address
set forth herein, such Lender's Loan Percentage of such Advance, or in the case
of a Swingline Advance, the amount thereof, in immediately available funds in
accordance with Administrative Agent's instructions. Prior to 2:00 p.m., Dallas,
Texas time, on the date of any Advance hereunder Administrative Agent shall,
subject to satisfaction of the conditions set forth in Article IV, disburse the
amounts made available to Administrative Agent by the Lenders or Swingline
Lender, as applicable, by transferring such amounts by wire transfer or
crediting such amounts to the account of Borrower maintained with Administrative
Agent as directed by an Authorized Borrowing Officer. All Advances (other than
Swingline Advances) shall be made by each Lender according to its Loan
Percentage.
(d) Method of Issuing Letters of Credit. Not less than three
(3) Business Days prior to the requested date of issuance of any Letter of
Credit, Borrower shall deliver to Administrative Agent a Request For Advance and
shall execute and deliver to the Issuing Lender the customary letter of credit
application and agreement used by the Issuing Lender in substantially the form
of Exhibit D attached hereto (the "LOC Application"). Nothing in this Agreement
shall prohibit the Issuing Lender from modifying the form of LOC Application in
effect from time to time in connection with the issuance of any Letter of
Credit, provided that, such modification does not substantially modify this
Agreement to the detriment of Borrower. In the event of a direct conflict
between the provisions of the LOC Application and this Agreement, the provisions
of this Agreement shall govern. In no event shall a Letter of Credit have an
expiration date which is later than the earlier of (i) one year from the date of
issuance thereof or (ii) the Termination Date. Letters of Credit may be standby
letters of credit only and be issued on behalf of Borrower. Upon satisfaction of
the applicable conditions precedent set forth in Article IV, and subject to the
other terms and conditions of this Agreement, the Issuing Lender shall issue
Letters of Credit for the account of Borrower within three (3) Business Days
from receipt by the Issuing Lender of the fully-executed LOC Application (so
long as the requested terms of such Letter of Credit are acceptable to the
Issuing Lender in its reasonable discretion).
Immediately upon the issuance of each Letter of Credit, the
Issuing Lender shall be deemed to have sold and transferred to each Lender, and
each Lender shall be deemed to have purchased and received from the Issuing
Lender, in each case irrevocably and without any
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 24
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further action by any party, an undivided interest and participation in such
Letter of Credit, each drawing thereunder and the obligations of Borrower under
this Agreement in respect thereof in an amount equal to the product of (x) such
Lender's Loan Percentage times (y) the maximum amount available to be drawn
under such Letter of Credit (assuming compliance with all conditions to
drawing). Within the limits of the Credit Facility, and subject to the limits
referred to above, Borrower may through an Authorized Borrowing Officer request
the issuance of Letters of Credit under this Section 2.2(d), repay any Advances
resulting from drawings thereunder pursuant to this Section 2.2(d) and request
the issuance of additional Letters of Credit under this Section 2.2(d).
The payment by the Issuing Lender of a draft drawn under any
Letter of Credit shall constitute for all purposes of this Agreement the making
by the Issuing Lender of an Advance, which shall bear interest at the Variable
Rate in effect under the Credit Facility, in the amount of such draft (but
without any requirement for compliance with the conditions set forth in Article
IV hereof). In the event that a drawing under any Letter of Credit is not
reimbursed by Borrower by 10:00 a.m. (Dallas time) on the first Business Day
after such drawing, the Issuing Lender shall promptly notify Administrative
Agent and each other Lender. Each such Lender shall, on the first Business Day
following such notification, make an Advance, which shall bear interest at the
Variable Rate in effect under the Credit Facility, and shall be used to repay
the applicable portion of the Issuing Lender's advance with respect to such
Letter of Credit, in an amount equal to the amount of its participation in such
drawing for application to reimburse the Issuing Lender (but without any
requirement for compliance with the applicable conditions set forth in Article
IV hereof) and shall make available to Administrative Agent for the account of
the Issuing Lender, by deposit at Administrative Agent's office, in same day
funds, the amount of such Advance. In the event that any Lender fails to make
available to Administrative Agent for the account of the Issuing Lender the
amount of such Advance, the Issuing Lender shall be entitled to recover such
amount on demand from such Lender together with interest thereon at a rate per
annum equal to the lesser of (i) the Maximum Lawful Rate or (ii) the Federal
Funds Rate.
(e) Swingline Advances. Swingline Advances shall be refunded
by the Lenders on demand by Swingline Lender. Such refundings shall be made by
the Lenders in accordance with their respective Loan Percentages and shall
thereafter be reflected as Advances under the Credit Facility of the Lenders on
the books and records of the Administrative Agent, which Advances under the
Credit Facility shall be Variable Rate Advances. Each Lender shall fund its
respective Loan Percentage of Advances as required to repay Swingline Advances
outstanding to the Swingline Lender upon demand by the Swingline Lender but in
no event later than 2:00 p.m. (Dallas time) on the next succeeding Business Day
after such demand is made. No Lender's obligation to fund its respective Loan
Percentage of a Swingline Advance shall be affected by any other Lender's
failure to fund its Loan Percentage of a Swingline Advance, nor shall any
Lender's Loan Percentage be increased as a result of any such failure of any
other Lender to fund its Loan Percentage.
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 25
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Borrower shall pay to Swingline Lender on demand the amount of
any Swingline Advances to the extent amounts received from the Lenders are not
sufficient to repay in the full the outstanding Swingline Advances requested or
required to be refunded.
Each Lender acknowledges and agrees that its obligation to
refund Swingline Advances in accordance with the terms of this Section 2.2 is
absolute and unconditional and shall not be affected by any circumstance
whatsoever (including, without limitation, repayment of such Swingline Advance
by Borrower pursuant to the above paragraph if the same is required to be
refunded to Borrower by Swingline Lender; provided, that if prior to the
refunding of any outstanding Swingline Advance pursuant to this Section 2.2, one
of the events described in Section 8.1(f) or (g) shall have occurred, each
Lender will, on the date the applicable Advance under the Credit Facility would
have been made, purchase an undivided participating interest in the Swingline
Advance to be refunded in an amount equal to its Loan Percentage of the
aggregate amount of such Swingline Advance). Each Lender will immediately
transfer to the Swingline Lender, in immediately available funds, the amount of
its participation and upon receipt thereof the Swingline Lender will deliver to
such Lender a certificate evidencing such participation dated the date of
receipt of such funds and for such amount.
SECTION 2.3. Fees.
(a) Unused Fees. In consideration for Lenders making available the
Credit Facility, Borrower agrees to pay to Administrative Agent the Unused Fee
commencing on the first day of the first calendar quarter after the Closing
Date, and continuing on the first day of each calendar quarter thereafter until
the Termination Date and on the Termination Date. The Unused Fee is to be
computed based on the number of actual days elapsed, assuming each calendar year
consisted of 360 days, subject, however, to proportionate adjustments because
the Closing Date is not the beginning or end of a calendar quarter, the
Termination Date is not at the beginning or end of a calendar quarter, and if
there is an increase or decrease in the Credit Facility during such calendar
quarter. The Unused Fee is to be paid by Administrative Agent to each Lender in
accordance with its Loan Percentage.
(b) Letter of Credit Fees. Borrower shall pay to Administrative Agent a
letter of credit fee (the "Letter of Credit Fee") as a condition to the issuance
of any Letter of Credit in an amount equal to the "Letter of Credit Fee
Percentage" as shown on, and as determined in accordance with, Schedule II
attached hereto times the amount of the Letter of Credit so issued. The fee
payable in respect of the Letters of Credit shall be subject to reduction or
increase, as set forth on Schedule II. Subject to Section 10.8 hereof, such fee
shall be computed on the basis of the actual number of days elapsed. The Letter
of Credit Fee is to be paid to each Lender in accordance with its Loan
Percentage and shall be payable in four (4) equal installments with the first
such payment being due and payable on the date of issuance of the applicable
Letter of Credit and the remaining portions of the applicable Letter of Credit
Fee to be paid on the immediately following three interest payment dates under
the Credit Facility; provided, that, any Letter of Credit Fee remaining unpaid
on the Termination Date shall be paid on such date.
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(c) Administrative and Agency Fee. In consideration of Administrative
Agent's administration services under the Credit Facility, Borrower agrees to
pay Administrative Agent (i) the Administrative Fee in advance, commencing on
the Closing Date and continuing on each anniversary of the Closing Date, until
such time as the Notes are paid in full, all Letters of Credit have been
terminated, and Lenders' commitment to make Advances under this Agreement have
been terminated and (ii) an Agency Fee in the amount of $5,000 for each new
lender added to the Credit Facility as a Lender, concurrently with the addition
of such Lender.
(d) Amendment Fee. Borrower shall pay to Administrative Agent, in
addition to such other fees and charges which Lenders may require, a fee of Five
Thousand and No/100 Dollars ($5,000.00) for each amendment to this Agreement
entered into by Administrative Agent, Lenders and Borrower after the date
hereof, but prior to the occurrence of an Event of Default which has not been
waived; provided, that no such fee shall be required in connection with any
amendment to this Agreement entered into solely for the purpose of adding any
Person as a Lender hereunder; provided further that nothing herein shall
restrict Administrative Agent or Lenders from requiring payment of an additional
facility fee or other fees in connection with any increase in the amount of the
Credit Facility or other amendments hereto. Such amendment fee shall be
distributed by Administrative Agent to each Lender in accordance with such
Lender's Loan Percentage.
(e) Syndication Expenses. Borrower shall not be liable for the costs
and expenses incurred by Lenders other than Administrative Agent related to the
purchase by any Lender after the Closing Date of an interest in the Loan, in
excess of an aggregate amount of such costs and expenses equal to $10,000.00.
ARTICLE III
TERMS OF CREDIT FACILITY
SECTION 3.1. Notes. The Credit Facility shall be evidenced by the
Notes. Each Lender shall receive an originally executed Note in an amount equal
to such Lender's Loan Commitment Amount. The Swingline Lender shall receive the
originally executed Swingline Note in an amount equal to the Swingline
Commitment.
SECTION 3.2. Maturity. All outstanding principal of the Notes, together
with all accrued but unpaid interest and other amounts owed with respect
thereto, shall be due and payable in full on the Termination Date.
SECTION 3.3. Interest Rate. Interest on the Advances shall accrue at a
rate per annum equal to the lesser of (a) at Borrower's option, the applicable
Variable Rate or the applicable Adjusted LIBOR Rate, subject, however, to the
provisions of Section 10.8 (the "Applicable Rate"), or (b) the Maximum Lawful
Rate; provided, however, if at any time the Applicable Rate
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exceeds the Maximum Lawful Rate, resulting in the charging of interest hereunder
to be limited to the Maximum Lawful Rate, then any subsequent reduction in the
Applicable Rate shall not reduce the rate of interest below the Maximum Lawful
Rate until the total amount of interest accrued on the indebtedness evidenced
hereby equals the amount of interest which would have accrued on such
indebtedness if the Applicable Rate had at all times been in effect.
Without notice to Borrower or anyone else, the Variable Rate and the
Maximum Lawful Rate shall each automatically fluctuate upward and downward as
and in the amount by which the Base Rate and Maximum Lawful Rate, respectively,
fluctuate, subject always to limitations contained in this Agreement. In
addition, without notice to Borrower or anyone else, the Variable Rate and the
Adjusted LIBOR Rate initially provided for under this Agreement shall fluctuate
upward or downward from time to time based on changes in (i) the Consolidated
Funded Debt to Consolidated EBITDA ratio and (ii) the Hypothetical Fixed Charge
Coverage Ratio, in each instance, pursuant to Schedule II. Such changes shall
occur on the first day of the calendar month following the month in which
Administrative Agent receives the quarterly financial statements and related
officer's certificate required to be delivered by Borrower pursuant to Sections
6.1 (b) and (d) hereof showing that such adjustment is appropriate (except that
with respect to any Adjusted LIBOR Rate then in effect, such change shall occur
at the end of the applicable Interest Period).
SECTION 3.4. Mandatory Interest and Principal Payments.
(a) Interest on the Notes, computed as provided in Section
3.11, shall be due and payable in arrears on the last day of each March, June,
September, and December, commencing on December 31, 1997, and on demand after
the Termination Date, so long as any principal of any Note remains unpaid. In
addition, interest accrued and unpaid on each LIBOR Rate Advance shall be due
and payable on the last day of the applicable Interest Period.
(b) Upon the sale of any Subsidiary of Borrower or any
Guarantor, Borrower shall make a principal payment in an amount equal to one
hundred percent (100%) of the net proceeds from such sale as such amount is
approved by Administrative Agent for the purpose of reducing the amount
outstanding under the Credit Facility.
(c) Upon any debt or equity offering by Borrower or any
Guarantor (other than the Required Institutional Debt), Borrower shall make a
principal payment in an amount equal to fifty percent (50%) of the net proceeds
to Borrower or such Guarantor from such offering as such amount is approved by
Administrative Agent for the purpose of reducing the amount outstanding under
the Credit Facility.
(d) Upon the closing of the Required Institutional Debt,
Borrower shall make a principal payment in an amount equal to one hundred
percent (100%) of the net proceeds (i.e. gross proceeds less usual and customary
closing costs and expenses as reasonably approved by
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Administrative Agent) to Borrower from such offering for the purpose of (i)
fully repaying any Short Term Debt and (ii) reducing the balance of the Credit
Facility.
SECTION 3.5. LIBOR Rate Advances.
(a) Upon at least three (3) Business Days' prior written
notice to Administrative Agent ("Minimum Notice Requirement"), Borrower may
through an Authorized Borrowing Officer, on any Interest Adjustment Date (other
than the Termination Date), convert amounts of any LIBOR Rate Advance into a
Variable Rate Advance with interest accruing thereon, with reference to the
applicable Variable Rate, as provided in Section 3.3 above.
(b) Upon satisfaction by Borrower of the Minimum Notice
Requirement, and subject to the conditions provided in this Agreement or the
Notes, Borrower may through an Authorized Borrowing Officer, on any date prior
to the Termination Date, convert amounts of not less than Two Million and No/100
Dollars ($2,000,000.00) in the aggregate on the same date (or any whole multiple
of One Hundred Thousand and No/100 Dollars ($100,000.00) in excess thereof) of
any Variable Rate Advances into a LIBOR Rate Advance with interest accruing
thereon with reference to the applicable Adjusted LIBOR Rate as provided in
Section 3.3 above, for the Interest Period selected in such notice.
(c) To the extent Borrower has not made an effective election
under and in accordance with subparagraphs (a) or (b) above (including, without
limitation, at the expiration of an Interest Period), the Applicable Rate shall
be the rate specified pursuant to the provisions contained herein for Variable
Rate Advances. If Borrower has failed to make such election at the end of an
Interest Period, the Lenders shall be deemed to have made a Variable Rate
Advance in the amount, and in replacement, of the LIBOR Rate Advance then
maturing.
Each notice of a LIBOR Rate election by Borrower must be given by an
Authorized Borrowing Officer, must satisfy the Minimum Notice Requirement and
shall include the following: (i) Borrower's election of the applicable Adjusted
LIBOR Rate; (ii) Borrower's choice of an Interest Period during which the
Adjusted LIBOR Rate will apply; (iii) Borrower's election of the effective date
(the "Effective Date") on which the LIBOR Rate Advance shall be made; and (iv)
the amount of outstanding loan principal which for any LIBOR Rate Advance shall
not be less than Two Million and No/100 Dollars ($2,000,000.00) (or any whole
multiple of One Hundred Thousand and No/100 Dollars ($100,000.00) in excess
thereof), to which the Adjusted LIBOR Rate shall apply. Borrower shall give
notice of such election to Administrative Agent on behalf of Lenders.
Borrower's election to convert to the Adjusted LIBOR Rate is subject to
the following conditions: (1) the Interest Period shall be limited to a period
commencing on the Effective Date and ending on a date 30, 90 or 180 days later
elected by Borrower in their notice to Administrative Agent; (2) Borrower's
written notice of an election shall be received by Administrative Agent in time
to satisfy the Minimum Notice Requirement; (3) the last day of the
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Interest Period will not be subsequent in time to the Termination Date; (4) in
the case of a continuation of a LIBOR Rate Advance, the Interest Period
applicable after such continuation shall commence on the last day of the
preceding Interest Period; (5) no LIBOR Rate election shall be made if
Administrative Agent notifies Borrower that it has determined by reason of
circumstances affecting the interbank Eurodollar market that either adequate or
reasonable means do not exist for ascertaining the Adjusted LIBOR Rate for any
Interest Period, or it becomes impracticable for Administrative Agent to obtain
funds by purchasing U.S. dollars in the interbank Eurodollar market, or if
Administrative Agent or any Lender determines that the Adjusted LIBOR Rate will
not adequately or fairly reflect the costs to any Lender of maintaining the
applicable LIBOR Rate Advances at such rate, or if as a result of any Regulatory
Change, it shall become unlawful or impossible for Lenders to maintain any such
LIBOR Rate election; (6) there shall never be more than four (4) LIBOR Rate
Advances, in the aggregate, in effect at any one time hereunder; and (7) no
LIBOR Rate election shall be made after the occurrence and during the
continuance of an Event of Default.
If, on or after the Effective Date, any Regulatory Change shall make it
unlawful or impossible for any Lender (or its Eurodollar lending office) to
make, maintain or fund LIBOR Rate Advances and such Lender shall so notify
Administrative Agent, Administrative Agent shall forthwith give notice thereof
to the other Lenders and Borrower, whereupon until such Lender notifies Borrower
and Administrative Agent that the circumstances giving rise to such suspension
no longer exist, the obligation of such Lender to make LIBOR Rate Advances shall
be suspended. If such Lender shall determine that it may not lawfully continue
to maintain and fund any of its outstanding LIBOR Rate Advances to maturity and
shall so specify in such notice, Borrower shall immediately prepay in full the
then outstanding principal amount of such Lender's portion of the LIBOR Rate
Advances, together with accrued interest thereon. Concurrently with prepaying
such portion of the LIBOR Rate Advances, Borrower shall borrow a Variable Rate
Advance in an equal principal amount from such Lender (on which interest and
principal shall be payable contemporaneously with the related LIBOR Rate
Advances of the other Lenders), and such Lender shall make such Variable Rate
Advance. If a Lender shall be unable to make, maintain or fund LIBOR Rate
Advances as above provided for more than sixty days, and the other Lenders are
not similarly restricted, Borrower shall be entitled to designate an Eligible
Assignee reasonably acceptable to Administrative Agent to purchase the interest
of the Lender which is unable to fund LIBOR Rate Advances, and such Lender shall
sell its interest to such Eligible Assignee within ten Business Days of
Borrower's request.
Borrower shall indemnify Administrative Agent and Lenders against any
loss or expense which Administrative Agent or Lenders may, as a consequence of
Borrower's failure to make a payment on the date such payment is due hereunder
or the payment, prepayment or conversion of any LIBOR Rate Advances hereunder on
a day other than an Interest Adjustment Date, sustain or incur in liquidating or
employing deposits from third parties acquired to effect, fund or maintain any
such LIBOR Rate Advances or any part thereof, including, without limitation, any
Consequential Loss.
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Borrower shall also indemnify Lenders against and reimburse Lenders for
increased costs to Lenders, as a result of any Regulatory Change, in the
maintaining of any LIBOR Rate Advances; provided that Administrative Agent shall
give Borrower written notice of such costs within one hundred eighty (180) days
of its or any Lender's implementation and/or compliance with any such Regulatory
Change and such costs shall be reimbursed to such Lender prior to the earlier of
(i) the Termination Date or (ii) ten (10) days following written notice thereof
from Administrative Agent to Borrower. All payments made pursuant to this
paragraph shall be made free and clear, without reduction for, or account of,
any present or future taxes or other levies of any nature, excluding net income
and franchise taxes.
SECTION 3.6. Payments of Advances; Reduction of Commitment Amount.
(a) At any time, Borrower may by notice to Administrative
Agent prior to 10:00 a.m. (Dallas, Texas time) at least three Business Days
prior to the date on which prepayment under this Section 3.6 is to be made (such
notice to be promptly given by Administrative Agent to Lenders), voluntarily
prepay outstanding Advances from time to time and at any time, in whole or in
part; provided, that (i) each such partial payment must be in a minimum amount
of at least Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00), and
(ii) Borrower shall pay any related Consequential Losses within ten days after
Administrative Agent's demand therefor. Each such optional prepayment shall be
applied ratably in accordance with Section 3.9 to pay the amounts owed to each
Lender under the Credit Facility.
(b) If the outstanding principal balance of the Credit
Facility (including the Swingline Advances) plus the Letter of Credit Exposure
ever exceeds the Available Commitment, Borrower shall make a mandatory
prepayment on the principal amount of the Credit Facility in at least the amount
of such excess together with any Consequential Loss arising as a result thereof.
If the outstanding principal balance of all Working Capital Advances (including
the Swingline Advances) plus the Letter of Credit Exposure ever exceeds
$10,000,000.00, Borrower shall make a mandatory prepayment on the principal
amount of the Credit Facility in at least the amount of such excess together
with any Consequential Loss arising as a result thereof.
(c) Borrower may terminate the Available Commitment at any
time prior to the Termination Date, provided, that (i) notice of such
termination must be received by Administrative Agent by 10:00 a.m. Dallas,
Texas, time on the first Business Day preceding the effective date of such
termination (such notice to be promptly given by Administrative Agent to
Lenders), (ii) Borrower shall not be entitled to terminate the Available
Commitment while any Letters of Credit are outstanding and (iii) in no event
shall Borrower be entitled to reduce the Available Commitment, unless Borrower
has elected to terminate the Available Commitment in full.
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(d) If Borrower shall prepay any LIBOR Rate Advance prior to
the expiration of its applicable Interest Period, a prepayment fee shall be due
to Lenders in an amount equal to the consequential loss (the "Consequential
Loss") incurred by Lenders as a result of any such prepayment, such
Consequential Loss to be an amount equal to any losses, costs or expenses
incurred by any Lender by virtue of such prepayment, which such loss, cost or
expense shall include that which any Lender may sustain or incur in liquidating
or employing deposits from any Lender or third parties acquired to effect, fund
or maintain any such LIBOR Rate Advance. Such loss or expense shall include,
without limitation, (i) any expense or penalty incurred by any Lender in
redepositing such principal amount, plus (ii) any "breakage" fees that any
Lender is required to pay by reason of the early breakage of any customary LIBOR
contract entered into by any Lender in connection with providing funds for such
LIBOR Rate Advance. Any prepayment fee required to be paid by Borrower pursuant
to this Section 3.6 or any other provisions of this Agreement or of the other
Loan Documents in connection with the prepayment of any LIBOR Rate Advances
shall be due and payable whether such prepayment is being made voluntarily or
involuntarily, including, without limitation, as a result of an acceleration of
sums due under LIBOR Rate Advances or any part thereof due to an Event of
Default.
SECTION 3.7. Schedules on Notes. Each Lender is hereby authorized to
record the date and amount of the initial principal balance of its Notes and the
date and amount of each Advance and repayment of principal on such Notes, and to
attach any such recording as a schedule to the Notes whereupon such schedule
shall constitute a part of such Notes for all purposes. Any such recording
shall, in the absence of manifest error, constitute prima facie evidence of the
accuracy of the information so recorded; provided that the absence or inaccuracy
of any such schedule or notation thereon shall not limit or otherwise affect the
liability of Borrower for the repayment of all amounts outstanding under the
Notes together with interest thereon.
SECTION 3.8. General Provisions as to Payments. Borrower shall make
each payment of principal and interest on the Credit Facility and all fees
payable hereunder or under any other Loan Document not later than 12:00 noon
(Dallas time) on the date when due, in Federal or other funds immediately
available in Dallas, Texas, to Administrative Agent at Administrative Agent's
address for payments set forth in Schedule I. Administrative Agent will promptly
(and if such payment is received by Administrative Agent by 12:00 noon (Dallas,
Texas time), and otherwise if reasonably possible, on the same Business Day, and
in any event not later than the next Business Day after receipt of such payment)
distribute to each Lender a payment on the applicable Note, such Lender's pro
rata share of each such payment received by Administrative Agent for the account
of Lenders. For purposes of calculating accrued interest on the Credit Facility,
any payment received by Administrative Agent as aforesaid by 12:00 noon (Dallas,
Texas time) on any Business Day shall be deemed made on such day; otherwise,
such payment shall be deemed made on the next Business Day after receipt by
Administrative Agent. Whenever any payment of principal or interest on the
Credit Facility, or any fees under the Loan Documents, shall be due on a day
which is not a Business Day, the date for payment thereof shall be extended to
the next succeeding Business Day. If the date for any payment of principal is
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extended by operation of law or otherwise, interest thereon shall be payable for
such extended time.
SECTION 3.9. Application of Payments. All payments made on the Credit
Facility or the exercise of any right of setoff hereunder shall be paid (i)
first to Swingline Lender in repayment of Swingline Advances and (ii) second,
ratably to each Lender in accordance with its Loan Percentage, subject to the
provisions of Article IX and any provision in the Loan Documents or agreements
among the Lenders providing for the application of such proceeds against
expenses or other amounts. Except as (a) to principal payments made pursuant to
Section 3.6, and (b) otherwise specifically provided in this Agreement or in any
Loan Document, all prepayments on the Credit Facility shall be applied against
accrued but unpaid interest and then against the principal portion of the Credit
Facility in the inverse order of maturity; provided, however, that, unless
otherwise designated by Borrower or required by law, prepayments and involuntary
payments received by Administrative Agent and applied to principal hereunder
shall be applied first to the Variable Rate Advances (or that portion of LIBOR
Rate Advances not subject to payment of Consequential Loss) and then to reduce
LIBOR Rate Advances.
SECTION 3.10. Post-Default Interest; Past Due Principal and Interest.
After maturity of the Notes or the occurrence of an Event of Default, the
outstanding principal balance of the Notes shall, at the option of the Required
Lenders, bear interest at the Default Rate. Any past due principal of and, to
the extent permitted by Law, past due interest on the Notes shall bear interest,
payable as it accrues on demand, for each day until paid at the Default Rate.
Such interest shall continue to accrue at the Default Rate notwithstanding the
entry of a judgment with respect to any of the Obligations, except as otherwise
provided by applicable Law.
SECTION 3.11. Computation of Interest and Fees. All interest payable
on the Notes hereunder or the amount of any fees hereunder shall be computed
based on the number of days elapsed and 360-days per year, subject to the
provisions hereof limiting interest to the Maximum Lawful Rate.
SECTION 3.12. Capital Adequacy. If any present or future Law,
governmental rule, regulation, policy, guideline or directive in effect in the
United States (whether or not having the force of law) or the interpretation
thereof by a court or governmental authority with appropriate jurisdiction
affects the amount of capital required or expected to be maintained by any
Lender or any corporation controlling such Lender and such Lender reasonably
determines that the amount of capital so required or expected to be maintained
is increased by or based upon the existence of the Credit Facility or the
Letters of Credit, then such Lender may notify Borrower of such fact, and
Borrower shall pay to such Lender or Administrative Agent (for the benefit of
such Lender) from time to time on demand, as an additional fee payable
hereunder, such amount as such Lender shall determine in good faith and certify
in a notice to Borrower in reasonable detail to be an amount that will
adequately compensate such Lender in light of these circumstances for its
increased costs of maintaining such capital. Each Lender shall allocate such
cost increases among its customers in good faith and on an equitable basis. If a
Lender requires the payment of
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an additional fee under this Section 3.12 and the other Lenders do not request
such payment, Borrower shall be permitted to designate an Eligible Assignee
reasonably acceptable to Administrative Agent to purchase the interest of the
Lender requiring payment of such fee.
SECTION 3.13. Deposit of Cash Collateral. Upon the occurrence of any
Event of Default, Borrower shall, on the next succeeding Business Day, deposit
in a segregated, interest bearing account with Administrative Agent such funds
as Administrative Agent may request, up to a maximum amount equal to the
aggregate existing Letter of Credit Exposure. Any funds so deposited shall be
held by Administrative Agent as security for the Credit Facility (including the
Letters of Credit) and Borrower will, in connection therewith, execute and
deliver such assignments and security agreements in form and substance
satisfactory to Administrative Agent which Administrative Agent may, in its
discretion, require. As drafts or demands for payment are presented under any
Letter of Credit, Borrower hereby irrevocably directs Administrative Agent to
apply such funds to satisfy such drafts or demands. When all Letters of Credit
have expired and the Notes have been repaid in full (and Lenders have no
obligation to make further Advances or issue Letters of Credit hereunder) or
such Event of Default has been cured to the satisfaction of Administrative
Agent, Administrative Agent shall release to Borrower any remaining funds
deposited under this Section 3.13. Whenever Borrower is required to make
deposits under this Section 3.13 and fails to do so on the day such deposit is
due, Lenders may make such deposit using any funds of Borrower then available to
any Lender.
SECTION 3.14. Guarantees and Collateral. The Obligations shall be
unconditionally guaranteed by each Subsidiary of Borrower pursuant to guaranty
agreements satisfactory to Administrative Agent and Lenders in all respects. In
addition to such other Loan Documents which Administrative Agent may require to
create a first and prior lien and security interest in the Collateral, the
Obligations shall be secured by (a) a first and prior security interest in all
of Borrower's and each Guarantor's Personal Property pursuant to the terms of
the Security Agreement and such other documents or agreements required by
Administrative Agent, (b) a first and prior collateral assignment by the Parent
Companies of all of the partnership interests in Monarch Dental and MacGregor
Dental pursuant to the terms of the Collateral Assignment of Partnership
Interests and such other documents or agreements required by Administrative
Agent, and (c) a first and prior security interest in all of the shares of stock
of the Subsidiaries of Borrower pursuant to the terms of the Pledge Agreement
and such other documents or agreements required by Administrative Agent.
ARTICLE IV
CONDITIONS TO FUNDING
SECTION 4.1. Conditions To Initial Advance or Letter of Credit. The
obligation of Lenders to fund the initial Advance or the Issuing Lender to issue
any Letter of Credit, whichever is first, as provided herein is subject to the
satisfaction of the following conditions and requirements:
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(a) receipt by Administrative Agent of (i) this Agreement,
properly executed by Borrower, and (ii) evidence acceptable to Administrative
Agent that Borrower has paid all fees and expenses required to be paid by
Borrower as of the date of such Advance or issuance;
(b) receipt by each Lender of its Note, properly executed by
Borrower;
(c) receipt by Administrative Agent of an opinion of counsel
for Borrower and Guarantors, opining as to the due organization and existence of
Borrower and Guarantors, the enforceability of each of the Loan Documents,
compliance by Borrower and Guarantors with the Dental Practices Laws, the Fraud
and Abuse Laws, and such other applicable Laws as Lenders may require, and such
other matters as Administrative Agent may reasonably request, in form and
substance satisfactory to Administrative Agent;
(d) receipt by Administrative Agent of all resolutions,
certificates or documents it may reasonably request relating to the formation,
existence and good standing of Borrower and each Guarantor, on the date hereof,
partnership and corporate authority for the execution and validity of this
Agreement and the other Loan Documents from, as applicable, Borrower and each
Guarantor, and any other matters relevant to this Agreement, all in form and
substance satisfactory to Administrative Agent, which resolutions, certificates
and documents shall include, without limitation, (i) the limited partnership
agreements and certificates of limited partnership for Monarch and MacGregor,
(ii) the articles of incorporation and bylaws of each Guarantor, each
Professional Corporation and Borrower, (iii) certificates of the partners of
Monarch and MacGregor and resolutions of the board of directors of each
Guarantor and Borrower authorizing the execution of the Loan Documents on behalf
of such Person, (iv) certificates of incumbency for the officers of Borrower and
each Guarantor, and (v) certificates of existence and good standing issued by
the state of organization of Borrower and each Guarantor, and from the
appropriate governmental authority of each state in which any such party is
required by applicable law to be qualified;
(e) filing officer certificates (or commercial reports similar
thereto, if satisfactory to Administrative Agent) under Section 9-407(2) of the
UCC, releases or partial releases of liens or financing statements, and other
evidence satisfactory to Administrative Agent that there are no Liens on any
assets of Borrower or Guarantors, except Permitted Encumbrances and those
identified in Section 7.8;
(f) satisfaction of all conditions contained in Sections 4.2
and 4.3 if an Advance is being made, or satisfaction of all conditions contained
in Section 4.4 if a Letter of Credit is being issued; and
(g) all other documents, instruments, certificates and
information to be delivered on or before the Closing Date pursuant to the terms
of this Agreement.
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All the documents, instruments, certificates, information, evidences and
opinions referred to in this Section 4.1 shall be delivered to Administrative
Agent (unless Administrative Agent has waived delivery) no later than the
Closing Date, and Lenders shall not be bound by or obligated hereunder until
Administrative Agent has received all such items.
SECTION 4.2. Conditions To All Advances. The obligation of Lenders to
fund any Advance as provided herein is subject to the satisfaction by Borrower
of the following conditions and requirements:
(a) receipt by Administrative Agent of a Request for Advance;
(b) immediately before and after giving effect to such
Advance, no Default shall have occurred and be continuing and the making of such
Advance shall not cause a Default;
(c) the representations and warranties contained in this
Agreement and in the other Loan Documents shall be true and correct in all
material respects on and as of the date of such Advance, except that all
representations and warranties that speak as of a particular date shall only be
required on the date of each such Advance to be true and correct in all material
respects as of the date to which such representation or warranty speaks and not
as of any subsequent date; and
(d) such other information and documentation as Administrative
Agent shall reasonably deem necessary in connection with the funding of such
Advance.
SECTION 4.3. Conditions To Particular Advances. In addition to the
conditions to each Advance set forth in Section 4.2, the obligation of Lenders
to fund any Advance which after giving effect to such Advance will cause the
aggregate amount of Advances outstanding under the Credit Facility to exceed
$10,000,000 is conditioned upon the receipt by Administrative Agent of evidence
that Borrower has hedged the interest rate expense for not less than
thirty-three percent (33%) of the amount outstanding under the Credit Facility
pursuant to an Interest Hedge Agreement acceptable to Administrative Agent;
provided, that, after Borrower has delivered to Administrative Agent the initial
Interest Hedge Agreement required by this Section, Borrower shall only be
required to enter into a new Interest Hedge Agreement at such time as the
difference between (a) the amount outstanding after giving effect to the then
current Request for Advance, less (b) the amount outstanding at the time
Borrower entered into the current Interest Hedge Agreement, is equal to or in
excess of $3,000,000.00.
SECTION 4.4. Conditions to Letters of Credit. The obligation of the
Issuing Lender to issue any Letter of Credit as provided herein is subject to
the satisfaction by Borrower of the following conditions and requirements:
(a) timely receipt by the Issuing Lender of a fully completed
LOC Application;
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(b) timely receipt by Administrative Agent of a Request for
Advance;
(c) immediately before and after the issuance of such Letter
of Credit, no Default shall have occurred and be continuing and the issuance of
any Letter of Credit shall not cause a Default;
(d) the representations and warranties contained in this
Agreement and in the other Loan Documents shall be true in all material respects
on and as of the date of issuance of such Letter of Credit, except that all
representations and warranties that speak as of a particular date shall only be
required on the date of issuance of each such Letter of Credit to be true and
correct in all material respects as of the date to which such representation or
warranty speaks and not as of any subsequent date;
(e) timely receipt by Administrative Agent (on behalf of
Lenders) of the Letter of Credit Fee and (on behalf of the Issuing Lender) of
the usual and customary administrative fees charged by the Issuing Lender for
the issuance of letters of credit; and
(f) such other information and documentation as Administrative
Agent or the Issuing Lender shall reasonably deem necessary in connection with
the issuance of such Letter of Credit.
SECTION 4.5. Conditions To Advances for Permitted Acquisitions. The
obligation of Lenders to fund any Advance for Permitted Acquisitions as provided
herein is subject to the satisfaction by Borrower of the following conditions
and requirements:
(a) receipt by Administrative Agent of audited financial
statements of the entity or entities to be acquired or holding the assets which
are to be acquired (collectively, the "Target") not more than one hundred twenty
(120) days after the date of such Advance, provided, that if Borrower is subject
to the rules and regulations of the Securities and Exchange Commission, and such
rules and regulations would not require Borrower to obtain audited financial
statements, then Borrower shall be required to obtain and deliver to
Administrative Agent information as shall be required by Administrative Agent;
(b) performance of due diligence review acceptable to Lenders
of the Target's books, records, contracts, preferred/common stock agreements,
employment contracts, any regulatory filings and the applicable stock or asset
purchase agreements;
(c) receipt by Administrative Agent of all information
required by Lenders in connection with subparagraph (b) above not less than ten
(10) Business Days prior to the funding of such Advance;
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(d) receipt by Administrative Agent of evidence satisfactory
to Administrative Agent of pro forma compliance with Sections 7.1 through 7.5
certified by an Authorized Officer of Borrower (Target Company EBITDA shall be
verified by an independent certified public accountant or other Person, as
approved by Lender, if the Total Acquisition Price exceeds $10,000,000.00);
(e) immediately before and after giving effect to such
Advance, no Default shall have occurred and be continuing and the making of such
Advance shall not cause a Default;
(f) satisfaction of all conditions contained in Sections 4.2
and 4.3 if an Advance is being made, or satisfaction of all conditions contained
in Section 4.4 if a Letter of Credit is being issued;
(g) on the date of such Permitted Acquisition, receipt by
Administrative Agent of a guaranty agreement satisfactory to Administrative
Agent in all respects, executed by each new Subsidiary of Borrower evidencing an
unconditional guaranty of payment of the Obligations;
(h) on the date of such Permitted Acquisition, receipt by
Administrative Agent of a modification to the contribution and indemnification
agreement previously executed by existing Guarantors, satisfactory to
Administrative Agent in all respects, executed by each new Subsidiary of
Borrower and all Guarantors as of the date of such modification;
(i) on the date of such Permitted Acquisition, receipt by
Administrative Agent of a modification to the Pledge Agreement or Collateral
Assignment of Partnership Interests, as applicable;
(j) on the date of such Permitted Acquisition, receipt by
Administrative Agent of a modification to the Security Agreement;
(k) on the date of such Permitted Acquisition, a copy of any
promissory note executed by Borrower as a part of the Total Acquisition Price
which promissory note shall be subordinate in all respects to the Notes and the
Obligations (such subordination to be in form and substance satisfactory to
Administrative Agent);
(l) such other information and documentation as Administrative
Agent shall reasonably deem necessary in connection with the funding of such
Advance (which information shall include, without limitation, any additional
Management Services Agreement, Succession Agreement, and landlord lien waivers
and consents not previously received by Administrative Agent); and
(m) all other documents, instruments, certificates and
information to be delivered on or before the Closing Date pursuant to the terms
of this Agreement.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lenders that:
SECTION 5.1. Existence and Power of Borrower and Guarantors. (a) Each
of Monarch Dental and MacGregor Dental (i) is a limited partnership duly
organized and existing under the laws of the State of Texas and is or will be
qualified under the laws of each state where such qualification is necessary for
it to conduct its business; and (ii) has all power and authority under its
partnership agreement and all governmental licenses, authorizations, consents
and approvals required to carry on its business as now conducted and as
contemplated to be conducted, except where the failure to have any such item
would not have a Material Adverse Effect.
(b) Each Borrower and Guarantor, other than Monarch Dental and
MacGregor Dental, (i) is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation and is or will be
qualified and in good standing under the laws of each state where such
qualification is necessary for such Person to conduct its business; and (ii) has
all corporate power and authority and all governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted and as
contemplated to be conducted, except where the failure to have any such item
would not have a Material Adverse Effect.
SECTION 5.2. Organization. Borrower owns free and clear all of the
common stock and preferred stock, if any, of the Guarantors (other than Monarch
Dental and MacGregor Dental), and all of such stock has been collaterally
assigned to Administrative Agent (on behalf of Lenders) pursuant to the Pledge
Agreement. The Parent Companies own free and clear all of the partnership
interests (both general and limited) of Monarch Dental and MacGregor Dental, and
all of such partnership interests have been collaterally assigned to
Administrative Agent (on behalf of Lenders) pursuant to the Collateral
Assignment of Partnership Interests. Other than the ownership by the Parent
Companies of the partnership interests of Monarch Dental and MacGregor Dental,
Guarantors have no Subsidiaries.
SECTION 5.3. Authorization; Contravention. The execution, delivery and
performance of this Agreement, the Notes, the LOC Applications and the other
Loan Documents by Borrower and each Guarantor, as applicable, (a) are within
Borrower's and each Guarantor's partnership or corporate powers, (b) have been
duly authorized by all necessary action, (c) require no action by or in respect
of, or filing with, any governmental body, agency or official and (d) to the
knowledge of Borrower and each Guarantor, do not contravene, or constitute a
default under, (i) any certificate of incorporation, bylaws or agreement of
limited partnership of Borrower or any Guarantor, as appropriate, or (ii) of
applicable law or regulation or any agreement, judgment,
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 39
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injunction, order, decree or other instrument binding upon Borrower or any
Guarantor or result in the creation or imposition of any Lien on any asset of
Borrower or any Guarantor, except where such failure would not have a Material
Adverse Effect.
SECTION 5.4. Enforceable Obligations. This Agreement, the Notes, the
LOC Applications and the other Loan Documents each constitutes a valid and
binding agreement of Borrower and each Guarantor which are parties thereto,
enforceable in accordance with its terms, except as (a) the enforceability
thereof may be limited by bankruptcy, insolvency, fraudulent transfer or similar
laws affecting creditors rights generally, and (b) the availability of equitable
remedies may be limited by equitable principles of general applicability.
SECTION 5.5. Financial Information.
(a) The current financial statements of Borrower and
Guarantors and all the other financial reports and information of Borrower and
Guarantors that have been delivered to Lenders are true and correct in all
material respects as of the date of such current financial statements and other
reports and information.
(b) Except as disclosed in writing to Lenders prior to the
Closing Date, since the later of June 30, 1999, or the date of the most recent
quarterly financial statements delivered to Administrative Agent, there has been
no material adverse change in the business, financial position or results of
operations of Borrower and Guarantors; and, there exists no condition, event or
occurrence that could reasonably be expected to result in a material adverse
change in the business, financial position or results of operations of Borrower
and Guarantors taken as a whole.
SECTION 5.6. Litigation. Except as set forth in Schedule IV or as
otherwise disclosed to Administrative Agent, there is no action, suit or
proceeding pending against, or to the knowledge of Borrower, threatened against
or affecting Borrower, the Guarantors or the Providers before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could materially adversely
affect the business, financial position or results of operations of any of
Borrower, Guarantors or the Providers or which could in any manner draw into
question the validity of the Loan Documents.
SECTION 5.7. ERISA.
(a) Each Employee Plan has been maintained and administered in
substantial compliance with the applicable requirements of the Code and ERISA.
No circumstances exist with respect to any Employee Plan that could have a
Material Adverse Effect.
(b) With respect to each Pension Plan, (i) no accumulated
funding deficiency (within the meaning of Section 412(a) of the Code), whether
waived or unwaived, exists; (ii) the present value of accrued benefits (based on
the most recent actuarial valuation prepared for each
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such plan, if any, in accordance with ongoing assumptions) does not exceed the
current value of plan assets allocable to such benefits by a material amount;
(iii) no reportable event (within the meaning of Section 4043 of ERISA) has
occurred other than a reportable event with respect to which the 30-day notice
requirement has been waived by regulation; (iv) no uncorrected prohibited
transactions (within the meaning of Section 4975 of the Code) exist which could
have a Material Adverse Effect and for which there exists no statutory or
regulatory exception; (v) to the extent such plan is covered by PBGC, no
material liability to the PBGC exists and no circumstances exist that could
reasonably be expected to result in any such liability; and (vi) no material
withdrawal liability (within the meaning of Section 4201(a) of ERISA) exists and
no circumstances exist that could reasonably be expected to result in any such
liability.
(c) As of the date hereof, neither Borrower, nor any Guarantor
has any obligation under any Employee Plan to provide post-employment health
care benefits to any of its current or former employees, except as may be
required by Section 4980B of the Code or otherwise required by law.
SECTION 5.8. Taxes and Filing of Tax Returns. Borrower and each
Guarantor has filed all material tax returns required to have been filed and has
paid or has made adequate provision for payment of all Taxes shown to be due and
payable on such returns, including interest and penalties, and all other Taxes
which are payable by such party, to the extent the same have become due and
payable other than Taxes with respect to which a failure to pay would not have a
Material Adverse Effect. Borrower has no knowledge of any proposed Tax
assessment against Borrower or any Guarantor other than customary ad valorem
taxes or other Taxes to become due in the normal course of business, and all Tax
liabilities of Borrower and each Guarantor is adequately provided for. No income
tax liability of Borrower or any Guarantor has been asserted by the Internal
Revenue Service for Taxes in excess of those already paid, the payment of which
would have a Material Adverse Effect.
SECTION 5.9. Ownership or Lease of Assets. Borrower and Guarantors
have good title to all of their assets. Borrower and Guarantors own or lease all
of the assets necessary to satisfy their obligations under their respective
Management Services Agreements and to enable the Providers to continue their
businesses as conducted prior to any connection of such Provider with Borrower.
Borrower's only material assets are shares of stock of it Subsidiaries, and the
Parent Companies' only material assets are the partnership interests of Monarch
Dental and MacGregor Dental. There is no Lien on Borrower's or any Guarantor's
assets other than the Permitted Encumbrances and Liens described in Section 7.8,
and the execution, delivery, performance or observance of the Loan Documents
will not require or result in the creation of any other Lien on Borrower's or
any Guarantor's assets.
SECTION 5.10. Business; Compliance. Borrower and each Guarantor has
performed and abided by all obligations required to be performed by it under any
license, permit, order, authorization, grant, contract, agreement, or regulation
to which it is a party or by which it or any
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of its assets are bound and which, if any such Person were to fail to perform or
abide by, such failure would have a Material Adverse Effect.
SECTION 5.11. Compliance with Law. The business and operations of
Borrower and each Guarantor have been and are being conducted in accordance with
all applicable Laws, rules and regulations of all Governmental Authorities
(including, without limitation, all Dental Practice Laws and Fraud and Abuse
Laws), other than violations which would not (either individually or
collectively) have a Material Adverse Effect.
SECTION 5.12. Full Disclosure. All information heretofore furnished by
Borrower and each Guarantor (or any other party on Borrower's behalf) to
Administrative Agent and Lenders for purposes of or in connection with this
Agreement or any transaction contemplated hereby is, and all such information
hereafter furnished by Borrower or any Guarantor to Administrative Agent and any
Lender will be, true and accurate in every material respect and shall be, to the
best of the knowledge and belief of the party furnishing such information,
without material omission. Other than general industry trends which are not
specific to Borrower, Borrower and each Guarantor have, to the best of their
knowledge, disclosed to Administrative Agent in writing any and all facts which
might reasonably be expected to materially and adversely affect the business,
operations, prospects or condition, financial or otherwise, of Borrower,
Guarantors or Providers taken as a whole, or the ability of Borrower or any
Guarantor to perform its obligations under this Agreement or the other Loan
Documents.
SECTION 5.13. Environmental Matters. Except as disclosed on Schedule
VI or as otherwise disclosed to Administrative Agent, Borrower (i) does not know
of any environmental condition or circumstance, such as the presence of any
hazardous substance (as defined in Section 6.7), adversely affecting the
properties or operation of Borrower and Guarantors, (ii) has not received any
report of a violation by Borrower or any Guarantor of any Applicable
Environmental Law, or (iii) does not know that Borrower or any Guarantor is
under any obligation to remedy any violation of any Applicable Environmental
Law.
SECTION 5.14. Purpose of Credit. Borrower will use the proceeds of the
Credit Facility for the purposes stated in Section 2.1 hereof. No part of the
proceeds of the Credit Facility will be used, directly or indirectly, for a
purpose which violates any law, rule or regulation. Borrower will not, directly
or indirectly, use any of the proceeds of the Credit Facility for the purpose of
purchasing or carrying, or retiring any Debt which was originally incurred to
purchase or carry, any "margin stock" as defined in the Margin Regulations, or
to purchase or carry any "security that is publicly-held" within the meaning of
Regulation T of the Board of Governors of the Federal Reserve System, or
otherwise take or permit any action which would involve a violation of such
Margin Regulations or any other regulation of such Board of Governors. Borrower
will not engage principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying any
"margin stock" within the meaning of the Margin Regulations.
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SECTION 5.15. Governmental Regulations. Neither Borrower nor any
Guarantor is subject to regulation under (a) the Investment Advisers Act of
1940, as amended, (b) the Investment Company Act of 1940, as amended, (c) the
Public Utility Borrower Act of 1935, as amended, (d) any Margin Regulations, or
(e) any other Law, rule or regulation which regulates the incurrence of Debt.
SECTION 5.16. Indebtedness. As of the Closing Date, neither Borrower,
nor any Guarantor is an obligor on any Debt other than Debt permitted by Section
7.6.
SECTION 5.17. Insurance. Borrower and each Guarantor maintains with
financially sound, responsible and reputable insurance companies or associations
(or, as to workers' compensation or similar insurance, with an insurance fund or
by self-insurance authorized by the jurisdictions in which it operates)
insurance concerning its properties and business against such casualties and
contingencies and of such types and in such amounts (and with co-insurance and
deductibles) as is customary for the same or similar businesses.
SECTION 5.18. Solvency. As of the Closing Date (a) the aggregate fair
market value of Borrower's and its Subsidiaries' assets, on a consolidated
basis, exceeds the aggregate amount of Borrower's and its Subsidiaries' Debts
(whether contingent, subordinated, unmatured, unliquidated, or otherwise), on a
consolidated basis, (b) Borrower and its Subsidiaries, on a consolidated basis,
have sufficient cash flow to enable them to pay their Debts as they mature, and
(c) Borrower and its Subsidiaries, on a consolidated basis, have a reasonable
amount of capital to conduct their business as presently contemplated.
SECTION 5.19. Providers Compliance with Dental Practice Laws and Fraud
and Abuse Laws. Without limiting any other provision of this Agreement,
Borrower has no knowledge that any Provider is in violation of any Dental
Practice Law or any Fraud and Abuse Law other than violations which would not
(either individually or collectively) have a Material Adverse Effect.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as Lenders' commitment to
make Advances under the Credit Facility remains in effect, any Letters of Credit
remain outstanding or any of the Obligations remain unpaid:
SECTION 6.1. Information From Borrower. Borrower will deliver, or
cause to be delivered, to Administrative Agent on behalf of Lenders:
(a) As soon as available and in any event within one hundred
twenty (120) days after the end of Borrower's Fiscal Year, (i) consolidated and
consolidating financial statements of Borrower (such financial statements shall
include, without limitation, a balance
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sheet of Borrower as of the end of such Fiscal Year and the related statements
of income and cash flow for such Fiscal Year), setting forth in each case in
comparative form the figures for the previous Fiscal Year, all reported by such
Person in accordance with GAAP and audited with an unqualified opinion issued by
a nationally recognized independent public accounting firm reasonably acceptable
to Administrative Agent, (ii) a copy of the opinion issued by such accounting
firm, and (iii) a copy of any management letter issued by such accounting firm.
(b) As soon as available and in any event within forty-five
(45) days after the end of each calendar quarter, a consolidated and
consolidating balance sheet and related statement of income of Borrower as of
the end of such quarter and year-to-date, all certified by the chief financial
officer or the chief accounting officer of such Person as to fairness of
presentation and as to whether such financial statements fairly reflect the
financial condition of such Person as of the date of delivery thereof, subject
to year-end adjustments. Such financial statements shall be prepared in
conformity with GAAP, except that certain information and note disclosures
normally included in annual financial statements prepared in accordance with
GAAP may be condensed or omitted provided that the disclosures made are adequate
to make the information presented not misleading, and GAAP shall be applied on a
basis consistent with the financial statements referred to in Section 6.1(a).
(c) As soon as available and in any event within thirty (30)
days after the end of each calendar month, a consolidated balance sheet and
related statement of income of Borrower as of the end of such month, certified
by the chief financial officer or chief accounting officer of such Person. Such
financial statements shall be prepared in conformity with GAAP, except that
certain information and note disclosures normally included in annual financial
statements prepared in accordance with GAAP may be condensed or omitted provided
that the disclosures made are adequate to make the information presented not
misleading, and GAAP shall be applied on a basis consistent with the financial
statements referred to in Section 6.1(a).
(d) Simultaneously with the delivery of each set of financial
statements referred to in Sections 6.1(a) and (b) and each Request for Advance,
a certificate of an Authorized Officer of Borrower, (i) setting forth in
reasonable detail the calculations required to establish compliance with the
requirements of Sections 7.1 through and including Section 7.7, on the date of
such financial statements, (ii) attesting to compliance with the terms of the
Loan Documents, and (iii) with respect only to the financial statements
delivered pursuant to Sections 6.1(a) and (b), stating, to the best of such
Authorized Officer's knowledge and belief, whether or not such financial
statements fairly reflect in all material respects the financial condition of
Borrower and results of Borrower's operations as of the date of the delivery of
such financial statements.
(e) As soon as available and in any event within sixty (60)
days after the end of each Fiscal Year, Borrower shall provide financial
projections (including, but not limited to, a capital expenditure budget) for
the ensuing fiscal year for Borrower, in form reasonably satisfactory to
Administrative Agent. Borrower shall provide updated projections with each
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Acquisition for which Borrower may request an Advance and shall obtain approval
of Lenders for all Permitted Acquisitions.
(f) As soon as available and in any event within thirty (30)
days after the end of each Fiscal Year, Borrower's operating lease schedule.
(g) As soon as available and in any event within ninety (90)
days after the end of each Fiscal Year, copies of all existing significant
dental health maintenance organization contracts involving Borrower or the
Providers with quarterly updates for new contracts and/or changes to existing
contracts to be delivered within sixty (60) days following the execution of such
new contract or change to existing contract. For purposes of this provision, a
dental health maintenance organization contract shall be significant if such
contract generates revenues for Borrower in excess of $5,000,000.00 annually.
(h) Immediately upon an Authorized Officer becoming aware of
the occurrence of any Default, a certificate of an Authorized Officer of
Borrower setting forth the details thereof and the action which Borrower is
taking or propose to take with respect thereto.
(i) Prompt notification of (i) any material adverse change in
the financial condition of Borrower or any Guarantor, including, without
limitation, the occurrence of any litigation which could reasonably be expected
to have a Material Adverse Effect, or (ii) the occurrence of any acceleration of
the maturity of any indebtedness owing by Borrower or any Guarantor, or any
default under any indenture, mortgage, agreement, contract or other instrument
to which Borrower or any Guarantor is a party or by which Borrower or any
Guarantor or any properties of Borrower or any Guarantor is bound, if such
default or acceleration might have a Material Adverse Effect. Nothing contained
in this Section 6.1(i) shall be deemed a waiver or modification in any manner of
any restrictions on the right of Borrower or any Guarantor to incur Debt or
encumber its Assets contained in this Agreement or in any of the Loan Documents.
(j) In connection with each Acquisition, (i) an unconditional
guaranty of the Obligations by each new Subsidiary of Borrower in form and
substance acceptable to Administrative Agent, (ii) a contribution and
indemnification agreement in form and substance acceptable to Administrative
Agent, executed by each new Subsidiary and the Guarantors, (iii) the stock
certificates of each new Subsidiary, (iv) blank stock powers for each such stock
certificate, (v) a modification to the Security Agreement which adds each new
Subsidiary as a debtor thereunder, (vi) a modification to the Pledge Agreement,
(vii) a copy of any Management Services Agreement, (viii) a copy of any
Succession Agreement, (ix) landlord lien waivers and consents as requested by
Administrative Agent, and (x) evidence satisfactory to Administrative Agent that
any promissory note executed by Borrower as a part of the consideration for such
Acquisition, is subordinate in all respects to the Notes and the Obligations
(such subordination to be in form and substance satisfactory to Administrative
Agent).
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(k) From time to time such additional information regarding
the financial position or business of Borrower or any Guarantor as
Administrative Agent, at the request of any Lender, may reasonably request,
including, without limitation, information concerning the insurance being
maintained by Borrower and Guarantors.
SECTION 6.2. Business of Borrower. The primary businesses of Borrower
are, and Borrower covenants that they shall remain, the providing of
comprehensive management and related administrative services to the dental
practices pursuant to the Management Services Agreements and the ownership and
maintenance of assets related thereto.
SECTION 6.3. Right of Inspection. Borrower will permit Administrative
Agent or any Lender, or any officer, employee or Administrative Agent of any
such party, to visit and inspect any of the assets of Borrower, examine the
books of record and accounts of Borrower, take copies and extracts therefrom,
and discuss the affairs, finances and accounts of Borrower with the respective
officers, accountants and auditors of Borrower, all at such reasonable times and
as often as Administrative Agent or any Lender may reasonably require and, prior
to the occurrence of an Event of Default, at the expense of Administrative Agent
or such Lender.
SECTION 6.4. Maintenance of Insurance. (a) Borrower and each Guarantor
will at all times maintain or cause to be maintained insurance covering its
respective risks as are customarily carried by businesses similarly situated
including, without limitation, the following: (i) workmen's compensation
insurance; (ii) comprehensive general public liability and property damage
insurance in respect of all activities in which such Person might incur personal
liability for the death or injury of an employee or third person, or damage to
or destruction of another's property; (iii) insurance against loss or damage by
fire, lightning, hail, tornado, explosion and other similar risk; and (iv)
comprehensive automobile liability insurance. Borrower and each Guarantor shall
maintain coverage with respect to the foregoing risks in such coverage amounts
as are customarily carried by businesses similarly situated.
(b) Borrower and each Guarantor shall maintain insurance for
claims, however characterized, against them in connection with the provision of
dental services by Providers and/or ancillary services covered by the Management
Services Agreements, in an amount determined by Borrower and approved by
Administrative Agent, which insurance shall name Administrative Agent as an
additional insured. Borrower shall further cause each Provider to maintain
dental malpractice insurance of an amount which usual and customary in the
dental industry.
SECTION 6.5. Payment of Taxes, Impositions and Claims. Borrower and
each Guarantor shall pay (a) all Taxes imposed upon it or any of its assets or
with respect to any of its franchises, business, income or profits, and all
Impositions not later than the due date thereof, or before any material penalty
or interest may accrue thereon and (b) all material claims (including, without
limitation, claims for labor, services, materials and supplies) for sums which
have become due and payable and which by law have or might become a Lien on any
of its assets;
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 46
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provided, however, payment of Taxes, Impositions or claims shall not be required
if and for so long as (i) the amount, applicability or validity thereof is
currently being contested in good faith by appropriate action promptly initiated
and diligently conducted in accordance with good business practices and no
material part of the property or assets of such Person are subject to levy or
execution, (ii) such Person, as required in accordance with GAAP, shall have set
aside on its books reserves (segregated to the extent required by GAAP) deemed
by it to be adequate with respect thereto, and (iii) Borrower has notified
Administrative Agent of such circumstances, in detail satisfactory to
Administrative Agent, and, provided further, that the applicable Person shall
pay any such Tax, Imposition or claim if such contest is not successful and in
any event prior to the commencement of any action to realize upon or foreclose
any lien against any of such Person's Assets.
SECTION 6.6. Compliance with Laws and Documents. Borrower shall at all
times observe and comply, and cause each Guarantor to observe and comply, with
all Laws (including but not limited to, the Dental Practice Laws and Fraud and
Abuse Laws), limited partnership agreements, articles of incorporation and
bylaws of Borrower and each Guarantor, as appropriate, and any other agreement
to which Borrower or any Guarantor is a party, unless its failure to so comply
alone or in the aggregate would not have a Material Adverse Effect. Borrower and
each Guarantor shall maintain all certificates, franchises, permits, licenses,
and authorizations necessary to the conduct of its business or the operation of
its properties, except when the failure to maintain such items would not have a
Material Adverse Effect. Borrower and each Guarantor shall use its best efforts
to assure the compliance by all Providers with all applicable Laws, including,
but not limited to, Dental Practice Laws and Fraud and Abuse Laws, relating to
their providing of professional services, except for those which, if violated
and full penalties were imposed for such violation, would not cause a Material
Adverse Effect.
SECTION 6.7. Environmental Law Compliance and Indemnity. Borrower
agrees to promptly pay and discharge when due all debts, claims, liabilities and
obligations with respect to any clean-up measures necessary for Borrower to
comply with Applicable Environmental Laws affecting Borrower. Borrower hereby
indemnifies and agrees to defend and hold Administrative Agent and each Lender
and its successors and assigns harmless from and against any and all claims,
demands, causes of action, loss, damage, liabilities, costs and expenses
(including reasonable attorneys' fees and court costs) of any and every kind or
character, known or unknown, fixed or contingent, asserted against or incurred
by Administrative Agent or any Lender at any time and from time to time
including, without limitation, those asserted or arising subsequent to the
payment or other satisfaction of the Notes and expiration of the Letters of
Credit, by reason of, arising out of or related in any way to Administrative
Agent's and Lenders' entering into this Agreement and the transactions herein
contemplated, INCLUDING MATTERS ARISING OUT OF THE ORDINARY NEGLIGENCE OF
ADMINISTRATIVE AGENT OR ANY LENDER (WHETHER SOLE, CONTRIBUTORY OR COMPARATIVE),
BUT EXCLUDING MATTERS ARISING OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
OF ADMINISTRATIVE AGENT OR ANY LENDER. It shall not be a defense to the covenant
of Borrower to indemnify that the act,
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 47
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omission, event or circumstance did not constitute a violation of any Applicable
Environmental Law at the time of its existence or occurrence. The terms
"hazardous substance" and "release" shall have the meanings specified in the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"), and the terms
"solid waste" and "disposed" shall have the meanings specified in the Resource
Conservation and Recovery Act of 1976 ("RCRA"); provided, to the extent that any
other applicable laws of the United States of America or political subdivision
thereof establish a meaning for "hazardous substance," "release," "solid waste,"
or "disposed" which is broader than that specified in either SARA or RCRA, such
broader meaning shall apply. As used in this Agreement, "Applicable
Environmental Law" shall mean and include the singular, and "Applicable
Environmental Laws" shall mean and include the collective aggregate of the
following: Any law, statute, ordinance, rule, regulation, order or determination
of any governmental authority or any board of fire underwriters (or other body
exercising similar functions), or any restrictive covenant or deed restriction
(recorded or otherwise) affecting Borrower pertaining to health, safety or the
environment, including, without limitation, all applicable flood disaster laws
and health, safety and environmental laws and regulations pertaining to health,
safety or the environment, including without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), the
Resource Conservation and Recovery Act of 1976, the Superfund Amendments and
Reauthorization Act of 1986, the Occupational Safety and Health Act, the Texas
Water Code, the Texas Solid Waste Disposal Act, the Texas Workers' Compensation
Laws, and any federal, state or municipal laws, ordinances, regulations or law
which may now or hereafter require removal of asbestos or other hazardous wastes
from any property of Borrower or impose any liability on Administrative Agent or
any Lender related to asbestos or other hazardous wastes in any property of
Borrower. The provisions of this Section 6.7 shall survive the repayment of the
Notes and expiration of the Letters of Credit. In the event of the transfer of
the Notes or any portion thereof, each Lender or any prior holder of the Notes
and any participants shall continue to be benefitted by this indemnity and
agreement with respect to the period of such holding of the Notes.
SECTION 6.8. Covenant Compliance. Borrower and each Guarantor shall
perform and comply with all covenants, obligations and agreements contained in
this Agreement and in the Loan Documents applicable to such Person.
SECTION 6.9. Quantity and Quality of Documents. All certificates,
opinions, reports and documents to be delivered from time to time hereunder
shall be in such number of counterparts as Administrative Agent may reasonably
request and in form reasonably acceptable to Administrative Agent, and
counterpart signature pages to any such documents may be attached to and shall,
together with all counterparts, constitute one and the same document.
SECTION 6.10. Additional Documents. Borrower shall execute and deliver
or cause to be executed and delivered to Administrative Agent upon
Administrative Agent's reasonable request such other and further instruments or
documents as in the judgment of Administrative Agent may be reasonably required
to better effectuate the transactions contemplated herein or to conform,
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create, evidence, perfect, preserve or maintain the Lenders' rights hereunder or
under the Loan Documents.
ARTICLE VII
NEGATIVE COVENANTS
Borrower covenants and agrees that without the prior written consent of
the Required Lenders, so long as Lenders' commitment to make Advances under the
Credit Facility remains in effect, any Letters of Credit remain outstanding or
any of the Obligations remain unpaid:
SECTION 7.1. Consolidated Funded Debt to Consolidated Capitalization.
As of the end of any calendar quarter, Borrower shall not permit the ratio of
Consolidated Funded Debt to Consolidated Capitalization to be (a) prior to and
including March 31, 2000, more than 0.63 to 1.00, (b) from April 1, 2000 through
and including December 31, 2000, more than 0.61 to 1.00, and (c) thereafter,
more than 0.55 to 1.00.
SECTION 7.2. Consolidated Funded Debt to Consolidated EBITDA. As of
the end of any calendar quarter, Borrower shall not permit the ratio of
Consolidated Funded Debt to Consolidated EBITDA for the immediately preceding
twelve months to be (a) prior to and including December 31, 1999, more than 4.00
to 1.00, and (b) thereafter, more than 3.75 to 1.00.
SECTION 7.3. Coverage Ratio. Borrower shall not permit the Fixed
Charge Coverage Ratio to be, as of the end of any calendar quarter, (i) prior to
and including December 30, 1999, less than 1.10 to 1.00, and (ii) from December
31, 1999 through and including March 30, 2000, less than 1.25 to 1.00. From and
after March 31, 2000, as of the end of any calendar quarter, Borrower shall not
permit the Hypothetical Fixed Charge Coverage Ratio to be less than 1.10 to
1.00.
SECTION 7.4. Minimum Consolidated Net Worth. As of the end of any
calendar year, Borrower shall maintain a Consolidated Net Worth of an amount
equal to the sum of (i) $41,000,000.00, plus (ii) the net proceeds of any equity
offering by Borrower which occurs subsequent to January 1, 1998, plus (iii)
seventy-five percent (75%) of Consolidated Net Income for the period from
January 1, 1998, through the date of determination (provided, that, for purposes
of calculating Consolidated Net Income under this Section 7.4, in no event shall
the Consolidated Net Income for any calendar year be less than zero), plus (iv)
the value of all equity securities issued to dentists or other investors in
connection with an Acquisition consummated after January 1, 1998.
SECTION 7.5. Consolidated Senior Funded Debt to Consolidated EBITDA.
As of the end of any calendar quarter, Borrower shall not permit the ratio of
Consolidated Senior Funded Debt to Consolidated EBITDA for the immediately
preceding twelve months to be (a) prior to
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the earlier of (i) October 1, 1999 or (ii) the closing of the Required
Institutional Debt (such date, the "Ratio Reduction Date"), more than 4.00 to
1.00, (b) for the period from the Ratio Reduction Date through and including
December 30, 1999, more than 3.50 to 1.00, (c) for the period from December 31,
1999 through and including March 31, 2000, more than 3.25 to 1.00, (d) for the
period from April 1, 2000 through and including December 31, 2000, more than
3.00 to 1.00 and (e) thereafter, more than 2.50 to 1.00; provided that the
Target Company EBITDA attributable to any Acquisition, for purposes of
calculating Consolidated EBITDA, shall, for the twelve (12) month period
commencing on the Acquisition Date, be computed by annualizing the actual Target
Company EBITDA for the period since the Acquisition Date.
SECTION 7.6. Limitation on Debt. Neither Borrower nor any Guarantor
shall incur any Debt, except for (a) the Obligations, (b) trade payables
incurred in the ordinary course of business, (c) the Debt described on Schedule
III hereto, (d) Debt in respect of (i) taxes, assessments, governmental charges
or levies and claims for labor, materials and supplies, (ii) judgments or awards
which have been in force for less than the applicable appeal period so long as
execution is not levied thereunder or in respect of which Borrower or Guarantor
shall at the time in good faith be prosecuting an appeal or proceedings for
review and in respect of which a stay of execution shall have been obtained
pending such appeal or review, and (iii) endorsements made in connection with
the deposits of items for credit or collection in the ordinary course of
business, (e) Debt of a Person outstanding prior to the date on which such
Person was acquired by Borrower as a subsidiary, and not incurred in
contemplation thereof, provided, that in no event shall the aggregate of all
such Debt exceed $2,000,000.00, (f) capitalized lease obligations related to
capital expenditures made by Borrower as permitted by Section 7.19 hereof (and
so long as such capitalized lease obligations do not cause Borrower to be in
violation of any other covenant of this Agreement), (g) Subordinate Acquisition
Debt, (h) Permitted Institutional Debt, provided that, (1) the amount of the
Permitted Senior Institutional Debt outstanding at any time cannot exceed the
lesser of 70% of the aggregate amount of Permitted Institutional Debt
outstanding at the time of determination or $17,500,000.00, (2) the amount of
Permitted Subordinate Institutional Debt outstanding at any time cannot be less
than $7,500,000.00, and (3) the issuance of said Permitted Institutional Debt
would otherwise be permitted by the other terms and conditions of the Credit
Facility, (i) the Short Term Debt in existence on the date of the execution of
this Agreement (Lenders hereby agreeing that (1) Administrative Agent shall be
entitled to execute on behalf of Lenders any documents or agreements approved by
Administrative Agent acknowledging that the Short Term Debt is included in the
Obligations and secured by the Collateral, subject, however, to the provisions
of Section 9.6 hereof and (2) all or any portion of the proceeds of the
Permitted Institutional Debt shall be used to repay the Short Term Debt and then
to pay down the Credit Facility), and (j) refinancings, renewals or extensions
of the Debt permitted under the foregoing clauses provided that such
refinancings, renewals or extensions do not result in an increase in the
aggregate unpaid principal amount of the Debt so refinanced, renewed or
extended.
SECTION 7.7. Limitation on Sale of Properties. Neither Borrower nor
any Guarantor shall sell, assign, convey, exchange, lease or otherwise dispose
of any of its properties, rights,
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assets or business, whether now owned or hereafter acquired, except (a) in the
ordinary course of its business, (b) obsolete or worn out property, or equipment
sold in contemplation of the acquisition of replacement equipment of at least
equal value or utility, and (c) the sale or other disposition of any property
other than as described above, provided that the aggregate book value of all
assets so sold or disposed of in any Fiscal Year shall not exceed $250,000.00.
SECTION 7.8. Limitations on Liens. Neither Borrower nor any Guarantor
shall create, incur, assume or suffer to exist any Lien upon any of its assets
other than (a) the Permitted Encumbrances, (b) Liens existing as of the Closing
Date and described in Schedule V, (c) Liens existing on any asset prior to the
acquisition thereof by Borrower or any Guarantor and not created in
contemplation of such acquisition, (d) Liens arising out of the refinancing,
extension or renewal or refunding of any debt secured by any lien permitted
under this Section 7.8, (e) Liens on security deposits with respect to leases of
office space and other liens arising by operation of law or under leases to
secure landlords or lessors, or under leases or rental agreements made in the
ordinary course of business and confined to the premises or property rented and
the tangible property located thereon, (f) liens related to the capitalized
lease obligations permitted in Section 7.6, and (g) Liens in favor of
Administrative Agent and the Lenders.
SECTION 7.9. Consolidations, Mergers, Acquisitions, Sales of Assets,
and Maintenance.
(a) Except for Acquisitions specifically permitted by the
terms of this Section 7.9, neither Borrower nor any Guarantor shall, without
prior approval of Required Lenders, (a)consolidate or merge with or into any
other Person, (b) sell, lease, abandon or otherwise transfer all or any material
part of its assets to any Person, in one or a series of related transactions, or
(c) terminate, or fail to maintain, its good standing and qualification to
transact business in all jurisdictions where the failure to maintain its good
standing or qualification to transact business could have a Material Adverse
Effect; provided, however, that Borrower or any Guarantor may merge with or into
Borrower or any other Guarantor. Borrower shall not make any Acquisitions, other
than Permitted Acquisitions, without the prior written consent of Required
Lenders. In addition, Borrower shall not make any Permitted Acquisition if the
Total Acquisition Price of such Permitted Acquisition, when added to the Total
Acquisition Price of all Permitted Acquisitions consummated within the twelve
(12) month period immediately preceding the Acquisition Date of such Permitted
Acquisition would exceed $30,000,000, without the prior written consent of
Required Lenders (other than Minor Acquisitions in an aggregate amount not to
exceed $10,000,000, which shall require only Administrative Agent's consent).
Required Lenders' and Administrative Agent's consent as provided in this Section
shall be predicated upon, among other things, receipt and approval of the items
specified in Section 4.5, regardless of whether an Advance is requested in
connection therewith.
(b) Notwithstanding anything contained in this Agreement
(including, without limitation, the terms and conditions of subsection (a)
above) during the pendency of any Short Term Debt and until the closing of the
Required Institutional Debt and the application of the
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proceeds thereof in accordance with the terms of this Agreement, Borrower shall
not make any Acquisition (regardless of whether such Acquisition would
constitute a Permitted Acquisition) unless (i) Borrower has at least $4,000,000
of availability under the Credit Facility and/or any Short Term Debt (or a
combination thereof), (ii) the cash portion of the Total Acquisition
Consideration of such Acquisition, when added to the cash portion of the Total
Acquisition Consideration of all Acquisitions consummated during the calendar
quarter in which such Acquisition is consummated, does not exceed $350,000,
(iii) the Total Acquisition Price of such Acquisition is less than $2,000,000.00
and (iv) Target Company EBITDA for any such Acquisition must be greater than
$1.00 . In any calendar quarter during which Borrower does not make Acquisitions
where the cash portion of the Acquisition Consideration total $350,000, the
difference may be carried forward to subsequent calendar quarters during that
calendar year.
SECTION 7.10. Investments. Neither Borrower, nor any Guarantor, shall
directly or indirectly, make any Acquisitions or any loans, advances, extensions
of credit or capital contributions to, make any investment in, or purchase any
stock or securities of, or interest in, any Person, except for (a) Permitted
Investments, (b) the ownership by Borrower of the stock of its Subsidiaries, (c)
the ownership by the Parent Companies of the partnership interests of Monarch
Dental and MacGregor Dental, (d) Acquisitions permitted hereunder or consented
to by Administrative Agent and, if required, the Lenders, (e) investments in the
form of loans, advances or other obligations owed by Borrower or any Guarantor
to Borrower or any other Guarantor and (f) investments in the form of loans or
advances made by Borrower or any Guarantor to any employee provided that such
loans or advances do not exceed $50,000 outstanding to all employees at any
time.
SECTION 7.11. Distributions. Neither Borrower nor any Guarantor shall
make or declare any Distributions until the Obligations have been paid in full
except for payments in respect of redemptions or repurchases of Borrower's
stock, provided that the maximum payments in respect thereof shall not exceed
$500,000.00 in the aggregate.
SECTION 7.12. Transactions with Affiliates. Except in connection with
any Acquisition permitted hereunder or approved by Lenders, neither Borrower nor
any Guarantor shall engage in any transaction with an Affiliate of Borrower or
any Guarantor unless such transaction is generally as favorable to Borrower or
such Guarantor as could be obtained in an arm's length transaction with an
unaffiliated Person in accordance with prevailing industry customs and
practices.
SECTION 7.13. Employee Plans.
(a) Neither Borrower nor any Guarantor shall permit or suffer
to exist any circumstances with respect to any Employee Plan that is likely to
have a Material Adverse Effect. Borrower and each Guarantor shall use its best
efforts to maintain and administer, and to cause each member of its Controlled
Group (as that term is defined in the Code) to maintain and
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administer, any Employee Plan in accordance with the applicable requirements of
the Code and ERISA.
(b) With respect to any Pension Plan, neither Borrower nor any
Guarantor shall (i) permit any accumulated funding deficiency (within the
meaning of Section 412(a) of the Code), whether waived or unwaived, to exist;
(ii) permit the present value of accrued benefits (based on the most recent
actuarial valuation prepared for each such plan, if any, in accordance with
ongoing actuarial assumptions) to exceed the current value of plan assets
allocable to such benefits by a material amount; (iii) permit any reportable
event (within the meaning of Section 4043 of ERISA) to occur, other than a
reportable event with respect to which the 30-day notice requirement has been
waived by regulation; (iv) permit a prohibited transaction (within the meaning
of Section 4975 of the Code) for which there exists no statutory or regulatory
exception to occur which has or could have a Material Adverse Effect; (v) incur
any material liability to the PBGC; or (vi) incur any material withdrawal
liability (within the meaning of Section 4201(a) of ERISA).
(c) Neither Borrower nor any Guarantor shall incur a material
obligation to provide post-employment health care benefits to any of its current
or former employees, except as may be required by Section 4980B of the Code or
otherwise required by law.
SECTION 7.14. Use Violations. Neither Borrower nor any Guarantor shall
use, maintain, operate or occupy, or allow the use, maintenance, operation or
occupancy of, any of its properties in any manner which (a) violates any Legal
Requirement unless such violation would not have a Material Adverse Effect, or
(b) makes void, voidable or cancelable any insurance then in force with respect
thereto.
SECTION 7.15. Fiscal Year and Accounting Methods. Neither Borrower nor
any Guarantor will change its Fiscal Year or its method of accounting (other
than changes as are concurred with by such Person's independent public
accountants as being required by GAAP).
SECTION 7.16. Governmental Regulations. Neither Borrower nor any
Guarantor will conduct its business in such a way that it will become subject to
regulation under the Investment Advisers Act of 1940, as amended. Neither
Borrower nor any Guarantor will conduct its business in such a way that it will
become subject to regulation under the Investment Company Act of 1940, as
amended, or the Public Utility Borrower Act of 1935, as amended, or any other
laws, rules or regulations which regulate the incurrence of Debt.
SECTION 7.17. Changes in Management. Neither Borrower nor any Guarantor
shall voluntarily change its chief executive officer, chief financial officer,
chief operating officer or president without giving Administrative Agent written
notice of any such change within five (5) days of notifying the affected officer
of such change.
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SECTION 7.18. Repurchase of Stock. Neither Borrower nor any Guarantor
shall purchase any of the stock of any of the Guarantors or Borrower in excess
of $500,000.00 in the aggregate during the term of the Credit Facility without
prior notice to and approval of Lenders.
SECTION 7.19. Capital Expenditures. Neither Borrower nor any Guarantor
shall make any capital expenditure if the aggregate capital expenditures made by
Borrower and Guarantors during the immediately preceding four (4) calendar
quarters exceeds the product of (i) nine percent (9%), times (ii) gross revenues
for Borrower and the Guarantors on a consolidated basis (calculated in
accordance with GAAP) for such four (4) calendar quarter period.
ARTICLE VIII
DEFAULTS AND REMEDIES
SECTION 8.1. Events of Default. The term "Event of Default" as used in
this Agreement, shall mean any one of the following:
(a) The failure of Borrower to pay when due any principal of
or interest on the Notes, or any fees, charges or any other amounts payable to
Administrative Agent or any Lender hereunder or under any of the Notes or other
Loan Documents. Administrative Agent shall endeavor to give Borrower notice that
an Event of Default has occurred under this Section 8.1(a), but the failure of
Administrative Agent to give such notice shall not (i) affect the validity of
such Event of Default, (ii) give rise to any liability of Administrative Agent
or any Lender to Borrower or any other Person, or (iii) give rise to any rights,
remedies, defenses or offsets to Borrower's obligations or Administrative
Agent's or any Lender's rights under this Agreement or any Loan Document.;
(b) The failure, refusal or neglect of Borrower to observe,
perform or comply with any covenant or agreement contained in Section 6.10 or
Article VII other than Sections 7.12 and 7.13 (which are covered by Section
8.1(c));
(c) The failure, refusal or neglect of Borrower to properly
observe, perform or comply with any covenant, agreement or obligation contained
in this Agreement, or any of the other Loan Documents [other than those covered
by Sections 8.1(a) and (b)] and the continuation of such failure, refusal or
neglect for twenty (20) days after written notice thereof has been given to
Borrower by Administrative Agent or a representative of Administrative Agent;
(d) Any representation, warranty, certification or statement
made by Borrower (either for itself or for any other Person) in this Agreement
or by Borrower or any other Person on behalf of Borrower in any certificate,
financial statement or other document delivered pursuant to this Agreement or
any other Loan Document shall prove to have been untrue in any material respect
when made or deemed to have been made;
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(e) The occurrence of any event or condition which results in
the acceleration of the maturity of any Debt in excess of $250,000 of Borrower
or any Guarantor;
(f) The filing or commencement by Borrower or any Guarantor of
a voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect, or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or Borrower or any
Guarantor shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due, or shall
take any corporate action to authorize any of the foregoing;
(g) The filing or commencement of an involuntary case or other
proceeding against Borrower or any Guarantor seeking liquidation, reorganization
or other relief with respect to it or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of sixty (60) days; or an
order for relief shall be entered against Borrower or any Guarantor under the
federal bankruptcy laws as now or hereafter in effect;
(h) The liquidation or dissolution of Borrower or any
Guarantor;
(i) One or more judgments or orders for the payment of money
aggregating in excess of $100,000.00 (net of insurance proceeds) shall be
rendered against Borrower or any Guarantor and such judgment or order (A) other
than the Atherton Judgment, which shall not be subject to the terms of this
subsection (A), shall continue unsatisfied and unstayed (unless bonded with a
supersedeas bond at least equal to such judgment or order) for a period of
thirty (30) days, or (B) is not fully paid and satisfied at least ten (10) days
prior to the date on which any of its assets may be lawfully sold to satisfy
such judgment or order; or
(j) The occurrence of any action by any Governmental Authority
that results in the revocation of the license or licenses of any Provider, if
the gross revenues to Borrower arising from the affected Provider or Providers
exceed ten percent (10%) of the immediately preceding fiscal year's aggregate
payments made under the Management Services Agreements.
(k) The failure of Borrower to raise $25,000,000.00 in gross
proceeds of Permitted Institutional Debt (the "Required Institutional Debt") and
to use such proceeds to fully repay the Short Term Debt and reduce the balance
of the Credit Facility on or before December 31, 1999.
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It is understood and agreed by Borrower that any of the foregoing
"Events of Default" shall constitute an Event of Default under each of the
Notes, and that such "Events of Default" are cumulative and in addition to any
default or events of default contained in any of the other Loan Documents, and
that in the event of any discrepancy or inconsistency between any Event of
Default hereunder and any default or event of default contained in any other
Loan Document, the description of the Event of Default stated herein shall
control.
SECTION 8.2. Remedies. Upon the occurrence of an Event of Default,
Administrative Agent shall have the right, at the direction and election of the
Required Lenders, acting by or through any of its Administrative Agents,
trustees or other Persons, without notice (unless expressly provided for
herein), demand or presentment (including, without limitation, notice of
default, notice of intent to accelerate or of acceleration) all of which are
hereby waived, and in addition to any other provision of this Agreement or any
other Loan Document, to exercise any or all of the following rights, remedies
and recourses:
(a) Terminate the Credit Facility and declare the unpaid
principal balance of each of the Notes, the accrued and unpaid interest thereon
and any other accrued but unpaid portion of the Obligations to be immediately
due and payable, without notice (other than notice of the occurrence of an Event
of Default sent by Administrative Agent or Lenders to Borrower simultaneously
with such acceleration of the Obligations) (expressly including, but not limited
to, notice of default, notice of intent to accelerate or of acceleration),
except any notice that is expressly required by the terms of this Agreement or
presentment, protest, demand or action of any nature whatsoever, each of which
hereby is expressly waived by Borrower, whereupon the same shall become
immediately due and payable. Notwithstanding the foregoing or anything to the
contrary contained herein or in any Loan Document, upon the occurrence of an
Event of Default described in Section 8.1(f), or Section 8.1(g) by Borrower, the
entire unpaid principal balance of the Notes, and all accrued, unpaid interest
thereon shall automatically be accelerated and immediately be due and payable in
full, without notice (expressly including, but not limited to, notice of
default, intent to accelerate or of acceleration), presentment, protest, demand
or action of any nature whatsoever, each of which hereby is expressly waived by
Borrower; provided, however, that if accelerated automatically pursuant to this
sentence, the Notes and all such indebtedness may be reinstated at the option
and upon the written approval of the each Lender.
(b) Sell or offer for sale the Collateral, or any part
thereof, in such portions and order as Administrative Agent may determine in
accordance with the provisions of the applicable Loan Documents and applicable
Legal Requirements.
(c) Make application to a court of competent jurisdiction, as
a matter of strict right and, except as otherwise provided by applicable Law,
without notice to Borrower or any Guarantor or without regard to the adequacy of
the Collateral for the payment of the Obligations, for the appointment of a
receiver of the Collateral, or any part thereof, and to the extent permitted by
applicable Law, Borrower does hereby irrevocably consent to such appointment.
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Any such receiver shall have all the usual powers and duties of
receivers in similar cases, including the full power to sell, dispose and
otherwise deal with the Collateral, or any part thereof, upon such terms that
may be approved by the court, and shall apply all proceeds from the Collateral
in accordance with the provisions of Section 8.9 hereof.
(d) Exercise any and all other rights, remedies and recourses
granted hereunder or under the Loan Documents or otherwise now or hereafter
existing in equity, at law, by virtue of statute or otherwise.
SECTION 8.3. Rights of Set-Off.
(a) Borrower hereby expressly grants to Lenders the right of
setoff against all deposits and other sums at any time held or credited by or
due from any Lender to Borrower, in accordance with the provisions of this
Section 8.3. The rights of each Lender under this Section 8.3 are in addition to
other rights and remedies (including, without limitation, other rights of setoff
under law or equity) which such Lender may have under law or by agreement.
(b) Upon the occurrence and during the continuance of any
Event of Default, each Lender is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, at its option, without notice or
demand and without liability, to set off and apply any and all deposits (general
or special, time or demand, provisional or final, excepting, however, any
fiduciary or escrow accounts established by Borrower into which only funds of
unrelated third-parties are deposited, and provided that Borrower has informed
such Lender and Administrative Agent of the nature of such accounts) at any time
held, and other indebtedness at any time owing, by any Lender to or for the
credit or the account of Borrower against any and all of the Obligations now or
hereafter existing under this Agreement, the Notes and the other Loan Documents,
in such order and manner as such Lender may determine, subject, however, to the
agreements contained in Section 9.14 hereof, regardless of whether such Lender
shall have made any demand under this Agreement or the Notes and although such
obligations may be unmatured.
(c) Borrower agrees, to the fullest extent it may effectively
do so under applicable Law, that each Lender and any holder of a participation
in any of the Notes (with the appropriate consent of such Lender) may exercise
rights of setoff or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of Borrower in the amount of such participation.
SECTION 8.4. Remedies Cumulative, Concurrent and Non-Exclusive.
Lenders shall have all rights, remedies and recourses granted in the Loan
Documents, and available at law or equity and same (a) shall be cumulative and
concurrent, (b) may be pursued separately, successively or concurrently against
Borrower or any Guarantor, or any others obligated under any of the Notes, or
against any one or more of them, at the sole discretion of Lenders, (c) may be
exercised as often as the occasion therefor shall arise, it being agreed by
Borrower that the exercise or failure to exercise any of same shall in no event
be construed as a waiver or release
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thereof or of any other right, remedy or recourse, and (d) are intended to be,
and shall be, non-exclusive.
SECTION 8.5. No Conditions Precedent to Exercise Remedies. Borrower,
Guarantors and any other Person hereafter obligated for payment or fulfillment
of all or any part of the Obligations shall not, except as otherwise provided by
applicable Law, be relieved of such obligation by reason of (a) the failure of a
trustee to comply with any request of Borrower or any Guarantor, or any other
person so obligated to enforce any provisions of the Loan Documents, (b) the
release, regardless of consideration, of any Person obligated with respect to
the Obligations, or of the Collateral or any part thereof, or the additions of
any Collateral in the future, and (c) any other act or occurrence, save and
except the complete payment of the Obligations. Borrower waives any right to
require Lenders to proceed against any other Person, exhaust any Collateral or
pursue any other remedy in Lenders' power. All dealings between Borrower and any
Lender, whether or not resulting in the creation of the Obligations, shall
conclusively be presumed to have been had or consummated upon reliance upon this
Agreement. Borrower authorizes Lenders, without notice or demand and without any
reservation of rights against Borrower and without affecting liability hereunder
or on the Obligations, from time to time, to (i) renew, extend for any period,
accelerate, modify, compromise, settle, or release the obligation of any other
Person that may be obligated with respect to any or all of the Obligations or
Collateral; (ii) take and hold any property as collateral, other than the
Collateral, for the payment of any or all of the Obligations, and exchange,
enforce, waive and release any or all of the Collateral or other property; and
(iii) after the occurrence of an Event of Default, apply the Collateral or other
property and direct the order or manner of sale thereof in accordance with the
terms of this Agreement and the other Loan Documents.
SECTION 8.6. Release of and Resort to Collateral. The release or
substitution of all or any part of the Collateral, regardless of consideration,
shall not in any way impair, affect, subordinate, or release the Lenders' Liens
or their status as first and prior Liens in and to any remaining Collateral. For
payment and performance of the Obligations, Lenders may resort to any other
security therefor held by a trustee in such order and manner as Required Lenders
may elect.
SECTION 8.7. Waivers. To the full extent permitted by Law, Borrower
hereby irrevocably and unconditionally waives and releases (a) all benefit that
might accrue to Borrower by virtue of any present or future law exempting the
Collateral from attachment, levy or sale on execution or providing for the
appraisement, evaluation, stay of execution, exemption from civil process,
redemption or extension of time for payment, (b) except as specifically provided
for herein, all notices of any Default or Event of Default or of any trustee's
or Lenders' election to exercise or his or their actual exercise of any right,
remedy or recourse provided for under the Loan Documents, (c) any right to a
marshaling of assets with respect to the Notes or the Letters of Credit or any
of the Collateral or any Debt of Borrower, or a sale in inverse order of
alienation and (d) except as specifically provided for herein, any and all right
to receive demand, grace,
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notice, presentment for payment, protest, notice of intention to accelerate the
Obligations or notice of acceleration of the Obligations.
SECTION 8.8. Discontinuance of Proceedings. In case Administrative
Agent shall have proceeded to invoke any right, remedy or recourse permitted
under the Loan Documents and shall thereafter elect to discontinue or abandon
same for any reason, Administrative Agent shall have the unqualified right to do
so and, in such event, Borrower, Guarantor and Lenders shall be restored to
their former positions with respect to the Obligations, the Loan Documents, and
otherwise, and the rights, remedies, recourses and powers of Administrative
Agent and Lenders shall continue as if same had never been invoked.
SECTION 8.9. Application of Proceeds. All payments on the Notes or the
Letters of Credit received by any Lender during the existence of an Event of
Default (unless otherwise elected by Lenders), and the proceeds of any sale or
disposition of, and all proceeds generated by, the Collateral during the
existence of an Event of Default and upon the exercise of Lenders' rights and
remedies hereunder or under any of the Loan Documents, shall be applied by
Lenders, the applicable trustee or the receiver, if one is appointed, to the
extent that funds are so available therefrom, as determined by the Required
Lenders (provided that, as among themselves, Lenders agree that any such
proceeds shall be applied as contemplated by Article IX hereof).
SECTION 8.10. Power of Attorney. Borrower hereby irrevocably appoints
Administrative Agent, acting for all the Lenders, as the true and lawful
attorney of Borrower with full power of substitution for, and on behalf of
Borrower, and in its name, upon the request and instruction of Borrower and in
any event after the occurrence of an Event of Default, to take any action to
preserve, maintain, protect or enforce the rights and interests of Borrower with
respect to the Collateral, including, without limitation, to (i) enforce, cure
any default or otherwise act with respect to any leases, service contracts,
management or marketing contracts or any other agreements which are part of,
pertain to or affect any of the Collateral, (ii) take all such action and to
execute all such documents as Administrative Agent deems necessary or desirable
to preserve or protect all Accounts included in the Collateral, and (iii) sue
for, demand or collect any sums owing to Borrower under any Accounts or under
leases or other agreements included in the Collateral. The power so vested in
Administrative Agent under this Section 8.10 is one coupled with an interest and
shall be irrevocable, except by written instrument executed jointly by Borrower
and Administrative Agent and filed for record in the Office of the County Clerk
of Dallas County, Texas. Notwithstanding the foregoing, Administrative Agent
shall be under no obligation to exercise any of the foregoing rights or take any
action necessary to preserve any right in any asset subject to the Lenders'
Liens against any other Person, and Administrative Agent, to the extent
permitted herein or by applicable law, may exercise any of the foregoing rights
without incurring any responsibility or liability to Borrower or any other
Person and without in any way affecting the Obligations or any other obligations
of Borrower or any Guarantor to Lenders. Borrower agrees to reimburse
Administrative Agent and Lenders upon demand for any costs and expenses,
including, without limitation, reasonable attorneys' fees and collection costs,
that Administrative Agent or any Lender may incur while acting as the
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attorney-in-fact of Borrower as provided hereunder (or pursuant to the
attorney-in-fact herein created), all of which costs and expenses shall be
included in the Obligations.
ARTICLE IX
ADMINISTRATIVE AGENT AND THE LENDERS
SECTION 9.1. Appointment and Authorization of Administrative Agent.
(a) Each Lender hereby irrevocably appoints and authorizes
Administrative Agent as its nominee and Administrative Agent, in its name and on
its behalf: (i) to act as nominee for and on behalf of such Lender in and under
all Loan Documents; (ii) to arrange the means whereby the funds of the Lenders
are to be made available to Borrower under the Loan Documents; (iii) to take
such action as may be requested by any Lender under the Loan Documents (when
such Lender is entitled to make such request under the Loan Documents and after
such requesting Lender has obtained the concurrence of such other Lenders as may
be required under the Loan Documents); (iv) to receive all documents and items
to be furnished to the Lenders under the Loan Documents; (v) to promptly
distribute to each Lender the material information, requests, documents and
items received from Borrower under the Loan Documents; (vi) to promptly
distribute to each Lender such Lender's Loan Percentage of each payment or
prepayment in accordance with the terms of the Loan Documents; and (vii) to
deliver to the appropriate Persons requests, demands, approvals and consents
received from the Lenders.
(b) The obligations of Administrative Agent hereunder are only
those expressly set forth herein. Each Lender and Borrower agree that
Administrative Agent is not a fiduciary for the Lenders or for Borrower but
simply is acting in the capacity described herein to alleviate administrative
burdens for both Borrower and the Lenders and that Administrative Agent has no
duties or responsibilities to the Lenders or Borrower except those expressly set
forth herein. Without limiting the generality of the foregoing, Administrative
Agent shall not be required to take any action or exercise any right or remedy
with respect to any Default or Event of Default, except if requested by the
Required Lenders. Notwithstanding the administrative authority delegated to
Administrative Agent, Administrative Agent shall not cause or permit any
modification of the Loan Documents or take other action relating to the Credit
Facility specifically requiring the consent or approval of the Required Lenders
without such consent or approval. Action taken by Administrative Agent
including, without limitation, any exercise of remedies or initiation of suit or
other legal proceedings made in accordance with the instructions of the Required
Lenders or as otherwise permitted by this Article IX, shall be binding upon each
of the Lenders.
(c) Administrative Agent, in its capacity as a Lender, shall have
the same Rights under the Loan Documents as any other Lender and may exercise
the same as though it were not acting as Administrative Agent, and any
resignation by Administrative Agent hereunder shall not
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impair or otherwise affect any Rights which it has or may have in its capacity
as an individual Lender.
(d) Administrative Agent may now or hereafter be engaged in one
or more loan, letter of credit, leasing, or other financing transactions with
Borrower or any Guarantor, act as trustee or depositary for Borrower or any
Guarantor or otherwise be engaged in other transactions with Borrower or any
Guarantor and/or their Affiliates (collectively, the "other activities") not the
subject of the Loan Documents. Without limiting the Rights of the Lenders
specifically set forth in the Loan Documents, Administrative Agent shall not be
responsible to account to the Lenders for such other activities, and no Lender
shall have any interest in any other activities, any present or future
guaranties by or for the account of Borrower or any Guarantor which are not
contemplated or included in the Loan Documents (any present or future offset
exercised by Administrative Agent in respect of such other activities), any
present or future property taken as security for any such other activities, or
any property now or hereafter in the possession or control of Administrative
Agent which may be or become security for the Obligations by reason of the
general description of indebtedness secured or of property contained in any
other agreements, documents or instruments related to any such other activities;
provided that, if any payments in respect of such guaranties, such property or
the proceeds thereof or any offset shall be applied to reduction of the
Obligations, then each Lender shall be entitled to share in such application
according to its Loan Percentage thereof.
SECTION 9.2. Possession of Instruments by Administrative Agent.
Administrative Agent shall exercise all rights and remedies under the Loan
Documents and take all actions with respect thereto in accordance with the
request or direction of the Required Lenders, or otherwise as and to the extent
provided herein or in the other Loan Documents; provided, however, that
Administrative Agent may take such actions in its name without the joinder of
the Lenders, and each Borrower and Guarantor and all third parties shall be
entitled to rely on the actions taken by Administrative Agent with respect to
the execution by Administrative Agent of any and all agreements, financing
statements, affidavits, notices or any other type of document or instrument
pertaining thereto, including, without limitation, in connection with the
exercise of any rights or remedies of the Lenders under the Loan Documents, and
the same shall be binding upon all the Lenders as to any third party relying on
such actions of Administrative Agent.
SECTION 9.3. Expenses. Each Lender shall pay its Loan Percentage of
any reasonable expenses (including, without limitation, court costs, reasonable
attorneys' fees and other costs of collection) incurred by Administrative Agent
in connection with any of the Loan Documents if Administrative Agent does not
receive reimbursement therefor from other sources within thirty (30) days after
incurred; provided that, and subject to the terms and conditions of Section
10.4, each Lender shall be entitled to receive its Loan Percentage of any
reimbursement for such expenses, or part thereof, which Administrative Agent
subsequently receives from such other sources.
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SECTION 9.4. Delegation of Duties; Reliance; Consultation. Lenders may
perform any of their duties or exercise any of their Rights under the Loan
Documents by or through Administrative Agent, and Lenders and Administrative
Agent may perform any of their duties or exercise any of their Rights under the
Loan Documents by or through their respective officers, directors, employees,
attorneys, agents, or other representatives (collectively, "Representatives").
Administrative Agent, Lenders, and their respective Representatives shall (a) be
entitled to rely upon (and shall be protected in relying upon) any writing,
resolution, notice, consent, certificate, affidavit, letter, cablegram,
telecopy, telegram, telex or teletype message, statement, order or other
documents or conversation believed by any of them to be genuine and correct and
to have been signed or made by the proper Person and, with respect to legal
matters, upon opinion of counsel selected by Administrative Agent or such
Lender, (b) be entitled to deem and treat each Lender as the owner and holder of
its Loan Percentage for all purposes until, subject to Section 10.10, written
notice of the assignment or transfer thereof shall have been given to and
received by Administrative Agent (and, any request, authorization, consent or
approval of any Lender shall be conclusive and binding on each subsequent
holder, assignee, or transferee of such Lender's Loan Percentage or Participant
therein until such notice is given and received), and (c) not be deemed to have
notice of the occurrence of a Default or an Event of Default unless notified
thereof by another Lender or Borrower. Administrative Agent may consult with
legal counsel, independent public accountants, consultants, appraisers and other
experts selected by Administrative Agent, and shall not be liable for any action
taken or omitted to be taken by Administrative Agent in good faith in accordance
with the advice of such counsel, accountants or experts. Any such counsel,
accountants or other experts shall be engaged to represent and render services
to all Lenders as a group unless otherwise specified by Administrative Agent.
SECTION 9.5. Limitation of Administrative Agent's Liability.
(a) Neither Administrative Agent nor any of its
Representatives shall be liable for any action taken or omitted to be taken by
it or them under the Loan Documents in good faith and believed by it or them to
be within the discretion or power conferred upon it or them by the Loan
Documents or be responsible for the consequences of any error of judgment or
negligence, except for gross negligence or willful misconduct, and neither
Administrative Agent nor any of its Representatives has a fiduciary relationship
with any Lender by virtue of the Loan Documents (provided that nothing herein
shall negate the obligation of Administrative Agent to account for funds
received by it for the account of any Lender).
(b) Unless indemnified to its satisfaction against loss, cost,
liability, and expense, Administrative Agent shall not be compelled to do any
act under the Loan Documents or to take any action toward the execution or
enforcement of the powers thereby created or to prosecute or defend any suit in
respect of the Loan Documents. If Administrative Agent requests instructions
from the Lenders with respect to any act or action (including, but not limited
to, any failure to act) in connection with any Loan Document, Administrative
Agent shall be entitled (but shall not be required) to refrain (without
incurring any liability to any Person by so refraining) from such act or action
unless and until it has received such instructions. In no event, however, shall
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Administrative Agent or any of its Representatives be required to take any
action which it or they reasonably determine could incur for it or them criminal
or civil liability.
(c) Administrative Agent shall not be responsible in any manner
to any Lender or any participant of a Lender for, and each Lender represents and
warrants that it has not relied upon Administrative Agent in respect of, (i) the
creditworthiness of Borrower or Guarantors and the risks involved to such
Lender, (ii) the effectiveness, enforceability, genuineness, validity, or the
due execution of any Loan Document, (iii) any representation, warranty,
document, certificate, report, or statement made therein or furnished thereunder
or in connection therewith, or (iv) the observation of or compliance with any of
the terms, covenants, or conditions of any Loan Document on the part of Borrower
or any Guarantor. Each Lender jointly and severally agrees to indemnify
Administrative Agent and hold it harmless from and against (but limited to such
Lender's Loan Percentage of) any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, reasonable expenses, and
reasonable disbursements of any kind or nature whatsoever (including counsel
fees and disbursements) which may be imposed on, asserted against, or incurred
by Administrative Agent in any way relating to or arising out of the Loan
Documents or any action taken or omitted by Administrative Agent under the Loan
Documents (PROVIDED THAT, ALTHOUGH ADMINISTRATIVE AGENT SHALL HAVE THE RIGHT TO
BE INDEMNIFIED FOR ITS ORDINARY NEGLIGENCE [WHETHER SOLE, CONTRIBUTORY OR
COMPARATIVE], ADMINISTRATIVE AGENT SHALL NOT HAVE THE RIGHT TO BE INDEMNIFIED
HEREUNDER FOR ITS OWN FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT).
SECTION 9.6. Default. Upon the occurrence and continuance of a
Default or an Event of Default, Administrative Agent shall make a recommendation
to Lenders of any actions to be taken and each of the Lenders agrees to promptly
confer in order that Lenders can consider such course of action or any other
actions to be taken for the enforcement of the Rights of Lenders; provided that
Administrative Agent shall be entitled (but not obligated) to proceed to take
any actions necessary in its reasonable judgment to preserve Rights, pending
agreement by Lenders on the course of action to be taken. If the Required
Lenders cannot agree on a course of action to be taken within sixty (60) days
following Administrative Agent's initial recommendation, Administrative Agent
shall thereafter take such action as Administrative Agent deems advisable to
protect the Collateral. Any action directed or approved by the Required Lenders,
including without limitation, any exercise of remedies or initiation of suit or
other legal proceedings, shall be binding upon each Lender. In actions with
respect to any property of Borrower or any Guarantor, Administrative Agent is
acting for the account of each Lender to the extent of each Lender's Loan
Percentage. Any and all agreements to subordinate (whether made heretofore or
hereafter) other indebtedness or obligations of Borrower or any Guarantor to the
Obligations shall be construed as being for the benefit of each Lender to the
extent of its respective Loan Percentage. If Administrative Agent acquires any
security for the Obligations or any guaranty of the Obligations, the same shall
be held for the benefit of each Lender in proportion to such Lender's respective
Loan Percentage.
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Lenders agree, among themselves, that unless otherwise agreed to by
Administrative Agent and the Required Lenders, all monies collected or received
by Administrative Agent in respect of the security of the Credit Facility,
directly or indirectly, shall be applied (a) to any fees owed to Administrative
Agent pursuant to any other agreements between Borrower and Administrative Agent
pertaining to the Credit Facility, to all costs of collection or maintenance of
the Collateral, to repay outstanding Swingline Advances, and then to all fees,
interest or principal of the Credit Facility and Short Term Debt on a pro rata
basis, or as otherwise recommended by Administrative Agent and approved by all
of the Lenders and (b) to the amounts owed to any Lender under any Interest
Hedge Agreement, but only after payment in full of the outstanding principal and
interest and other amounts under the Credit Facility (if Borrower has entered
into an Interest Hedge Agreement with more than one Lender, the amounts
distributed pursuant hereto shall be paid to such Lenders on a pro rata basis
based upon each such Lender's estimated exposure as reasonably determined by
such Lenders).
SECTION 9.7. Lenders' Decision. Lenders agree as among themselves that
any decisions or elections to be made by Lenders (and not Administrative Agent)
under this Agreement and the other Loan Documents shall be made by the Required
Lenders, except in the case, if any, where a specific different number or
percentage of Lenders is expressly required under this Agreement or any other
Loan Documents (use of the terms "Lenders" in any of the Loan Documents, without
an express provision for different voting rights other than as set forth in the
definition of Required Lenders, does not imply that unanimous consent is thereby
required). Administrative Agent may, at its election, request any determination,
vote, consent or approval by Lenders in writing or orally (by telephone or in
person). In addition, if any request by Administrative Agent for Lenders'
determination or approval hereunder is made in writing and such writing contains
written notice to Lenders requesting a response within five Business Days, or
longer, from the date Lenders are deemed to have received notice as herein
provided (and setting forth the actual date of the last day of the Lender reply
period), then Lenders shall use reasonable efforts to reply within the
applicable reply period, provided, that if any such Lender does not reply within
the applicable reply period, such Lender shall be deemed not to have approved of
or consented to or concurred with such recommendation or determination.
SECTION 9.8. Limitation of Liability of Lenders. To the extent
permitted by Law, (a) no Lender nor any participant of a Lender shall incur any
liability to any other Lender or participant of a Lender except for acts or
omissions in bad faith, and (b) neither Administrative Agent nor any Lender or
participant of a Lender shall incur any liability to Borrower or any Guarantor
or any other Person for any act or omission of any other Lender or any
participant.
SECTION 9.9. Relationship of Lenders. Nothing herein shall be construed
as creating a partnership or venture among Administrative Agent and Lenders or
among Lenders.
SECTION 9.10. Debtor-Creditor Relationship. Each Lender has and shall
maintain a direct creditor-debtor relationship with Borrower and will have
direct recourse, singly or in the aggregate, against Borrower, subject to the
terms and conditions of the Loan Documents.
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Notwithstanding the foregoing, any right, remedy, action, omission or waiver
respecting this Agreement, the Notes, and the other Loan Documents shall only be
exercised, made, taken, or permitted by Administrative Agent, acting upon the
direction of the Required Lenders, as the Administrative Agent for all Lenders;
provided, however, that if the Required Lenders have elected and directed
Administrative Agent to institute suit against Borrower or any Guarantor for
payment of any past due amounts under the Notes or any other Obligations for
which Lenders have recourse against Borrower or any Guarantor, or in the event
of any bankruptcy proceedings or other legal proceedings relating to this
Agreement against Borrower or any Guarantor, each Lender shall be entitled, at
its option, to bring or join in such proceedings in its own name.
SECTION 9.11. Credit Decisions. Each Lender acknowledges that it has,
independently and without reliance upon Administrative Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement and each of the other Loan Documents to which it is a party or to
which Administrative Agent is a party for its benefit. Each Lender also
acknowledges that it will, independently and without reliance upon
Administrative Agent or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking any action under this Agreement or with
respect to the Credit Facility.
SECTION 9.12. Removal of Administrative Agent. Lenders, acting by
written notice to Administrative Agent from and agreed to by all of the Lenders
other than Administrative Agent, may remove for cause the then current
Administrative Agent, as Administrative Agent, and appoint one of the other
Lenders as the successor Administrative Agent; provided, that such successor
Administrative Agent shall, prior to the occurrence of a Default, be subject to
the approval of Borrower which shall not be unreasonably withheld. Upon the
appointment of a successor Administrative Agent, the removed Administrative
Agent and the successor Administrative Agent shall execute such documents as any
Lender may reasonably request to reflect such appointment of a successor
Administrative Agent and shall notify Borrower of such change in the
Administrative Agent. The successor Administrative Agent shall be vested with
all rights, powers and privileges and be bound to all duties, obligations and
responsibilities of Administrative Agent in and under this Agreement and the
other Loan Documents; provided, however, that until such time as Borrower is
notified in writing signed by both the removed and successor Administrative
Agents as to the appointment of the successor Administrative Agent, Borrower
shall be entitled to rely on any decision, approval or other act by the removed
Administrative Agent as binding on Lenders, and may pay to Administrative Agent
any amounts due or owing by Borrower under the Loan Documents.
SECTION 9.13. Resignation by Administrative Agent. An Administrative
Agent's status as Administrative Agent under this Agreement shall automatically
terminate fifteen (15) days after the closing or liquidation of such
Administrative Agent or fifteen (15) days after such Administrative Agent is
adjudicated insolvent. Additionally, Administrative Agent may resign its
position as Administrative Agent at any time by giving at least thirty (30) days
written notice
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thereof to Borrower and the other Lenders. Upon any such occurrence causing a
termination of Administrative Agent or the delivery of such notice of
resignation from Administrative Agent, the Required Lenders and Borrower shall
select a successor Administrative Agent. If the Required Lenders and Borrower
cannot agree upon the choice of the successor Administrative Agent within ten
(10) days after the occurrence causing a termination in the case of a
termination of Administrative Agent, or ten (10) days prior to the effective
resignation date set forth in Administrative Agent's resignation notice in the
case of a resignation by Administrative Agent, then the Designated Successor
Administrative Agent shall become the successor Administrative Agent. Borrower
shall be entitled to participate in the selection of the replacement
Administrative Agent only prior to the occurrence of a Default. Upon any such
termination or resignation, (a) the successor Administrative Agent shall
automatically be vested with all rights, powers and privileges and be bound to
all duties, obligations and responsibilities of Administrative Agent in and
under this Agreement and the other Loan Documents and shall thereafter be deemed
the "Administrative Agent" for all purposes under the Loan Documents and (b)
such terminating or resigning Administrative Agent shall act only in a custodial
capacity for the holding by it of any funds theretofore received from Borrower
and any such funds shall be held in trust for the benefit of the Lenders or
Borrower, as the case may be. Additionally, upon the successor Administrative
Agent becoming Administrative Agent as provided in this Section 9.13, the
terminating or resigning Administrative Agent and the new Administrative Agent
shall execute such documents as any Lender may reasonably request to reflect
such succession. All costs incurred in connection with the execution of such
documents shall be paid by Lenders in proportion to each Lender's Loan
Percentage.
SECTION 9.14. Sharing of Payments and Setoffs. Each Lender agrees that
if it should receive any amount (whether by voluntary payment, by the exercise
of the right of setoff or banker's lien, by counterclaim or cross action, by the
enforcement of any right under the Loan Documents or otherwise) which is
applicable to the payment of the principal of or interest on the Credit
Facility, of a sum which with respect to the related sum or sums received by the
other Lenders exceeds such Lender's Loan Percentage, then such Lender receiving
such excess payment shall purchase without recourse or warranty from the other
Lenders an interest in the indebtedness of Borrower to such Lenders in such
amount as shall result in a proportional participation by all of the Lenders in
such amount; provided that if all or any portion of such excess amount is
thereafter recovered from such Lender, such purchase shall be rescinded and the
purchase price restored to the extent of such recovery, but without interest.
This Section 9.14 shall not impair the right of any Lender to exercise any right
of setoff or counterclaim it may have with respect to any funds in an account
pledged to such Lender to secure only indebtedness other than the Obligations,
and to apply the amount received or subject to such exercise to the payment of
such other indebtedness, it being expressly agreed by all the Lenders, however,
that until the Obligations are paid and satisfied in full, any and all amounts
received by any Lender from offset of any account of Borrower shall be applied
to the Obligations, and not to any other indebtedness of Borrower to such
Lender, except in the case of a certificate of deposit or other designated
account (but in no event any operating account of Borrower) that is specifically
pledged or assigned to a Lender as security for indebtedness other than the
Obligations.
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SECTION 9.15. Non-advancing Lenders. In the event that any Lender shall
fail or refuse to advance its Loan Percentage of any payment or reimbursement by
the Lenders as required hereunder, or of any amount to be funded pursuant to
Section 9.3, when it is obligated to do so, Administrative Agent shall notify
the other Lenders of such failure, and such remaining Lenders, or any of them,
may elect, at their sole option and discretion (without any obligation
whatsoever to do so), to advance such non-advancing Lender's portion, pro rata
in accordance with the proportion that the Loan Percentage of each Lender
electing to make such advance bears to the Loan Percentages of all Lenders
electing to make such advance. Upon making any such advance, and notwithstanding
anything to the contrary expressed or implied herein or in the Notes or any Loan
Document, all subsequent payments made on the Credit Facility or from the
exercise of right of setoff or other remedies under this Agreement or the other
Loan Documents, shall be applied, in the manner described below, only to Lenders
other than the non-advancing Lender (and the non-advancing Lender shall not be
entitled to receive the same), until the amounts advanced by such advancing
Lenders on behalf of the non-advancing Lender (together with the interest earned
thereon pursuant to this Agreement and the Notes), have been repaid in full. As
among Lenders other than the non-advancing Lender, Lenders that advanced funds
on behalf of the non-advancing Lender shall receive the portion the
non-advancing Lender would have been entitled to receive had it advanced
(together with the interest earned thereon pursuant to this Agreement and the
Notes), to be applied pro rata in accordance with the amounts advanced by each
such advancing Lender, until the amounts advanced by such Lenders on behalf of
the non-advancing Lender (together with the interest earned thereon pursuant to
this Agreement and the Notes), have been repaid in full; any Lender that
advanced only on its own behalf based on its Loan Percentage shall be repaid
based on such Loan Percentage. In addition, any Lenders that advance funds on
behalf of a non-advancing Lender pursuant to this Section 9.15 shall have a
claim against such non-advancing Lender for the amounts so advanced and shall be
entitled to all rights and remedies at law or in equity to recover any unpaid
amounts. A non-advancing Lender shall not be entitled to vote on any matters
hereunder or related to the Credit Facility (and its interest shall be excluded
for purposes of determining the requisite percentage or number of Lenders for a
vote) so long as such Lender remains a non-advancing Lender.
SECTION 9.16. Benefit of Lenders. All terms, conditions and agreements
set forth in this Article IX, specifically including, without limitation, the
provisions of Section 9.14 are for the sole and exclusive benefit of Lenders,
and neither Borrower nor any other Person shall be entitled to rely on or seek
the benefit of such provisions; provided, however, that Borrower shall be
entitled to rely on any decision, approval or other act by Administrative Agent
as binding Lenders. The Lenders shall be entitled to amend (whether pursuant to
a separate inter-creditor agreement or otherwise) any of the terms, conditions
or agreements set forth in this Article IX or as to any other matter in the Loan
Documents respecting the required number of the Lenders to approve or disapprove
any matter or to take or refrain from taking any action, without the consent of
Borrower, any Guarantor or any other Person or the execution by Borrower, any
Guarantor or any other Person of any such amendment or inter-creditor agreement.
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ARTICLE X
MISCELLANEOUS
SECTION 10.1. Continuing Agreement. This is a continuing Agreement and
all the rights, powers and remedies of Lenders hereunder and all agreements and
obligations of Borrower and Lenders hereunder, shall continue to exist until all
Advances have been paid in full, the commitment of Lenders to make Advances
hereunder has been terminated, all Letters of Credit have been terminated and
all other Obligations have been paid in full.
SECTION 10.2. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, telecopy or
similar writing), except for any telephone notices as specifically provided for
herein, may be personally served or sent by telecopier, mail or the express mail
service of the United States Postal Service, Federal Express or other equivalent
overnight or expedited delivery service, and (a) if given by personal service or
telecopier (confirmed by telephone), it shall be deemed to have been given upon
receipt; (b) if sent by telecopier without telephone confirmation, it shall be
deemed to have been given twenty-four (24) hours after being given; (c) if sent
by mail, it shall be deemed to have been given upon the earlier of (i) actual
receipt, or (ii) three (3) Business Days after deposit in a depository of the
United States Postal Service, first class mail, postage prepaid; (d) if sent by
Federal Express, the express mail service of the United States Postal Service or
other equivalent overnight or expedited delivery service, it shall be deemed
given upon the earlier of (i) actual receipt or (ii) twenty-four (24) hours
after delivery to such overnight or expedited delivery service, delivery charges
prepaid, and properly addressed to Borrower or the applicable Lender; provided
that notices to Administrative Agent under Article III and Article IV shall not
be effective until received. For purposes hereof, the address of the parties to
this Agreement shall be as set forth in Schedule I attached hereto. Any party
may, by proper written notice hereunder to the other parties, change the address
to which notices shall thereafter be sent to it. Notwithstanding anything to the
contrary implied or expressed herein, the notice requirements herein (including
the method, timing or deemed giving of any notice) is not intended to and shall
not be deemed to increase the number of days or to modify the method of notice
or to otherwise supplement or affect the requirements for any notice required or
sent pursuant to any Legal Requirement (including, without limitation, any
applicable statutory or law requirement), or otherwise given hereunder, that is
not required under this Agreement or the other Loan Documents. The provisions of
this Section 10.2 shall control over any conflicting contractual notice
provisions contained in the Loan Documents.
SECTION 10.3. No Waivers. No failure or delay by Administrative Agent
or any Lender in exercising any right, power or privilege hereunder or under the
Notes or any other Loan Document shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or
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privilege. The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law or in any of the other Loan
Documents.
SECTION 10.4. Expenses; Documentary Taxes; Indemnification. Borrower,
agrees to pay (a) all expenses of Administrative Agent and the reasonable fees
and disbursements of legal counsel for Administrative Agent and for additional
Lenders, in connection with the negotiation, documentation and closing of the
Credit Facility, and in connection with any waiver or consent hereunder or under
the Loan Documents or any amendment, supplement or replacement of any of the
Loan Documents (provided that the aggregate amount of costs and expenses
incurred by Lenders [other than Administrative Agent] prior to the occurrence of
a Default [including, without limitation, the attorneys' fees and expenses of
such Lenders] which Borrower shall be required to pay hereunder shall not exceed
$20,000.00) (subject, however, to the limitations contained in the definition of
"Obligations" and Section 2.3(e) hereof); and (b) if a Default or an Event of
Default occurs, all out-of-pocket expenses incurred by Administrative Agent or
Lenders, including fees and disbursements of legal counsel in connection with
such Event of Default and collection and other enforcement proceedings resulting
therefrom (including, without limitation, any bankruptcy or other insolvency
proceedings), fees of auditors and consultants incurred in connection therewith
and investigation expenses incurred by Lenders in connection therewith. Borrower
shall indemnify Administrative Agent and each Lender against any Taxes (other
than Taxes on the income of any Lender) imposed by reason of the execution and
delivery of this Agreement or the Notes. Borrower further shall indemnify
Administrative Agent and each Lender and hold Administrative Agent and each
Lender harmless from and against any and all liabilities, losses, damages, costs
and expenses of any kind (including, without limitation, the reasonable fees and
disbursements of counsel for Administrative Agent and Lenders in connection with
any investigative, administrative or judicial proceeding, whether or not
Administrative Agent or Lenders shall be designated a party thereto) which may
be incurred by Administrative Agent or any Lender relating to or arising out of
this Agreement or any actual or proposed use of proceeds of the Notes or the
Letters of Credit; PROVIDED THAT NEITHER ADMINISTRATIVE AGENT NOR ANY LENDER
SHALL HAVE THE RIGHT TO BE INDEMNIFIED HEREUNDER FOR ITS OWN GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT, IT BEING THE INTENTION HEREBY THAT ADMINISTRATIVE AGENT AND
EACH LENDER SHALL BE INDEMNIFIED FOR THE CONSEQUENCES OF ITS NEGLIGENCE, WHETHER
SOLE, CONTRIBUTORY, OR COMPARATIVE.
SECTION 10.5. Amendments and Waivers; Consent to Deviation. Any
provision of this Agreement, the Notes or the other Loan Documents may be
amended or waived if, but only if, such amendment or waiver is in writing and is
signed by Borrower and Required Lenders.
SECTION 10.6. Survival. All representations, warranties and covenants
made by each Borrower herein or in any certificate or other instrument delivered
by it or on its behalf under the Loan Documents shall be considered to have been
relied upon by Lenders and shall survive the delivery to Administrative Agent or
Lenders of such Loan Documents or the extension of any of
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the Notes or the issuance of any of the Letters of Credit (or any part thereof),
regardless of any investigation made by or on behalf of Administrative Agent or
any Lender.
SECTION 10.7. Prior Understandings; No Defenses; Release; No Oral
Agreements. This Agreement supersedes all other prior understandings and
agreements, whether written or not, between the parties hereto relating
specifically to the transactions provided for herein. Each Borrower confirms
that there are no existing defenses, claims, counterclaims or rights of offset
against any Lender in connection with the negotiation, preparation, execution,
performance or any other matters related to this Agreement or any of the other
Loan Documents executed as of the date hereof and any of the transactions
contemplated thereby, and Borrower hereby expressly releases and discharges each
Lender, and its officers and representatives, from any and all such claims,
known or unknown. Borrower further confirms that none of the Lenders has made
any agreements with, or commitments or representations to, Borrower (either in
writing or orally) other than as expressly stated herein or in the other Loan
Documents executed as of the date hereof.
THIS WRITTEN LOAN AGREEMENT, TOGETHER WITH THE OTHER WRITTEN LOAN
DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS BETWEEN THE PARTIES.
To the fullest extent applicable, Borrower and Lender acknowledges and agrees
that this Agreement and each of the Loan Documents shall be subject to Section
26.02 of the Texas Business and Commerce Code.
SECTION 10.8. Limitation on Interest. It is expressly stipulated and
agreed to be the intent of Borrower and Lenders at all times to comply with the
applicable law governing the maximum rate or amount of interest payable on or in
connection with the Notes, the Advances and the Letters of Credit. If the
applicable law is ever judicially interpreted so as to render usurious any
amount called for under the Notes or under any of the other Loan Documents, or
contracted for, charged, taken, reserved or received with respect to any of the
Advances or the Letters of Credit, or if acceleration of the maturity of the
Notes, any prepayment by Borrower, or any other circumstance whatsoever, results
in any Lender having been paid any interest in excess of that permitted by
applicable law, then it is the express intent of Borrower and Lenders that all
excess amounts theretofore collected by Lenders be credited on the principal
balance of the Notes (or, if the Notes have been or would thereby be paid in
full, refunded to Borrower), and the provisions of the Notes and the other
applicable Loan Documents immediately be deemed reformed and the amounts
thereafter collectible hereunder and thereunder reduced, without the necessity
of the execution of any new document, so as to comply with the applicable law,
but so as to permit the recovery of the fullest amount otherwise called for
hereunder and thereunder. The right to accelerate the maturity of the Notes does
not include the right to accelerate any
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interest which has not otherwise accrued on the date of such acceleration, and
Lenders do not intend to collect any unearned interest in the event of
acceleration. All sums paid or agreed to be paid to Lenders for the use,
forbearance or detention of the indebtedness evidenced hereby or by the Notes
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such indebtedness until payment
in full so that the rate or amount of interest on account of such indebtedness
does not exceed the Maximum Lawful Rate or maximum amount of interest permitted
under applicable law. The term "applicable law" as used herein shall mean the
laws of the State of Texas, or any other applicable United States federal law to
the extent that it permits Lenders to contract for, charge, take, reserve or
receive a greater amount of interest than under Texas law. The provisions of
this Section 10.8 shall control all agreements between Borrower and Lenders.
SECTION 10.9. Invalid Provisions. If any provision of the Loan
Documents is held to be illegal, invalid, or unenforceable under present or
future laws effective during the term thereof, such provision shall be fully
severable, the Loan Documents shall be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part thereof,
and the remaining provisions thereof shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance therefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provision there shall be added automatically as a part of the Loan
Documents a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid and enforceable.
SECTION 10.10. Assignments and Participations. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that
(a) Borrower shall not directly or indirectly, assign or
transfer, or attempt to assign or transfer, any of its rights, duties or
obligations under this Agreement without the express prior written consent of
the Required Lenders;
(b) each Lender may assign to one or more Eligible Assignees
all or a portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Note, and its Loan Commitment
Amount); provided, however, that
(i) each such assignment shall be to an Eligible
Assignee;
(ii) except in the case of an assignment to another
Lender or an assignment of all of a Lender's rights and
obligations under this Agreement, any such partial assignment
shall be in an amount at least equal to $5,000,000 or an
integral multiple of $500,000 in excess thereof;
(iii) each such assignment by a Lender shall be of a
constant, and not varying, percentage of all of its rights
and obligations under this Agreement and the Note; and
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 71
<PAGE> 72
(iv) the parties to such assignment shall execute
and deliver to the Administrative Agent for its acceptance an
Assignment and Acceptance in the form of Exhibit "C" hereto,
together with any Note subject to such assignment and a
processing fee of $3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance, the
assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender hereunder and
the assigning Lender shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this Section, the assignor,
Administrative Agent and Borrower shall make appropriate arrangements so that,
if required, new Notes are issued to the assignor and the assignee. If the
assignee is not incorporated under the laws of the United States of America or a
state thereof, it shall deliver to Borrower and Administrative Agent
certification as to exemption from deduction or withholding of Taxes in
accordance with Section 10.20.
(c) Administrative Agent shall maintain at its address on
Schedule I attached hereto a copy of each Assignment and Acceptance delivered to
and accepted by it and a register for the recordation of the names and addresses
of the Lenders and the Loan Commitment Amount of, and principal amount of the
Credit Facility owing to, each Lender from time to time (the "Register"). The
entries in the Register shall be conclusive and binding for all purposes, absent
manifest error, and Borrower, Administrative Agent and the Lenders may treat
each Person whose name is recorded in the Register as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection by
Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed
by the parties thereto, together with any Note subject to such assignment and
payment of the processing fee, Administrative Agent shall, if such Assignment
and Acceptance has been completed and is in substantially the form of Exhibit
"C" hereto, (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii) give prompt notice
thereof to the parties thereto.
(e) Each Lender may sell participations to one or more Persons
in all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Loan Commitment Amount); provided, however,
that (i) such Lender's obligations under this Agreement shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other parties hereto for
the performance of such obligations, (iii) the participant shall be entitled to
the benefit of the yield protection provisions contained in Article III and the
right of set-off contained in Section 8.3, and (iv) Borrower shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement, and such Lender shall retain the
sole right to enforce the obligations of Borrower relating to its Note and
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 72
<PAGE> 73
to approve any amendment, modification, or waiver of any provision of this
Agreement (other than amendments, modifications, or waivers decreasing the
amount of principal of or the rate at which interest is payable on such Note,
extending any scheduled principal payment date or date fixed for the payment of
interest on such Note, or extending its Loan Commitment Amount).
(f) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time assign and pledge all or any portion of its Note to
any Federal Reserve Bank as collateral security pursuant to Regulation A and any
Operating Circular issued by such Federal Reserve Bank. No such assignment shall
release the assigning Lender from its obligations hereunder.
(g) Any Lender may furnish any information concerning Borrower or any
of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants),
subject to Section 10.19 hereof.
SECTION 10.11. Senior Debt; Borrower Subordination. The indebtedness
of Borrower hereunder and under the Notes and all of the Obligations is intended
to be and shall be senior to any subordinated indebtedness of Borrower secured
by a Lien on any portion of the Collateral (the foregoing shall not in any way
imply Lenders' consent to any such subordinate debt which is not otherwise
permitted by this Agreement). The Notes and any other amounts advanced to or on
behalf of Borrower or any other Person pursuant to the terms of this Agreement
or any other Loan Document, shall never be in a position subordinate to any Debt
of Borrower owing to any other Person, except with the knowledge and written
consent of Lenders.
SECTION 10.12. Revolving Loan. Borrower and Lenders hereby agree that,
except for Section 15.10(b) thereof, the provisions of Art. 5069-15.01 et seq.
of the Revised Civil Statues of Texas, 1925, as amended (regulating certain
revolving credit loans and revolving triparty accounts) shall not govern or in
any manner apply to the Notes, the Letters of Credit or the Loan Documents.
SECTION 10.13. Construction. The parties hereto acknowledge and agree
that neither this Agreement nor any other Loan Document shall be construed more
favorably in favor of one than the other based upon which party drafted the
same, it being acknowledged that all parties hereto contributed substantially to
the negotiations and preparation of this Agreement and the other Loan Documents.
SECTION 10.14. APPLICABLE LAW. THIS AGREEMENT, THE NOTES AND ALL THE
LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE LAWS OF ANOTHER JURISDICTION
GOVERN THE CREATION, PERFECTION OR ENFORCEMENT OF INTERESTS, OR THE REMEDIES,
RELATED TO ANY PART OF BORROWER'S OR ANY GUARANTOR'S ASSETS OR TO THE EXTENT
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 73
<PAGE> 74
THAT UNITED STATES FEDERAL LAW APPLIES PURSUANT TO SECTION 10.8 OR OTHERWISE.
SECTION 10.15. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS.
(a) Any legal action or proceeding with respect to this
Agreement or the Notes or any document related thereto may be brought in the
courts of the State of Texas or of the United States of America for the Northern
District of Texas, and, by execution and delivery of this Agreement, Borrower
hereby accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. The parties hereto
hereby irrevocably waive any objection, including, without limitation, any
objection to the laying of venue or based on the grounds of forum non
conveniens, which any of them may now or hereafter have to the bringing of any
such action or proceeding in such respective jurisdictions.
(b) Borrower irrevocably consents to the service of process of
any of the aforesaid courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to Borrower at
its address provided herein.
(c) Nothing contained in this Section 10.16 shall affect the
right of the Administrative Agent, any Lender or any holder of a Note to serve
process in any other manner permitted by Law or commence legal proceedings or
otherwise proceed against Borrower in any other jurisdiction.
SECTION 10.16. JURY TRIAL WAIVER. BORROWER AND LENDERS EACH HEREBY
WAIVE ANY RIGHT TO A JURY TRIAL WITH RESPECT TO ANY MATTER ARISING OR RELATING
TO THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
SECTION 10.17. Counterparts. This Agreement and all amendments hereto,
and all the other Loan Documents may be executed in any number of original
counterparts, each of which when so executed and delivered shall be an original,
and all of which, collectively, shall constitute one and the same agreement, it
being understood and agreed that the signature pages may be detached from one or
more counterparts and combined with the signature pages from any other
counterpart in order that one or more fully executed originals may be assembled.
SECTION 10.18. Inconsistent Provisions. In the event of any conflict
or inconsistency between the terms of this Agreement and the terms of the other
Loan Documents, the terms of this Agreement shall control.
SECTION 10.19. Confidentiality. The Administrative Agent and the
Lenders will maintain the confidentiality of any non-public information relating
to Borrower or any Guarantor which has been identified in writing as
confidential on the information itself or otherwise (the "Confidential
Information") and, except as provided below, will exercise the same degree of
care
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 74
<PAGE> 75
that each of the Administrative Agent and the Lenders exercise with respect to
its own proprietary information to prevent the unauthorized disclosure of the
Confidential Information to third parties. Confidential Information shall not
include information that either: (a) is in the public domain or in the knowledge
or possession of the Administrative Agent or the Lenders when disclosed to the
Administrative Agent or the Lenders, or becomes part of the public domain after
disclosure to the Administrative Agent or the Lenders through no fault of the
Administrative Agent or such Lenders; or (b) is disclosed to the Administrative
Agent or the Lenders by a third party, provided that the Administrative Agent or
the Lenders do not have actual knowledge that such third party is prohibited
from disclosing such information. The terms of this section shall not apply to
disclosure of Confidential Information by the Administrative Agent or the
Lenders that is in their good faith opinion, compelled by laws, regulations,
rules, orders or legal process or proceedings or as disclosed to: (i) any party,
including a prospective participant or assignee, who has signed a
confidentiality agreement containing terms substantially similar to those
contained herein; (ii) legal counsel, examiners, auditors and directors of the
Administrative Agent or the Lenders and examiners, auditors and investigators
having regulatory authority over the Administrative Agent or the Lenders; or
(iii) any party in connection with the exercise of remedies by the
Administrative Agent or the Lenders after the occurrence of an Event of Default.
SECTION 10.20. Taxes. Each Lender that is not a corporation or
partnership created or organized in or under the laws of the United States, any
estate that is subject to federal income taxation regardless of the source of
its income or any trust which is subject to the supervision of a court within
the United States and the control of a United States fiduciary as described in
section 7701 (a) (30) of the Internal Revenue Code (a "Non-U.S. Lender") shall
deliver to Borrower and Administrative Agent (or, in the case of a Participant,
to the Lender from which the related participation shall have been purchased )
on or before the date on which it becomes a party to this Agreement (or, in the
case of a Participant, on or before the date on which such Participant purchases
the related participation) either:
(a) (x) two duly completed and signed copies of either
Internal Revenue Service Form 1001 (relating to such Non-U.S. Lender and
entitling it to a complete exemption from withholding of U.S. Taxes on all
amounts to be received by such Non-U.S. Lender pursuant to this Agreement and
the other Loan Documents) or Form 4224 (relating to all amounts to be received
by such Non-U.S. Lender pursuant to this Agreement and the other Loan
Documents), or successor and related applicable forms, as the case may be, or
(y) two duly completed and signed copies of Internal Revenue Service Form W-8 or
W-9, or successor and related applicable forms, as the case may be; or
(b) in the case of a Non-U.S. Lender that is not a "bank"
within the meaning of Section 881 (c) (3) (A) of the Code and that does not
comply with the requirements of clause (a) hereof, (x) a statement in a form as
shall be reasonably requested by Borrower from time to time to the effect that
such Non-U.S. Lender is eligible for a complete exemption from
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 75
<PAGE> 76
withholding of U.S. Taxes under Code Section 87(b) or 881(c), and (y) two duly
completed and signed copies of Internal Revenue Service Form W-8 or successor
and related applicable forms.
Further, each Non-U.S. Lender agrees to deliver to Borrower and Administrative
Agent, and if applicable, the assigning Lender (or, in the case of a
Participant, to the Lender from which the related participation shall have been
purchased) two further duly completed and signed copies of such Forms 1001,
4224, W-8 or W-9, as the case may be, or successor and related applicable forms,
on or before the date that any such form expires or becomes obsolete and
promptly after the occurrence of any event requiring a change from the most
recent form(s) previously delivered by it to the Borrower (or, in the case of a
Participant, to the Lender from which the related participation shall have been
purchased) in accordance with applicable United States Laws and regulations;
unless, in any such case, any change in Law or regulations has occurred
subsequent to the date such Lender became a party to this Agreement ( or in the
case of a Participant, the date on which such Participant purchased the related
participation) which renders all such forms inapplicable or which would prevent
such Lender (or Participant) from properly completing and executing any such
form with respect to it and such Lender promptly notifies Borrower and
Administrative Agent (or, in the case of a Participant, the Lender from which
the related participation shall have been purchased) if it is no longer able to
deliver, or if it is required to withdraw or cancel, any form or statement
previously delivered by it pursuant to this Section 10.20. A Non-U.S. Lender
shall not be required to deliver any form or statement pursuant to the
immediately preceding sentences in this Section 10.20 that such Non-U.S. Lender
is not legally able to deliver it being understood and agreed that Borrower
shall withhold or deduct such amount from any payments made to such Non-U.S.
Lender that the Borrower reasonably determines are required by law that payments
resulting from a failure to comply with this Section 10.20 shall not be subject
to payment or indemnity by Borrower pursuant to Section 10.4).
SECTION 10.21. Common Enterprise. Borrower and Guarantors are engaged
in the businesses set forth in Section 6.2 of this Agreement. These operations
require financing on a basis such that the credit supplied can be made available
from time to time to Borrower and Guarantors, as required for the continued
successful operation of Borrower and Guarantors. Borrower has requested that
Lenders make the Credit Facility available primarily for the purposes of
financing the operations of Borrower and Guarantors. Borrower and Guarantors
expect to derive benefit (and the boards of directors or other governing body of
Borrower and each Guarantor may reasonably be expected to derive benefit),
directly or indirectly, from the Credit Facility established by Lenders, both in
their separate capacities and as members of the group of companies, since the
successful operation and condition of Borrower and each Guarantor is dependent
on the continued successful performance of the functions of the group as a
whole.
SECTION 10.22. Amendment and Restatement/Renewal and Extension. The
Credit Facility is in renewal and extension of (but does not extinguish) the
Working Capital Facility and this Agreement renews and extends and amends and
restates in its entirety the Original Loan Agreement. Borrower and Guarantors
acknowledge and agree that all liens and security interests
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 76
<PAGE> 77
securing the Working Capital Facility are hereby renewed and extended and
continue to secure the Working Capital Facility as renewed and extended and
amended and restated by the Credit Facility.
SECTION 10.23. Compliance Certificate. Notwithstanding anything to the
contrary contained in this Agreement, Borrower shall not be entitled to any
Advances after any payments on the Credit Facility or Short Term Debt with the
proceeds of the Permitted Institutional Debt until Administrative Agent shall
have received a then current Borrower's compliance certificate. Such current
compliance certificate should show all quarterly calculations as of the
immediately preceding quarter even if such quarterly calculations are not then
due pursuant to the terms of this Agreement.
SECTION 10.24. Year 2000 Compliance - Representation, Warranty and
Covenant. Borrower hereby represents and warrants to Administrative Agent and
Lenders that Borrower has (i) initiated a review and assessment of all areas
within its, each of its Subsidiaries' and each of its Affiliates' business and
operations (including those affected by suppliers and vendors) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by Borrower, any of its Subsidiaries or any of its Affiliates
(or their suppliers and vendors) may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date after
December 31, 1999), (ii) developed a plan and timeline for addressing the Year
2000 Problem on a timely basis, and (iii) to date, implemented that plan in
accordance with that timetable. Borrower reasonably believes that all computer
applications (including those of its suppliers and vendors) that are material to
its, any of its Subsidiaries' or any of its Affiliates' business and operations
will on a timely basis be able to perform properly date-sensitive functions for
all dates before and after January 1, 2000 (that is, be "Year 2000 compliant"),
except to the extent that a failure to do so could not reasonably be expected to
have a Material Adverse Effect. Borrower will promptly notify Administrative
Agent in the event Borrower discovers or determines that any computer
application (including those of its suppliers and vendors) that is material to
its, any of its Subsidiaries' or any of its Affiliates' business and operations
will not be Year 2000 compliant on a timely basis, except to the extent that
such failure could not reasonably be expected to have a Material Adverse Effect.
[REMAINDER OF PAGE INTENTIONALLY BLANK -
SEE SIGNATURES ON FOLLOWING PAGE]
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 77
<PAGE> 78
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers effective as of the
Effective Date.
BORROWER:
MONARCH DENTAL CORPORATION, a
Delaware corporation
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
ADMINISTRATIVE AGENT:
BANK OF AMERICA, N.A.,
formerly NationsBank, N.A.,
a national banking association,
as Administrative Agent for Lenders
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 78
<PAGE> 79
LENDERS:
BANK OF AMERICA, N.A.,
formerly NationsBank, N.A.,
a national banking association
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
FLEET NATIONAL BANK,
a national banking association
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "Rabobank Nederland",
New York Branch
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 79
<PAGE> 80
CONSENT OF GUARANTORS
Each Guarantor hereby (a) acknowledges its consent to this Agreement and the
changes to the Credit Facility effected hereby, (b) ratifies and confirms all
terms and provisions of its respective Guaranty and the security instruments
relating to the Collateral , (c) agrees that such Guaranty and security
instruments are and shall remain in full force and effect, (d) acknowledges that
there are no claims or offsets against, or defenses or counterclaims to, the
terms and provisions of and the obligations created and evidenced by such
Guaranty or security instruments, (e) reaffirms all agreements and obligations
under such Guaranty and such security instruments with respect to the Credit
Facility, the Notes, this Agreement and all other documents, instruments or
agreements governing, securing or pertaining to the Credit Facility, as the same
may be modified by this Agreement, (f) and acknowledges that the Obligations
described in this Agreement are the guaranteed obligations under such Guaranty
and are the obligations secured by such security instruments and (g) represents
and warrants that all requisite corporate or partnership action necessary for it
to execute this Agreement has been taken.
EXECUTED as of the 30th day of June, 1999.
<TABLE>
<CAPTION>
GUARANTORS:
<S> <C>
Managed Dental Care Centers, Inc., a Texas corporation
Monarch Dental Associates (Arkansas), Inc., an Arkansas
corporation (f/k/a United Dental Care, Inc.)
Dental Care One (Monarch), Inc., an Ohio corporation
Midwest Dental Management, Inc., a Wisconsin corporation
Dental Centers of Indiana (Monarch), Inc., an Indiana corporation;
Midwest Dental Care, Mondovi, Inc., a Wisconsin corporation;
Midwest Dental Care, Sheboygan, Inc., a Wisconsin corporation;
Monarch Dental Management, Inc., a Texas corporation;
Three Peaks Dental Management, Inc., a Colorado corporation;
Monarch Dental Associates (Utah), Inc., a Utah corporation
By:
---------------------------------------------------------------
Name:
-------------------------------------------------------------
Title:
------------------------------------------------------------
MacGregor Dental Associates, L.P., a Texas limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
---------------------------------------------------------------
Name:
-------------------------------------------------------------
Title:
------------------------------------------------------------
</TABLE>
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 80
<PAGE> 81
Monarch Dental Associates, L.P., a
Texas limited partnership
By: Monarch Dental Management,
Inc., a Texas corporation, its
general partner
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Monarch Dental (Press) Associates,
L.P., a Texas limited partnership
By: Monarch Dental Management,
Inc., a Texas corporation, its
general partner
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Monarch Dental Associates
(Midland/Odessa), L.P., a Texas
limited partnership
By: Monarch Dental Management,
Inc., a Texas corporation, its
general partner
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Monarch Dental Associates
(Abilene), L.P., a Texas limited
partnership
By: Monarch Dental Management,
Inc., a Texas corporation,
its general partner
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 81
<PAGE> 82
Monarch Dental Associates
(Arizona), L.L.C., an Arizona
limited liability company
By: Monarch Dental Associates
(Utah), Inc., a Utah
corporation, its manager
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Partners Dental Corporation, a
Delaware corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Valley Forge Dental Associates,
Inc., a Delaware corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
VFD of Pennsylvania, Inc., a
Delaware corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Horizon Group International, Inc.,
an Ohio corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 82
<PAGE> 83
Precise Dental Lab, Inc., an Ohio
corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
VFD of Georgia, Inc., a Delaware
corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
VFD of Pittsburgh, Inc., a
Pennsylvania corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Pro Dent, Inc., a Pennsylvania
corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
VFD Realty, Inc., a Delaware
corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
SECOND AMENDED AND RESTATED LOAN AGREEMENT (Monarch Dental Corporation) Page 83
<PAGE> 84
================================================================================
SECOND AMENDED AND RESTATED LOAN AGREEMENT
DATED AS OF
JUNE 30, 1999
AMONG
MONARCH DENTAL CORPORATION
AS "BORROWER"
AND
BANK OF AMERICA, N.A.
AS "ADMINISTRATIVE AGENT", "SOLE LEAD ARRANGER"
AND "SOLE BOOK MANAGER"
AND
BANK OF AMERICA, N.A.
AND THE OTHER ENTITIES DESIGNATED HEREIN
AS "LENDERS"
================================================================================
<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
TERMS DEFINED 1
SECTION 1.1. Definitions 1
SECTION 1.2. Singular and Plural of Definitions 20
SECTION 1.3. Substantive Definitions 20
SECTION 1.4. Money 20
SECTION 1.5. Captions; References 20
SECTION 1.6. Accounting Terms and Determinations 21
ARTICLE II
COMMITMENT 21
SECTION 2.1. Credit Facility Commitment 21
SECTION 2.2. Method of Borrowing 22
SECTION 2.3. Fees 25
TERMS OF CREDIT FACILITY 26
SECTION 3.1. Notes 26
SECTION 3.2. Maturity 26
SECTION 3.3. Interest Rate 26
SECTION 3.4. Mandatory Interest and Principal Payments 27
SECTION 3.5. LIBOR Rate Advances 27
SECTION 3.6. Payments of Advances; Reduction of Commitment Amount. 29
SECTION 3.7. Schedules on Notes 30
SECTION 3.8. General Provisions as to Payments 31
SECTION 3.9. Application of Payments 31
SECTION 3.10. Post-Default Interest; Past Due Principal and Interest 31
SECTION 3.11. Computation of Interest and Fees 32
SECTION 3.12. Capital Adequacy 32
SECTION 3.13. Deposit of Cash Collateral 32
SECTION 3.14. Guarantees and Collateral 32
ARTICLE IV
CONDITIONS TO FUNDING 33
SECTION 4.1. Conditions To Initial Advance or Letter of Credit 33
SECTION 4.2. Conditions To All Advances 34
SECTION 4.3. Conditions To Particular Advances 34
SECTION 4.4. Conditions to Letters of Credit 35
SECTION 4.5. Conditions To Advances for Permitted Acquisitions 35
</TABLE>
i
<PAGE> 86
<TABLE>
<S> <C>
ARTICLE V
REPRESENTATIONS AND WARRANTIES 37
SECTION 5.1. Existence and Power of Borrower 37
SECTION 5.2. Organization 37
SECTION 5.3. Authorization; Contravention 37
SECTION 5.4. Enforceable Obligations 38
SECTION 5.5. Financial Information 38
SECTION 5.6. Litigation 38
SECTION 5.7. ERISA 38
SECTION 5.8. Taxes and Filing of Tax Returns 39
SECTION 5.9. Ownership or Lease of Assets 39
SECTION 5.10. Business; Compliance 39
SECTION 5.11. Compliance with Law 40
SECTION 5.12. Full Disclosure 40
SECTION 5.13. Environmental Matters 40
SECTION 5.14. Purpose of Credit 40
SECTION 5.15. Governmental Regulations 40
SECTION 5.16. Indebtedness 41
SECTION 5.17. Insurance 41
SECTION 5.18. Solvency 41
SECTION 5.19. Providers Compliance with Dental Practice Laws and Fraud
and Abuse Laws 41
ARTICLE VI
AFFIRMATIVE COVENANTS 41
SECTION 6.1. Information From Borrower 41
SECTION 6.2. Business of Borrower 43
SECTION 6.3. Right of Inspection 44
SECTION 6.4. Maintenance of Insurance 44
SECTION 6.5. Payment of Taxes, Impositions and Claims 44
SECTION 6.6. Compliance with Laws and Documents 45
SECTION 6.7. Environmental Law Compliance and Indemnity 45
SECTION 6.8. Covenant Compliance 46
SECTION 6.9. Quantity and Quality of Documents 46
SECTION 6.10. Additional Documents 46
ARTICLE VII
NEGATIVE COVENANTS 46
SECTION 7.1. Consolidated Funded Debt to Consolidated Capitalization. 46
</TABLE>
ii
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<TABLE>
<S> <C>
SECTION 7.2. Consolidated Funded Debt to Consolidated EBITDA 47
SECTION 7.3. Coverage Ratio 47
SECTION 7.4. Minimum Consolidated Net Worth 47
SECTION 7.5. Consolidated Senior Funded Debt to Consolidated EBITDA 47
SECTION 7.6. Limitation on Debt 47
SECTION 7.7. Limitation on Sale of Properties 48
SECTION 7.8. Limitations on Liens 48
SECTION 7.9. Consolidations, Mergers, Acquisitions, Sales of Assets,
and Maintenance 49
SECTION 7.10. Investments 49
SECTION 7.11. Distributions 50
SECTION 7.12. Transactions with Affiliates 50
SECTION 7.13. Employee Plans 50
SECTION 7.14. Use Violations 50
SECTION 7.15. Fiscal Year and Accounting Methods 51
SECTION 7.16. Governmental Regulations 51
SECTION 7.17. Changes in Management 51
SECTION 7.18. Repurchase of Stock 51
SECTION 7.19. Capital Expenditures 51
ARTICLE VIII
DEFAULTS AND REMEDIES 51
SECTION 8.1. Events of Default 51
SECTION 8.2. Remedies 53
SECTION 8.3. Rights of Set-Off 54
SECTION 8.4. Remedies Cumulative, Concurrent and Non-Exclusive 55
SECTION 8.5. No Conditions Precedent to Exercise Remedies 55
SECTION 8.6. Release of and Resort to Collateral 55
SECTION 8.7. Waivers 55
SECTION 8.8. Discontinuance of Proceedings 56
SECTION 8.9. Application of Proceeds 56
SECTION 8.10. Power of Attorney 56
ARTICLE IX
Administrative Agent AND THE LENDERS 57
SECTION 9.1. Appointment and Authorization of Administrative Agent 57
SECTION 9.2. Possession of Instruments by Administrative Agent 58
SECTION 9.3. Expenses 58
SECTION 9.4. Delegation of Duties; Reliance; Consultation 58
SECTION 9.5. Limitation of Administrative Agent's Liability 59
SECTION 9.6. Default 60
</TABLE>
iii
<PAGE> 88
<TABLE>
<S> <C>
SECTION 9.7. Lenders' Decision 61
SECTION 9.8. Limitation of Liability of Lenders 61
SECTION 9.9. Relationship of Lenders 61
SECTION 9.10. Debtor-Creditor Relationship 61
SECTION 9.11. Credit Decisions 62
SECTION 9.12. Removal of Administrative Agent 62
SECTION 9.13. Resignation by Administrative Agent 62
SECTION 9.14. Sharing of Payments and Setoffs. 63
SECTION 9.15. Non-advancing Lenders. 63
SECTION 9.16. Benefit of Lenders 64
ARTICLE X
MISCELLANEOUS 64
SECTION 10.1. Continuing Agreement 64
SECTION 10.2. Notices 64
SECTION 10.3. No Waivers 65
SECTION 10.4. Expenses; Documentary Taxes; Indemnification 65
SECTION 10.5. Amendments and Waivers; Consent to Deviation 66
SECTION 10.6. Survival 66
SECTION 10.7. Prior Understandings; No Defenses; Release;
No Oral Agreements 66
SECTION 10.8. Limitation on Interest 67
SECTION 10.9. Invalid Provisions 67
SECTION 10.10. Assignments and Participations 67
SECTION 10.11. Senior Debt; Borrower Subordination 69
SECTION 10.12. Revolving Loan 69
SECTION 10.13. Construction 69
SECTION 10.14. APPLICABLE LAW 70
SECTION 10.15. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS 70
SECTION 10.16. JURY TRIAL WAIVER 70
SECTION 10.17. Counterparts 70
SECTION 10.18. Inconsistent Provisions 71
SECTION 10.19. Confidentiality 71
SECTION 10.20. Taxes 71
SECTION 10.21. Common Enterprise 72
SECTION 10.22. Amendment and Restatement/Renewal and Extension 72
SECTION 10.23. Compliance Certificate 73
SECTION 10.24. Year 2000 Compliance - Representation,
Warranty and Covenant 73
</TABLE>
iv
<PAGE> 89
EXHIBITS
EXHIBIT A-1 NOTE FORM
EXHIBIT A-2 SWINGLINE NOTE
EXHIBIT B - REQUEST FOR ADVANCE
EXHIBIT C - ASSIGNMENT AND ACCEPTANCE
EXHIBIT D - LOC APPLICATION FORM
EXHIBIT E - SHORT TERM DEBT DOCUMENTS
SCHEDULE I - LENDERS
SCHEDULE II - BASE RATE SPREAD; LIBOR MARGIN;
LETTER OF CREDIT FEE PERCENTAGE;
UNUSED FEE PERCENTAGE;
RATE ENHANCEMENT SPREAD
SCHEDULE III - DEBT
SCHEDULE IV - LITIGATION
SCHEDULE V - LIENS AS OF THE CLOSING DATE
SCHEDULE VI ENVIRONMENTAL MATTERS
SCHEDULE VII BORROWER'S SUBSIDIARIES
v
<PAGE> 90
Exhibit A-1
AMENDED AND RESTATED PROMISSORY NOTE
$_______________ Dallas, Texas ________________
FOR VALUE RECEIVED, MONARCH DENTAL CORPORATION, a Delaware corporation
("Maker"), hereby promises to pay to the order of ____________________________
("Lender"), at the offices of Lender at____________________, the principal sum
of ___________________ and No/100 Dollars ($___________________) (or the unpaid
balance of all principal advanced against this Note, if that amount is less), on
or before the Termination Date for this Note (as established by the Loan
Agreement), together with interest on the unpaid principal balance of this Note
from day to day outstanding, as hereinafter provided and as provided in the Loan
Agreement.
This Note has been executed and delivered pursuant to the terms of that
certain Second Amended and Restated Loan Agreement (as the same may be further
modified, amended, supplemented, extended or restated from time to time, the
"Loan Agreement") dated as of August __, 1999, executed by and among Maker,
Administrative Agent and the Lenders (which includes the payee of this Note).
This Note is one of the notes defined in the Loan Agreement as a "Note" with the
terms and provisions of the Loan Agreement, related to this Note being
incorporated herein by reference for all purposes. Each capitalized term not
expressly defined herein shall have the meaning given to such term under the
Loan Agreement. The terms of the Loan Agreement shall govern in the case of any
inconsistency between such terms and the terms hereof.
This Note is secured by the Collateral Assignment of Partnership
Interests, the Pledge Agreement, the Security Agreement, the guaranties of the
Guarantors and all the other Loan Documents, and all liens and security
interests created or evidenced thereby. Any holder shall be entitled to all
benefits and remedies and security set forth in the Loan Agreement and all the
other Loan Documents. This Note renews, extends and replaces that certain
Amended and Restated Promissory Note dated ___________in the stated principal
amount of $________________, executed by Maker, payable to the order of Lender.
1. Interest and Payment.
(a) Maturity. The principal of this Note and all accrued but unpaid
interest hereon shall be due and payable in full on the Termination Date as
provided in the Loan Agreement.
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 91
(b) Accrual of Interest. Subject to Paragraph 1(f) below, interest
on this Note shall accrue at a rate and on the terms provided in the Loan
Agreement.
(c) Agreements Concerning Pricing Election. Reference should be made
to the provisions of Section 3.5 of the Loan Agreement concerning the terms,
manner and agreements related to the interest rate elections available to Maker
under this Note.
(d) Principal and Interest Payments. Principal and interest hereon
shall be due and payable as is provided in Article III of the Loan Agreement.
(e) Default Rate. After maturity of this Note or during the
continuance of an Event of Default, the outstanding principal balance of this
Note shall, at the option of the Required Lenders, bear interest at the Default
Rate, as provided in the Loan Agreement.
(f) Maximum Lawful Rate Adjustments. If at any time the Applicable
Rate shall be limited to the Maximum Lawful Rate, any subsequent reductions in
the Applicable Rate shall not reduce the rate of interest on this Note below the
Maximum Lawful Rate until the total amount of interest accrued equals the amount
of interest which would have accrued if the Applicable Rate had at all times
been in effect. In the event that at maturity (stated or by acceleration), or at
the final payment of the Credit Facility, the total amount of interest paid or
accrued on the Credit Facility is less than the amount of interest which would
have accrued if the Applicable Rate had at all times been in effect with respect
thereto, then at such time, to the extent permitted by law, Maker shall pay to
Administrative Agent, for the ratable benefit of the Lenders, an amount equal to
the difference between (a) the lesser of the amount of interest which would have
accrued if the Applicable Rate had at all times been in effect and the amount of
interest which would have accrued if the Maximum Lawful Rate had at all times
been in effect, and (b) the amount of interest actually paid on the Credit
Facility.
2. Default. The occurrence of a Default or an Event of Default, under
and as defined in the Loan Agreement, shall constitute, respectively, a Default
or an Event of Default under this Note.
3. Remedies.
(a) All Remedies Available. Upon the occurrence of an Event of
Default, the holder hereof, acting by and through Administrative Agent in
accordance with the terms of Articles VIII and IX of the Loan Agreement, shall
have the right to declare the entire unpaid principal balance of, and all
accrued unpaid interest on, this Note at once due and payable (and upon such
declaration, the same shall be at once due and payable), to foreclose any and
all liens and security interests securing payment hereof, to offset against this
Note any sum or sums owed
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 2
<PAGE> 92
by it to Maker, and to exercise any of its other rights, powers and remedies
under this Note, under the Loan Agreement or any other Loan Document, or at law
or in equity.
(b) No Waiver. Neither the failure by the holder hereof to exercise,
nor delay by the holder hereof in exercising, the right to accelerate the
maturity of this Note or any other right, power or remedy upon any Default or
Event of Default shall be construed as a waiver of such Default or Event of
Default or as a waiver of the right to exercise any such right, power or remedy
at any time. No single or partial exercise by the holder hereof of any right,
power or remedy shall exhaust the same or shall preclude any other or further
exercise thereof, and every such right, power or remedy may be exercised at any
time and from time to time. All rights and remedies provided for in this Note
and in any other Loan Document are cumulative of each other and of any and all
other rights and remedies existing at law or in equity, and the holder hereof
shall, in addition to the rights and remedies provided herein or in any other
Loan Document, be entitled to avail itself of all such other rights and remedies
as may now or hereafter exist at law or in equity for the collection of the
indebtedness owing hereunder, and the resort to any right or remedy provided for
hereunder or under any such other Loan Document or provided for by law or in
equity shall not prevent the concurrent or subsequent employment of any other
appropriate rights or remedies. Without limiting the generality of the foregoing
provisions, the acceptance by the holder hereof from time to time of any payment
under this Note which is past due or which is less than the payment in full of
all amounts due and payable at the time of such payment, shall not (i)
constitute a waiver of or impair or extinguish the rights of the holder hereof
to accelerate the maturity of this Note or to exercise any other right, power or
remedy at the time or at any subsequent time, or nullify any prior exercise of
any such right, power or remedy, or (ii) constitute a waiver of the requirement
of punctual payment and performance, or a novation in any respect.
4. Usury Savings Provisions.
(a) General Limitation. Notwithstanding anything herein or in any
other Loan Documents, expressed or implied, to the contrary, in no event shall
any interest rate charged hereunder or under any of the other Loan Documents, or
any interest contracted for, collected or received by Lender or any holder
hereof, exceed the Maximum Lawful Rate.
(b) Intent of Parties. It is expressly stipulated and agreed to be
the intent of Maker and Lender at all times to comply with the applicable law
governing the maximum rate or amount of interest payable on or in connection
with this Note. If the applicable law is ever judicially interpreted so as to
render usurious any amount called for under this Note or under any of the other
Loan Documents, or contracted for, charged, taken, reserved or received with
respect to this Note, or if acceleration of the maturity of this Note, any
prepayment by Maker, or any other circumstance whatsoever, results in Lender
having been paid any interest in excess of that permitted by applicable law,
then it is the express intent of Maker and Lender that all excess amounts
theretofore collected by Lender be credited on the principal balance of this
Note (or, if
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 3
<PAGE> 93
this Note has been or would thereby be paid in full, refunded to Maker), and the
provisions of this Note and the other applicable Loan Documents immediately be
deemed reformed and the amounts thereafter collectible hereunder and thereunder
reduced, without the necessity of the execution of any new document, so as to
comply with the applicable law, but so as to permit the recovery of the fullest
amount otherwise called for hereunder and thereunder. The right to accelerate
the maturity of this Note does not include the right to accelerate any interest
which has not otherwise accrued on the date of such acceleration, and Lender
does not intend to collect any unearned interest in the event of acceleration.
All sums paid or agreed to be paid to Lender for the use, forbearance or
detention of the indebtedness evidenced hereby or by any other Loan Document
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such indebtedness until payment
in full so that the rate or amount of interest on account of such indebtedness
does not exceed the Maximum Lawful Rate. The term "applicable law" as used
herein shall mean the laws of the State of Texas, or any applicable United
States federal law to the extent that it permits Lender to contract for, charge,
take, reserve or receive a greater amount of interest than under Texas law. The
provisions of this paragraph shall control all agreements between Maker and
Lender.
5. General Provisions.
(a) Business Days. Whenever any payment shall be due under this Note
on a day which is not a Business Day, the date on which such payment is due
shall be extended to the next succeeding Business Day, and such extension of
time shall be included in the computation of the amount of interest then
payable.
(b) Manner of Payment. The manner in which payments are to be made
on this Note shall be governed by the provisions hereof and the Loan Agreement,
including, without limitation, Article III of the Loan Agreement.
(c) Prepayments. Prepayments may be made, and as provided in Section
3.6 of the Loan Agreement are required to be made, on this Note subject to and
in accordance with Section 3.6 of the Loan Agreement.
(d) Application of Payments. All payments made on this Note shall be
applied in accordance with Sections 3.6, 3.9 and 8.9 of the Loan Agreement, as
applicable. Nothing herein shall limit or impair any rights of any holder hereof
to apply as provided in the Loan Documents any past due payments, any proceeds
from the disposition of any collateral by foreclosure or other collections after
default.
(e) Costs of Collection. If any holder of this Note retains an
attorney in connection with any default or at maturity or to collect, enforce or
defend this Note or any other Loan Document in any lawsuit or in any probate,
reorganization, bankruptcy or other proceeding, or if Maker sues any holder of
this Note in connection with this Note or any other Loan Document and does not
prevail, then Maker agrees to pay to each such holder, in addition to
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 4
<PAGE> 94
principal and interest, all costs and expenses incurred by such holder in trying
to collect this Note or in any such suit or proceeding, including reasonable
attorneys' fees as and to the extent provided in the Loan Agreement.
(f) Waivers and Acknowledgments. Maker and all sureties, endorsers,
guarantors and any other party now or hereafter liable for the payment of this
Note in whole or in part, hereby severally (i) waive demand, presentment for
payment, notice of dishonor and of nonpayment, protest, notice of protest,
notice of intent to accelerate, notice of acceleration and all other notice
(except only for any notice that is specifically required by the terms of the
Loan Agreement or any other Loan Document), filing of suit and diligence in
collecting this Note or enforcing any of the security herefor; (ii) agree to any
substitution, subordination, exchange or release of any such security or the
release of any party primarily or secondarily liable hereon; (iii) agree that
the holder hereof shall not be required first to institute suit or exhaust its
remedies against Maker or others liable or to become liable hereon or to enforce
its rights against them or any security herefor; (iv) consent to any extension
or postponement of time of payment of this Note for any period or periods of
time and to any partial payments, before or after maturity, and to any other
indulgences with respect hereto, without notice thereof to any of them; and (v)
submit (and waive all rights to object) to personal jurisdiction in the State of
Texas, and venue in Dallas County, Texas, for the enforcement of any and all
obligations under the Loan Documents.
(g) Amendments in Writing. This Note may not be changed, amended or
modified except in a writing expressly intended for such purpose and executed by
the party against whom enforcement of the change, amendment or modification is
sought.
(h) Purpose of Proceeds. The proceeds of this Note will be used
solely for business purposes and not for personal, family, household or
agricultural purposes.
(i) Notices. Any notice required or which any party desires to give
under this Note shall be given and effective as provided in Section 10.2 of the
Loan Agreement.
(j) Assignments/Participations. Maker acknowledges and agrees that
the holder of this Note may, at any time and from time to time, assign all or a
portion of its interest in the Credit Facility or transfer to any Person a
participation interest in the Credit Facility, subject to and in accordance with
the terms and conditions of the Loan Agreement, including Section 10.10 thereof.
(k) Successors and Assigns. All of the covenants, stipulations,
promises and agreements contained in this Note by or on behalf of Maker shall
bind its successors and assigns and shall be for the benefit of Lender and any
holder hereof, and their successors and assigns, as and to the extent provided
in the Loan Agreement.
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 5
<PAGE> 95
(l) GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY TEXAS LAW, EXCEPT TO THE EXTENT THAT THE LAWS OF ANOTHER
JURISDICTION GOVERN THE CREATION, PERFECTION OR ENFORCEMENT OF INTERESTS, OR THE
REMEDIES RELATED TO ANY PART OF THE COLLATERAL, OR TO THE EXTENT THAT UNITED
STATES FEDERAL LAW APPLIES PURSUANT TO SECTION 10.8 OF THE LOAN AGREEMENT OR
OTHERWISE.
(m) Time of the Essence. Time shall be of the essence in this Note
with respect to all of Maker's obligations hereunder.
(n) INTEGRATION. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 6
<PAGE> 96
IN WITNESS WHEREOF, Maker has duly executed this Note as of the date
first above written.
MAKER:
MONARCH DENTAL CORPORATION,
a Delaware corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
AMENDED AND RESTATED PROMISSORY NOTE (MONARCH DENTAL CORPORATION) PAGE 7
<PAGE> 97
Exhibit A-2
SWINGLINE NOTE
$2,000,000 Dallas, Texas September __, 1999
FOR VALUE RECEIVED, MONARCH DENTAL CORPORATION, a Delaware corporation
("Maker"), hereby promises to pay to the order of Bank of America, N.A.
("Swingline Lender"), at the offices of Swingline Lender at 901 Main Street,
Dallas, Texas, 75202 (Attention: Healthcare Banking Group - 7th Floor), the
principal sum of Two Million and No/100 Dollars ($2,000,000) (or the unpaid
balance of all principal advanced against this Note, if that amount is less), on
or before the Termination Date for this Note (as established by the Loan
Agreement), together with interest on the unpaid principal balance of this Note
from day to day outstanding, as hereinafter provided and as provided in the Loan
Agreement.
This Note has been executed and delivered pursuant to the terms of that
certain Second Amended and Restated Loan Agreement (as the same may be further
modified, amended, supplemented, extended or restated from time to time, the
"Loan Agreement") executed by and among Maker, Administrative Agent and the
Lenders (which includes the payee of this Note). This Note is the "Swingline
Note" defined in the Loan Agreement, with the terms and provisions of the Loan
Agreement, related to this Note being incorporated herein by reference for all
purposes. Each capitalized term not expressly defined herein shall have the
meaning given to such term under the Loan Agreement. The terms of the Loan
Agreement shall govern in the case of any inconsistency between such terms and
the terms hereof.
This Note is secured by the Collateral Assignment of Partnership
Interests, the Pledge Agreement, the Security Agreement, the guaranties of the
Guarantors and all the other Loan Documents, and all liens and security
interests created or evidenced thereby. Any holder shall be entitled to all
benefits and remedies and security set forth in the Loan Agreement and all the
other Loan Documents.
1. Interest and Payment.
(a) Maturity. The principal of this Note and all accrued but unpaid
interest hereon shall be due and payable in full on the Termination Date as
provided in the Loan Agreement.
(b) Accrual of Interest. Subject to Paragraph 1(f) below, interest
on this Note shall accrue at a rate and on the terms provided in the Loan
Agreement.
SWINGLINE NOTE (MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 98
(c) Agreements Concerning Pricing Election. Reference should be made
to the provisions of Section 3.5 of the Loan Agreement concerning the terms,
manner and agreements related to the interest rate elections available to Maker
under this Note.
(d) Principal and Interest Payments. Principal and interest hereon
shall be due and payable as is provided in Article III of the Loan Agreement.
(e) Default Rate. After maturity of this Note or during the
continuance of an Event of Default, the outstanding principal balance of this
Note shall, at the option of the Swingline Lender, bear interest at the Default
Rate, as provided in the Loan Agreement.
(f) Maximum Lawful Rate Adjustments. If at any time the Applicable
Rate shall be limited to the Maximum Lawful Rate, any subsequent reductions in
the Applicable Rate shall not reduce the rate of interest on this Note below the
Maximum Lawful Rate until the total amount of interest accrued equals the amount
of interest which would have accrued if the Applicable Rate had at all times
been in effect. In the event that at maturity (stated or by acceleration), or at
the final payment of the Credit Facility, the total amount of interest paid or
accrued on the Credit Facility is less than the amount of interest which would
have accrued if the Applicable Rate had at all times been in effect with respect
thereto, then at such time, to the extent permitted by law, Maker shall pay to
Swingline Lender, an amount equal to the difference between (a) the lesser of
the amount of interest which would have accrued if the Applicable Rate had at
all times been in effect and the amount of interest which would have accrued if
the Maximum Lawful Rate had at all times been in effect, and (b) the amount of
interest actually paid on the Swingline Advances.
2. Default. The occurrence of a Default or an Event of Default, under
and as defined in the Loan Agreement, shall constitute, respectively, a Default
or an Event of Default under this Note.
3. Remedies.
(a) All Remedies Available. Upon the occurrence of an Event of
Default, the holder hereof, acting by and through Administrative Agent in
accordance with the terms of Articles VIII and IX of the Loan Agreement, shall
have the right to declare the entire unpaid principal balance of, and all
accrued unpaid interest on, this Note at once due and payable (and upon such
declaration, the same shall be at once due and payable), to foreclose any and
all liens and security interests securing payment hereof, to offset against this
Note any sum or sums owed by it to Maker, and to exercise any of its other
rights, powers and remedies under this Note, under the Loan Agreement or any
other Loan Document, or at law or in equity.
(b) No Waiver. Neither the failure by the holder hereof to exercise,
nor delay by the holder hereof in exercising, the right to accelerate the
maturity of this Note or any other right, power or remedy upon any Default or
Event of Default shall be construed as a waiver of
SWINGLINE NOTE (MONARCH DENTAL CORPORATION) PAGE 2
<PAGE> 99
such Default or Event of Default or as a waiver of the right to exercise any
such right, power or remedy at any time. No single or partial exercise by the
holder hereof of any right, power or remedy shall exhaust the same or shall
preclude any other or further exercise thereof, and every such right, power or
remedy may be exercised at any time and from time to time. All rights and
remedies provided for in this Note and in any other Loan Document are cumulative
of each other and of any and all other rights and remedies existing at law or in
equity, and the holder hereof shall, in addition to the rights and remedies
provided herein or in any other Loan Document, be entitled to avail itself of
all such other rights and remedies as may now or hereafter exist at law or in
equity for the collection of the indebtedness owing hereunder, and the resort to
any right or remedy provided for hereunder or under any such other Loan Document
or provided for by law or in equity shall not prevent the concurrent or
subsequent employment of any other appropriate rights or remedies. Without
limiting the generality of the foregoing provisions, the acceptance by the
holder hereof from time to time of any payment under this Note which is past due
or which is less than the payment in full of all amounts due and payable at the
time of such payment, shall not (i) constitute a waiver of or impair or
extinguish the rights of the holder hereof to accelerate the maturity of this
Note or to exercise any other right, power or remedy at the time or at any
subsequent time, or nullify any prior exercise of any such right, power or
remedy, or (ii) constitute a waiver of the requirement of punctual payment and
performance, or a novation in any respect.
4. Usury Savings Provisions.
(a) General Limitation. Notwithstanding anything herein or in any
other Loan Documents, expressed or implied, to the contrary, in no event shall
any interest rate charged hereunder or under any of the other Loan Documents, or
any interest contracted for, collected or received by Swingline Lender or any
holder hereof, exceed the Maximum Lawful Rate.
(b) Intent of Parties. It is expressly stipulated and agreed to be
the intent of Maker and Swingline Lender at all times to comply with the
applicable law governing the maximum rate or amount of interest payable on or in
connection with this Note. If the applicable law is ever judicially interpreted
so as to render usurious any amount called for under this Note or under any of
the other Loan Documents, or contracted for, charged, taken, reserved or
received with respect to this Note, or if acceleration of the maturity of this
Note, any prepayment by Maker, or any other circumstance whatsoever, results in
Swingline Lender having been paid any interest in excess of that permitted by
applicable law, then it is the express intent of Maker and Swingline Lender that
all excess amounts theretofore collected by Swingline Lender be credited on the
principal balance of this Note (or, if this Note has been or would thereby be
paid in full, refunded to Maker), and the provisions of this Note and the other
applicable Loan Documents immediately be deemed reformed and the amounts
thereafter collectible hereunder and thereunder reduced, without the necessity
of the execution of any new document, so as to comply with the applicable law,
but so as to permit the recovery of the fullest amount otherwise called for
hereunder and thereunder. The right to accelerate the maturity of this Note does
not
SWINGLINE NOTE (MONARCH DENTAL CORPORATION) PAGE 3
<PAGE> 100
include the right to accelerate any interest which has not otherwise accrued on
the date of such acceleration, and Swingline Lender does not intend to collect
any unearned interest in the event of acceleration. All sums paid or agreed to
be paid to Swingline Lender for the use, forbearance or detention of the
indebtedness evidenced hereby or by any other Loan Document shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
Maximum Lawful Rate. The term "applicable law" as used herein shall mean the
laws of the State of Texas, or any applicable United States federal law to the
extent that it permits Swingline Lender to contract for, charge, take, reserve
or receive a greater amount of interest than under Texas law. The provisions of
this paragraph shall control all agreements between Maker and Swingline Lender.
5. General Provisions.
(a) Business Days. Whenever any payment shall be due under this Note
on a day which is not a Business Day, the date on which such payment is due
shall be extended to the next succeeding Business Day, and such extension of
time shall be included in the computation of the amount of interest then
payable.
(b) Manner of Payment. The manner in which payments are to be made
on this Note shall be governed by the provisions hereof and the Loan Agreement,
including, without limitation, Article III of the Loan Agreement.
(c) Prepayments. Prepayments may be made, and as provided in Section
3.6 of the Loan Agreement are required to be made, on this Note subject to and
in accordance with Section 3.6 of the Loan Agreement.
(d) Application of Payments. All payments made on this Note shall be
applied in accordance with Sections 3.6, 3.9 and 8.9 of the Loan Agreement, as
applicable. Nothing herein shall limit or impair any rights of any holder hereof
to apply as provided in the Loan Documents any past due payments, any proceeds
from the disposition of any collateral by foreclosure or other collections after
default.
(e) Costs of Collection. If any holder of this Note retains an
attorney in connection with any default or at maturity or to collect, enforce or
defend this Note or any other Loan Document in any lawsuit or in any probate,
reorganization, bankruptcy or other proceeding, or if Maker sues any holder of
this Note in connection with this Note or any other Loan Document and does not
prevail, then Maker agrees to pay to each such holder, in addition to principal
and interest, all costs and expenses incurred by such holder in trying to
collect this Note or in any such suit or proceeding, including reasonable
attorneys' fees as and to the extent provided in the Loan Agreement.
SWINGLINE NOTE (MONARCH DENTAL CORPORATION) PAGE 4
<PAGE> 101
(f) Waivers and Acknowledgments. Maker and all sureties, endorsers,
guarantors and any other party now or hereafter liable for the payment of this
Note in whole or in part, hereby severally (i) waive demand, presentment for
payment, notice of dishonor and of nonpayment, protest, notice of protest,
notice of intent to accelerate, notice of acceleration and all other notice
(except only for any notice that is specifically required by the terms of the
Loan Agreement or any other Loan Document), filing of suit and diligence in
collecting this Note or enforcing any of the security herefor; (ii) agree to any
substitution, subordination, exchange or release of any such security or the
release of any party primarily or secondarily liable hereon; (iii) agree that
the holder hereof shall not be required first to institute suit or exhaust its
remedies against Maker or others liable or to become liable hereon or to enforce
its rights against them or any security herefor; (iv) consent to any extension
or postponement of time of payment of this Note for any period or periods of
time and to any partial payments, before or after maturity, and to any other
indulgences with respect hereto, without notice thereof to any of them; and (v)
submit (and waive all rights to object) to personal jurisdiction in the State of
Texas, and venue in Dallas County, Texas, for the enforcement of any and all
obligations under the Loan Documents.
(g) Amendments in Writing. This Note may not be changed, amended or
modified except in a writing expressly intended for such purpose and executed by
the party against whom enforcement of the change, amendment or modification is
sought.
(h) Purpose of Proceeds. The proceeds of this Note will be used
solely for business purposes and not for personal, family, household or
agricultural purposes.
(i) Notices. Any notice required or which any party desires to give
under this Note shall be given and effective as provided in Section 10.2 of the
Loan Agreement.
(j) Assignments/Participations. Maker acknowledges and agrees that
the holder of this Note may, at any time and from time to time, assign all or a
portion of its interest in the Credit Facility or transfer to any Person a
participation interest in the Credit Facility, subject to and in accordance with
the terms and conditions of the Loan Agreement, including Section 10.10 thereof.
(k) Successors and Assigns. All of the covenants, stipulations,
promises and agreements contained in this Note by or on behalf of Maker shall
bind its successors and assigns and shall be for the benefit of Swingline Lender
and any holder hereof, and their successors and assigns, as and to the extent
provided in the Loan Agreement.
(l) GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY TEXAS LAW, EXCEPT TO THE EXTENT THAT THE LAWS OF ANOTHER
JURISDICTION GOVERN THE CREATION, PERFECTION OR ENFORCEMENT OF INTERESTS, OR THE
REMEDIES RELATED TO ANY PART OF THE COLLATERAL, OR TO THE
SWINGLINE NOTE (MONARCH DENTAL CORPORATION) PAGE 5
<PAGE> 102
EXTENT THAT UNITED STATES FEDERAL LAW APPLIES PURSUANT TO SECTION 10.8 OF THE
LOAN AGREEMENT OR OTHERWISE.
(m) Time of the Essence. Time shall be of the essence in this Note
with respect to all of Maker's obligations hereunder.
(n) INTEGRATION. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, Maker has duly executed this Note as of the date
first above written.
MAKER:
MONARCH DENTAL CORPORATION,
a Delaware corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
SWINGLINE NOTE (MONARCH DENTAL CORPORATION) PAGE 6
<PAGE> 103
Schedule 1
PARTIES TO LOAN AGREEMENT AND NOTICE ADDRESSES
I. BORROWER
MONARCH DENTAL CORPORATION
4201 Spring Valley Road, Suite 320
Dallas, Texas 75244
Attention: Chief Executive Officer
II. ADMINISTRATIVE AGENT AND LENDERS
A. ADMINISTRATIVE AGENT:
Bank of America, N.A.
901 Main Street, 7th Floor
Dallas, Texas 75202
Attn: Nathan McClellan
B. LENDERS:
Bank of America, N.A.
901 Main Street, 7th Floor
Dallas, Texas 75202
Attn: Nathan McClellan
(214) 209-2963 phone
(214) 209-3140 fax
Fleet National Bank
One Federal Street, Mail Stop: MA OF D07B
Boston, Massachusetts 02110
Attn: Ginger C. Stolzenthaler
(617) 346-4618 phone
(617) 346-4699 fax
Cooperatieve Centrale Raiffeisen-
Boerenleenbank B.A. "Rabobank
Nederland", New York branch
245 Park Avenue
New York, NY 10167-0062
Attn: Corporate Services
(212) 916-7928 phone
(212) 818-0233 fax
SCHEDULE 1 TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 104
With a copy to:
Cooperatieve Centrale Raiffeisen-
Boerenleenbank B.A. "Rabobank
Nederland", New York branch
13355 Noel Road, Suite 1000
Dallas, Texas 75240-6645
Attn: David Thomas
(972) 419-5266 phone
(972) 419-6315 fax
<TABLE>
<CAPTION>
Lender Amount Percentage
------ ----- ----------
<S> <C> <C>
1. Bank of America, N.A. 30,000,000.00 40%
2. Fleet National Bank 22,500,000.00 30%
3. "Rabobank Nederland", New York Branch 22,500,000.00 30%
=============== ====
Totals $ 75,000,000.00 100%
</TABLE>
SCHEDULE 1 TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 2
<PAGE> 105
Exhibit D
FORM OF LOC Application
(See following pages)
EXHIBIT D TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 106
Schedule II
<TABLE>
<CAPTION>
========================================================================================================
If Borrower's Consolidated Letter of
Funded Debt to Consolidated Base Rate LIBOR Credit Fee Unused
EBITDA Ratio is: Spread Margin Percentage Fee
<S> <C> <C> <C> <C>
Greater than or equal to 3.50 to
1.00, but less than 4.00 to 1.00 1.25% 3.00% 3.00% 0.50%
Greater than or equal to 3.00 to
1.00, but less than 3.50 to 1.00 0.75% 2.50% 2.50% 0.50%
Greater than or equal to 2.50 to
1.00, but less than 3.00 to 1.00 0.50% 2.25% 2.25% 0.375%
Greater than or equal to 2.00 to
1.00, but less than 2.50 to 1.00 0.50% 2.00% 2.00% 0.375%
Greater than or equal to 1.50 to
1.00, but less than 2.00 to 1.00 0.50% 1.50% 1.50% 0.25%
Greater than or equal to 1.00 to
1.00, but less than 1.50 to 1.00 0.25% 1.25% 1.25% 0.25%
Greater than or equal to 0.50 to
1.00, but less than 1.00 to 1.00 0.00% 1.00% 1.00% 0.20%
Less than 0.50 to 1.00 0.00% 0.75% 0.75% 0.20%
========================================================================================================
</TABLE>
Rate Enhancement Spread
<TABLE>
<CAPTION>
========================================================================================================
If Borrower's Hypothetical Fixed Charge
Coverage Ratio is: Rate Enhancement Spread
<S> <C>
Greater than 1.25 to 1.00 0.00%
Less than or equal to 1.25 to 1.00 0.25%
========================================================================================================
</TABLE>
EXHIBIT D TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 2
<PAGE> 107
Schedule III
Debt
Please provide.
SCHEDULE III TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 108
Schedule IV
Litigation
Please provide.
SCHEDULE IV TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 109
Schedule V
Liens
Please provide.
SCHEDULE V TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 110
Schedule VI
Environmental Matters
Please provide.
SCHEDULE VI TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 111
Section VII
1. Managed Dental Care Centers, Inc., a Texas corporation
2. Monarch Dental Associates (Arkansas), Inc., an Arkansas corporation
(f/k/a United Dental Care, Inc.)
3. Dental Care One (Monarch), Inc., an Ohio corporation
4. Midwest Dental Management, Inc., a Wisconsin corporation
5. Dental Centers of Indiana (Monarch), Inc., an Indiana corporation
6. Midwest Dental Care, Mondovi, Inc., a Wisconsin corporation
7. Midwest Dental Care, Sheboygan, Inc., a Wisconsin corporation
8. Monarch Dental Management, Inc., a Texas corporation
9. Three Peaks Dental Management, Inc., a Colorado corporation
10 Partners Dental Corporation, a Delaware corporation
11. MacGregor Dental Associates, L.P., a Texas limited partnership
12 Monarch Dental Associates, L.P., a Texas limited partnership
13. Monarch Dental (Press) Associates, L.P., a Texas limited partnership
14. Monarch Dental Associates (Midland/Odessa), L.P., a Texas limited
partnership
15. Monarch Dental Associates (Abilene), L.P., a Texas limited
partnership
16. Monarch Dental Associates (Utah), Inc., a Utah corporation
17. Monarch Dental Associates (Arizona), L.L.C., an Arizona limited
liability company
18. Valley Forge Dental Associates, a Delaware corporation
19. VFD of Pennsylvania, Inc., a Delaware corporation
20. Horizon Group International, Inc., an Ohio corporation
21. Precise Dental Lab, Inc., an Ohio corporation
22. VFD of Georgia, Inc., a Delaware corporation
23. VFD of Pittsburgh, Inc., a Pennsylvania corporation
24. Pro Dent, Inc., a Pennsylvania corporation
25. VFD Realty, Inc., a Delaware corporation
SCHEDULE VII TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(MONARCH DENTAL CORPORATION) PAGE 1
<PAGE> 1
EXHIBIT 10.28
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(this "Amendment") is executed as of December 30, 1999, by and among MONARCH
DENTAL CORPORATION, a Delaware corporation ("Borrower"), BANK OF AMERICA, N.A.,
a national banking association ("Administrative Agent"), as administrative
agent, and the entities from time to time designated as "Lenders" under the Loan
Agreement (herein defined) ("Lenders"), and is consented to by the GUARANTORS
listed on the signature pages attached hereto.
W I T N E S S E T H:
WHEREAS, Borrower, Administrative Agent and Lenders entered into that
certain Second Amended and Restated Loan Agreement, dated as of June 30, 1999,
pursuant to which Lenders agreed to make the Credit Facility (as therein
defined) available to Borrower (as heretofore or hereafter amended, the "Loan
Agreement")(each capitalized term used but not otherwise defined herein shall
have the same meaning given to it in the Loan Agreement); and
WHEREAS, Borrower has requested that Administrative Agent and Lenders
modify certain covenants, terms and conditions contained in the Loan Agreement;
and
WHEREAS, subject to the terms and conditions contained herein,
Administrative Agent and the Lenders have agreed to such request.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, Borrower,
Administrative Agent and Lenders hereby covenant and agree as follows:
ARTICLE I - AMENDMENTS
Section 1.1. Modification of Definitions. The following definitions
contained in Section 1.1 of the Loan Agreement are hereby deleted and replaced
with the following:
Default Rate means the fluctuating per annum rate of interest
equal to the lesser of (a) the Variable Rate plus 6% or (b) the Maximum
Lawful Rate.
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 1
<PAGE> 2
Fixed Charge Coverage Ratio means, for any date of
determination and computed for the immediately preceding twelve month
period, the ratio of (a) the difference between (i) the sum of (A)
Consolidated EBITDA plus (B) Consolidated Lease Expense, and (ii) the
sum of (X) Maintenance Capital Expenditures, plus (Y) payments made to
the other owners of partially-owned subsidiaries which constitute such
other owner's portion of net earnings of such partially-owned
subsidiaries (to the extent that such amounts are included in
Consolidated EBITDA), plus (Z) all "earnout payments" made during such
period, to (b) the sum of (i) Consolidated Interest Expense (excluding
any non-cash amortization of capitalized financing fees included in
Consolidated Interest Expense, including, without limitation, the
Warrants (as defined in Section 2.2(b) of this Amendment)), plus (ii)
Consolidated Current Maturities, plus (iii) Consolidated Lease Expense,
plus (iv) Consolidated Capital Lease Expense, plus (v) Actual Taxes.
The amount of the Consolidated Net Income, Consolidated Lease Expense
and Consolidated Interest Expense to be included in computing the Fixed
Charge Coverage Ratio shall be the actual amount of such items incurred
during the relevant periods. The term "earnout payments" means any
amount payable by Borrower or any Subsidiary of Borrower under any
agreement for an Acquisition by Borrower or any Subsidiary of Borrower
other than the consideration paid at the closing of such Acquisition.
Section 1.2. New Definitions. The following definitions are hereby
added to Section 1.1 of the Loan Agreement:
Change in Control means the acquisition, after the date
hereof, by any Person, or two or more Persons acting in concert, of
beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of
1934) of 20% or more of the outstanding shares of voting stock of
Borrower.
Change in Management means that any of the following Persons
shall cease to be employed by Borrower in the capacity in which they
are employed as of the date of this Amendment: Lisa Peterson as Chief
Financial Officer and Gary Cage as Chief Executive Officer.
Section 1.3. Interest Rate. Section 3.3 of the Loan Agreement is hereby
amended and replaced with the following Section 3.3:
SECTION 3.3. Interest Rate. Interest on the Advances shall
accrue at a rate per annum equal to the lesser of (a) at Borrower's
option, the applicable Variable Rate or the applicable Adjusted LIBOR
Rate, subject, however, to the provisions of Section 10.8 (the
"Applicable Rate"), or (b) the Maximum Lawful Rate; provided, however,
if at any time the Applicable Rate exceeds the Maximum Lawful Rate,
resulting in the charging of interest hereunder to be limited to the
Maximum Lawful Rate, then any subsequent reduction in the Applicable
Rate shall not reduce the rate of interest below the Maximum Lawful
Rate until the total amount of interest accrued on the indebtedness
evidenced
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 2
<PAGE> 3
hereby equals the amount of interest which would have accrued on such
indebtedness if the Applicable Rate had at all times been in effect.
Without notice to Borrower or anyone else, the Variable Rate
and the Maximum Lawful Rate shall each automatically fluctuate upward
and downward as and in the amount by which the Base Rate and Maximum
Lawful Rate, respectively, fluctuate, subject always to limitations
contained in this Agreement. In addition, without notice to Borrower or
anyone else, the Variable Rate and the Adjusted LIBOR Rate initially
provided for under this Agreement shall fluctuate upward or downward
from time to time based on changes in the Consolidated Funded Debt to
Consolidated EBITDA ratio, pursuant to Schedule II. Such changes shall
occur on the first day of the calendar month following the month in
which Administrative Agent receives the quarterly financial statements
and related officer's certificate required to be delivered by Borrower
pursuant to Sections 6.1 (b) and (d) hereof showing that such
adjustment is appropriate (except that with respect to any Adjusted
LIBOR Rate then in effect, such change shall occur at the end of the
applicable Interest Period).
Section 1.4. Principal Payments. Subsection (c) of Section 3.4 of the
Loan Agreement is hereby amended and replaced with the following subsection (c):
(c) Upon any debt or equity offering by Borrower or any
Guarantor (other than the Required Institutional Debt), Borrower shall
make a principal payment in an amount equal to one-hundred percent
(100%) of the net proceeds to Borrower or such Guarantor from such
offering as such amount is approved by Administrative Agent for the
purpose of reducing the amount outstanding under the Credit Facility.
A new subsection (e) is hereby added to Section 3.4 of the Loan Agreement as
follows:
(e) In addition to any other payments required hereunder,
Borrower shall pay to Administrative Agent, for the ratable benefit of
the Lenders, on the same date as interest payments are required to be
made under subsection (a) above, a principal payment under the Credit
Facility in an amount equal to the product of (i) 0.75 multiplied by
(ii) the unpaid amount of payments of any kind scheduled to be made
during the calendar quarter then ended under Debt of Borrower or any
Subsidiary (including, without limitation, any Subordinate Acquisition
Debt and "earnout payments" owing by Borrower or such Subsidiary, but
excluding the Credit Facility and the Short Term Debt) which was not
paid as a result of a permanent reduction or forgiveness of such Debt.
As used in this Section 3.4(e) only, the term "earnout payments" means
"earnout payments" (as defined in the definition of Fixed Charge
Coverage Ratio) which are guaranteed to be paid by Borrower or the
applicable Subsidiary, without the satisfaction of any condition to
such payment.
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 3
<PAGE> 4
Section 1.5. Coverage Ratio. Section 7.3 of the Loan Agreement is
hereby amended and replaced with the following Section 7.3:
SECTION 7.3. Coverage Ratio. Borrower shall not permit its
Fixed Charge Coverage Ratio to be, as of the end of any calendar
quarter, (i) prior to and including June 30, 2000, less than 1.00 to
1.00, and (ii) thereafter, less than 1.20 to 1.00.
Section 1.6. Leverage Ratio. Section 7.5 of the Loan Agreement is
hereby amended and replaced with the following Section 7.5:
SECTION 7.5. Consolidated Senior Funded Debt to Consolidated
EBITDA. As of the end of any calendar quarter, Borrower shall not
permit the ratio of Consolidated Senior Funded Debt to Consolidated
EBITDA for the immediately preceding twelve months to be (a) prior to
the earlier of (i) June 30, 2000 or (ii) the closing of the Required
Institutional Debt (such date, the "Ratio Reduction Date"), more than
3.60 to 1.00, (b) for the period from the Ratio Reduction Date through
and including December 31, 2000, more than 3.00 to 1.00, and (c)
thereafter, more than 2.50 to 1.00; provided that the Target Company
EBITDA attributable to any Acquisition, for purposes of calculating
Consolidated EBITDA, shall, for the twelve (12) month period commencing
on the Acquisition Date, be computed by annualizing the actual Target
Company EBITDA for the period since the Acquisition Date.
Section 1.7. Limitation on Debt. Section 7.6 of the Loan Agreement is
hereby amended and replaced with the following Section 7.6:
SECTION 7.6. Limitation on Debt. Neither Borrower nor any
Guarantor shall incur any Debt, except for (a) the Obligations, (b)
trade payables incurred in the ordinary course of business, (c) the
Debt described on Schedule III hereto, (d) Debt in respect of (i)
taxes, assessments, governmental charges or levies and claims for
labor, materials and supplies, (ii) judgments or awards which have been
in force for less than the applicable appeal period so long as
execution is not levied thereunder or in respect of which Borrower or
Guarantor shall at the time in good faith be prosecuting an appeal or
proceedings for review and in respect of which a stay of execution
shall have been obtained pending such appeal or review, and (iii)
endorsements made in connection with the deposits of items for credit
or collection in the ordinary course of business, (e) capitalized lease
obligations related to capital expenditures made by Borrower as
permitted by Section 7.19 hereof (and so long as such capitalized lease
obligations do not cause Borrower to be in violation of any other
covenant of this Agreement), (f) Subordinate Acquisition Debt, (g)
Permitted Institutional Debt, provided that, (1) the amount of the
Permitted Senior Institutional Debt outstanding at any time cannot
exceed the lesser of 70% of the aggregate amount of Permitted
Institutional Debt outstanding at the time of determination or
$17,500,000.00, (2) the amount of Permitted Subordinate Institutional
Debt outstanding at any time cannot be less than $7,500,000.00, and (3)
the
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 4
<PAGE> 5
issuance of said Permitted Institutional Debt would otherwise be
permitted by the other terms and conditions of the Credit Facility, (h)
the Short Term Debt in existence on the date of the execution of this
Agreement (Lenders hereby agreeing that (1) Administrative Agent shall
be entitled to execute on behalf of Lenders any documents or agreements
approved by Administrative Agent acknowledging that the Short Term Debt
is included in the Obligations and secured by the Collateral, subject,
however, to the provisions of Section 9.6 hereof and (2) all or any
portion of the proceeds of the Permitted Institutional Debt shall be
used to repay the Short Term Debt and then to pay down the Credit
Facility), and (i) refinancings, renewals or extensions of the Debt
permitted under the foregoing clauses provided that such refinancings,
renewals or extensions do not result in an increase in the aggregate
unpaid principal amount of the Debt so refinanced, renewed or extended.
Section 1.8. Acquisitions. Section 7.9 of the Loan Agreement is hereby
amended and replaced with the following Section 7.9:
SECTION 7.9. Consolidations, Mergers, Acquisitions, Sales of
Assets, and Maintenance. Neither Borrower nor any Guarantor shall,
without prior approval of Required Lenders, (a) consolidate or merge
with or into any other Person, (b) sell, lease, abandon or otherwise
transfer all or any material part of its assets to any Person, in one
or a series of related transactions, or (c) terminate, or fail to
maintain, its good standing and qualification to transact business in
all jurisdictions where the failure to maintain its good standing or
qualification to transact business would reasonably be expected to have
a Material Adverse Effect; provided, however, that any Guarantor may
merge with or into Borrower or any other Guarantor. Borrower shall not
make any Acquisitions or open any new offices or branches, without the
prior written consent of Required Lenders (other than the new office in
Decatur, Georgia which is scheduled to open in January, 2000).
Section 1.9. Distributions. Section 7.11 of the Loan Agreement is
hereby amended and replaced with the following Section 7.11:
SECTION 7.11. Distributions. Neither Borrower nor any
Guarantor shall make or declare any Distributions until the Obligations
have been paid in full.
Section 1.10. Repurchase of Stock. Section 7.18 of the Loan Agreement
is hereby amended and replaced with the following Section 7.18:
SECTION 7.18. Repurchase of Stock. Neither Borrower nor any
Guarantor shall purchase any of the stock of any of the Guarantors or
Borrower during the term of the Credit Facility without prior notice to
and approval of Required Lenders.
Section 1.11. Capital Expenditures. Section 7.19 of the Loan Agreement
is hereby amended and replaced with the following Section 7.19:
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 5
<PAGE> 6
SECTION 7.19. Capital Expenditures. Borrower and Guarantors
shall not make capital expenditures, in the aggregate, in excess of (a)
during calendar year 2000, $5,000,000 plus $1,121,000 (representing
capital expenditures incurred in 1999 but which have not yet been
paid), and (b) during each calendar year thereafter, the lesser of (i)
2.5% of gross revenues for Borrower and the Guarantors on a
consolidated basis (calculated in accordance with GAAP) for the
previous calendar year or (ii) 115% of the budgeted amount for capital
expenditures in Borrower's operating budget for such year.
Section 1.12. Defaults. Subsection (k) of Section 8.1 of the Loan
Agreement is hereby deleted.
A new subsection (l) is hereby added to Section 8.1 of the Loan Agreement as
follows:
(l) The occurrence of (i) any Change in Control or, (ii) a
Change in Management prior to the closing and funding of either (i)
Permitted Institutional Debt in an amount not less than $25,000,000 (at
least $10,000,000 of which shall be Permitted Subordinate Institutional
Debt), or (ii) Permitted Subordinate Institutional Debt in an amount
not less than $15,000,000.
Section 1.13. Replacement Schedule. Schedule II to the Loan Agreement
is hereby deleted and replaced with Schedule II hereto.
ARTICLE II - MISCELLANEOUS
Section 2.1. Closing. The closing (the "Closing") of the transactions
contemplated by this Amendment shall occur on and as of the date that all
conditions hereto contained in Section 2.2 of this Amendment have been satisfied
(the "Modification Closing Date").
Section 2.2. Conditions to the Closing. As conditions precedent to the
Closing, all of the following shall have been satisfied:
(a) Borrower, each Guarantor and Required Lenders shall have
executed and delivered this Amendment; and
(b) Borrower shall execute and deliver to Administrative Agent
(i) that certain Fee Letter (herein so called) from Administrative Agent to
Borrower and shall have paid to Administrative Agent, for the benefit of the
Lenders, all fees payable in cash as provided therein and (ii) that certain
Warrant Agreement (herein so called) in the form attached hereto as Exhibit "A"
and the Warrant Certificates (as defined in the Warrant Agreement).
Section 2.3. Continuing Effect. Except as modified and amended hereby,
the Loan Agreement and other Loan Documents are and shall remain in full force
and effect in accordance with their terms.
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 6
<PAGE> 7
Section 2.4. Representations and Warranties. Borrower hereby represents
and warrants to Administrative Agent and the Lenders that (i) except as has been
disclosed by Borrower to Administrative Agent in writing, all representations
and warranties made by Borrower in the Loan Agreement as of the date thereof are
true and correct as of the date hereof, as if such representations and
warranties were recited herein in their entirety and (ii) Borrower is not in
default of any covenant or agreement contained in the Loan Agreement.
Section 2.5. Payment of Expenses. Borrower agrees to pay to
Administrative Agent the reasonable attorneys' fees and expenses of
Administrative Agent's counsel and other expenses incurred by Administrative
Agent in connection with this Amendment.
Section 2.6. Binding Agreement. This Amendment shall be binding upon,
and shall inure to the benefit of, the parties' respective representatives,
successors and assigns.
Section 2.7. Ratification. Except as otherwise expressly modified by
this Amendment, all terms and provisions of the Loan Agreement, the Notes and
the other Loan Documents, shall remain unchanged and hereby are ratified and
confirmed and shall be and shall remain in full force and effect, enforceable in
accordance with their terms.
Section 2.8. No Defenses. Borrower and each Guarantor, by its execution
of this Amendment, hereby declares that it has no set-offs, counterclaims,
defenses or other causes of action against Administrative Agent or any Lender
arising out of the Credit Facility, the modification of the Credit Facility, any
documents mentioned herein or otherwise; and, to the extent any such set-offs,
counterclaims, defenses or other causes of action may exist, whether known or
unknown, such items are hereby waived by Borrower and each Guarantor.
Section 2.9. Further Assurances. The parties hereto shall execute such
other documents as may be necessary or as may be required, in the opinion of
counsel to Administrative Agent, to effect the transactions contemplated hereby
and the liens and/or security interests of all other collateral instruments, as
modified by this Amendment. Borrower also agrees to provide to Administrative
Agent such other documents and instruments as Lenders reasonably may request in
connection with the modification of the Credit Facility effected hereby.
Section 2.10. Usury Savings Clause. Notwithstanding anything to the
contrary in this Amendment, the Notes or any other Loan Document, or in any
other agreement entered into in connection with the Notes or securing the
indebtedness evidenced by the Notes, whether now existing or hereafter arising
and whether written or oral, it is agreed that the aggregate of all interest and
other charges constituting interest, or adjudicated as constituting interest,
and contracted for, chargeable or receivable under the Notes or otherwise in
connection with the Notes shall under no circumstances exceed the maximum rate
of interest permitted by applicable law. In the event the maturity of the Notes
is accelerated by reason of an election by any of the
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 7
<PAGE> 8
holders thereof resulting from a default thereunder or under any other document
executed as security therefor or in connection therewith, or by voluntary
prepayment by the maker, or otherwise, then earned interest may never include
more than the maximum rate of interest permitted by applicable law. If from any
circumstance any holder of any of the Notes shall ever receive interest or any
other charges constituting interest, or adjudicated as constituting interest,
the amount, if any, which would exceed the maximum rate of interest permitted by
applicable law shall be applied to the reduction of the principal amount owing
on such Notes or on account of any other principal indebtedness of the maker to
the holders of such Notes, and not to the payment of interest, or if such
excessive interest exceeds the unpaid balance of principal thereof and such
other indebtedness, the amount of such excessive interest that exceeds the
unpaid balance of principal thereof and such other indebtedness shall be
refunded to the maker. All sums paid or agreed to be paid to the holders of the
Notes for the use, forbearance or detention of the indebtedness of the maker to
the holders of such Notes shall be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full for the
purpose of determining the actual rate on such indebtedness is uniform
throughout the term thereof.
The terms "maximum amount" or "maximum rate" as used in this
Amendment or the Notes, or in any other agreement entered into in connection
with the Notes or securing the indebtedness evidenced by the Notes, whether now
existing or hereafter arising and whether written or oral, include, as to
Chapter 303 of the Texas Finance Code (and as same may be incorporated by
reference in other statutes of the State of Texas), but otherwise without
limitation, that rate based upon the "weekly ceiling"; provided, however, that
this designation shall not preclude the rate of interest contracted for, charged
or received in connection with the Credit Facility from being governed by, or
construed in accordance with, any other state or federal law, including but not
limited to, Public Law 96-221.
Section 2.11. Non-Waiver of Events of Default. Neither this Amendment
nor any other document executed in connection herewith constitutes or shall be
deemed (a) a waiver of, or consent by Administrative Agent or any Lender to, any
default or event of default which may exist or hereafter occur under any of the
Loan Documents, (b) a waiver by Administrative Agent or any Lender of any of
Borrower's obligations under the Loan Documents, or (c) a waiver by
Administrative Agent or any Lender of any rights, offsets, claims, or other
causes of action that any Lender may have against Borrower.
Section 2.12. Enforceability. In the event the enforceability or
validity of any portion of this Amendment, the Loan Agreement, the Notes, or any
of the other Loan Documents is challenged or questioned, such provision shall be
construed in accordance with, and shall be governed by, whichever applicable
federal or Texas law would uphold or would enforce such challenged or questioned
provision.
Section 2.13. Counterparts. This Amendment may be executed in several
counterparts, all of which are identical, each of which shall be deemed an
original, and all of which counterparts together shall constitute one and the
same instrument, it being understood and
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 8
<PAGE> 9
agreed that the signature pages may be detached from one or more of such
counterparts and combined with the signature pages from any other counterpart in
order that one or more fully executed originals may be assembled.
Section 2.14. Choice of Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE
EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF TEXAS.
Section 2.15. Entire Agreement. This Amendment and the other Loan
Documents, contain the entire agreements between the parties relating to the
subject matter hereof and thereof. This Amendment and the other Loan Documents
may be amended, revised, waived, discharged, released or terminated only by a
written instrument or instruments, executed by the party against which
enforcement of the amendment, revision, waiver, discharge, release or
termination is asserted. Any alleged amendment, revision, waiver, discharge,
release or termination which is not so documented shall not be effective as to
any party.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURES FOUND ON FOLLOWING PAGES.]
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 9
<PAGE> 10
IN WITNESS WHEREOF, this Amendment is executed effective as of the date
first written above.
BORROWER:
MONARCH DENTAL CORPORATION,
a Delaware corporation
By:
Name:
Title:
ADMINISTRATIVE AGENT:
BANK OF AMERICA, N.A., a national
banking association, as Administrative Agent
By:
Name:
Title:
LENDERS:
BANK OF AMERICA, N.A., a national banking
association,
By:
Name:
Title:
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 10
<PAGE> 11
FLEET NATIONAL BANK,
a national banking association
By:
Name:
Title:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "Rabobank Nederland",
New York Branch
By:
Name:
Title:
By:
Name:
Title:
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 11
<PAGE> 12
CONSENT OF GUARANTORS
Each Guarantor hereby (a) acknowledges its consent to this Agreement and the
changes to the Credit Facility effected hereby, (b) ratifies and confirms all
terms and provisions of its respective Guaranty and the security instruments
relating to the Collateral , (c) agrees that such Guaranty and security
instruments are and shall remain in full force and effect, (d) acknowledges that
there are no claims or offsets against, or defenses or counterclaims to, the
terms and provisions of and the obligations created and evidenced by such
Guaranty or security instruments, (e) reaffirms all agreements and obligations
under such Guaranty and such security instruments with respect to the Credit
Facility, the Notes, this Agreement and all other documents, instruments or
agreements governing, securing or pertaining to the Credit Facility, as the same
may be modified by this Agreement, (f) and acknowledges that the Obligations
described in this Agreement are the guaranteed obligations under such Guaranty
and are the obligations secured by such security instruments and (g) represents
and warrants that all requisite corporate or partnership action necessary for it
to execute this Agreement has been taken.
EXECUTED as of the 30th day of December, 1999.
GUARANTORS:
Managed Dental Care Centers, Inc., a Texas
corporation
Monarch Dental Associates (Arkansas), Inc., an
Arkansas corporation (f/k/a United Dental Care, Inc.)
Dental Care One (Monarch), Inc., an Ohio corporation
Midwest Dental Management, Inc., a Wisconsin
corporation
Dental Centers of Indiana (Monarch), Inc., an Indiana
corporation;
Midwest Dental Care, Mondovi, Inc., a Wisconsin
corporation;
Midwest Dental Care, Sheboygan, Inc., a Wisconsin
corporation;
Monarch Dental Management, Inc., a Texas corporation;
Three Peaks Dental Management, Inc., a Colorado
corporation;
Monarch Dental Associates (Utah), Inc., a Utah
corporation
By:
-------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
MacGregor Dental Associates, L.P., a Texas limited
partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 12
<PAGE> 13
Monarch Dental Associates, L.P., a Texas limited
partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Monarch Dental (Press) Associates, L.P., a Texas
limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Monarch Dental Associates (Midland/Odessa), L.P., a
Texas limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Monarch Dental Associates (Abilene), L.P., a Texas
limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 13
<PAGE> 14
Monarch Dental Associates (Arizona), L.L.C., an
Arizona limited liability company
By: Monarch Dental Associates (Utah), Inc., a
Utah corporation, its manager
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Partners Dental Corporation, a Delaware corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Valley Forge Dental Associates, Inc.,
a Delaware corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
VFD of Pennsylvania, Inc.,
a Delaware corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Horizon Group International, Inc.,
an Ohio corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 14
<PAGE> 15
Precise Dental Lab, Inc.,
an Ohio corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
VFD of Georgia, Inc.,
a Delaware corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
VFD of Pittsburgh, Inc.,
a Pennsylvania corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
Pro Dent, Inc.,
a Pennsylvania corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
VFD Realty, Inc.,
a Delaware corporation
By:
-------------------------------------------------
Name:
-----------------------------------------------
Title:
----------------------------------------------
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 15
<PAGE> 16
1
Schedule II
<TABLE>
<CAPTION>
====================================================================================================================
If Borrower's Consolidated Base Rate LIBOR Letter of Unused
Funded Debt to Consolidated Spread Margin Credit Fee Fee
EBITDA Ratio is: Percentage
<S> <C> <C> <C> <C>
Greater than or equal to 3.50 to 1.00, but 2.10% 4.10% 2.00% 0.50%
less than 4.00 to 1.00
Greater than or equal to 3.00 to 1.00, but 1.50% 3.70% 2.00% 0.50%
less than 3.50 to 1.00
Greater than or equal to 2.50 to 1.00, but 1.00% 3.30% 2.00% 0.375%
less than 3.00 to 1.00
Greater than or equal to 2.00 to 1.00, but 1.00% 2.90% 2.00% 0.375%
less than 2.50 to 1.00
Less than 2.00 to 1.00 0.50% 2.50% 2.00% 0.25%
====================================================================================================================
</TABLE>
FIRST AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 1
<PAGE> 1
EXHIBIT 10.29
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(this "Amendment") is executed as of March 9, 2000, by and among MONARCH DENTAL
CORPORATION, a Delaware corporation ("Borrower"), BANK OF AMERICA, N.A., a
national banking association ("Administrative Agent"), as administrative agent,
and the entities from time to time designated as "Lenders" under the Loan
Agreement (herein defined) ("Lenders"), and is consented to by the GUARANTORS
listed on the signature pages attached hereto.
W I T N E S S E T H:
WHEREAS, Borrower, Administrative Agent and Lenders entered into that
certain Second Amended and Restated Loan Agreement, dated as of June 30, 1999,
pursuant to which Lenders agreed to make the Credit Facility (as therein
defined) available to Borrower (as heretofore or hereafter amended, the "Loan
Agreement")(each capitalized term used but not otherwise defined herein shall
have the same meaning given to it in the Loan Agreement); and
WHEREAS, Borrower has requested that Administrative Agent and Lenders
clarify the definition of Consolidated Current Maturities contained in the Loan
Agreement; and
WHEREAS, subject to the terms and conditions contained herein,
Administrative Agent and the Lenders have agreed to such request.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereinafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, Borrower,
Administrative Agent and Lenders hereby covenant and agree as follows:
ARTICLE I - AMENDMENTS
Section 1.1. Modification of Definition. The following definition
contained in Section 1.1 of the Loan Agreement is hereby deleted and replaced
with the following:
Consolidated Current Maturities means, with respect to
Borrower and its Subsidiaries, on any date of calculation, the current
portion of the long term debt (excluding the Credit Facility and any
Short Term Debt then outstanding) of Borrower and its Subsidiaries on a
consolidated basis, determined in accordance with GAAP.
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 1
<PAGE> 2
ARTICLE II - MISCELLANEOUS
Section 2.1. Closing. The closing (the "Closing") of the transactions
contemplated by this Amendment shall occur on and as of the date that all
conditions hereto contained in Section 2.2 of this Amendment have been satisfied
(the "Modification Closing Date").
Section 2.2. Conditions to the Closing. As conditions precedent to the
Closing, Borrower, each Guarantor and Required Lenders shall have executed and
delivered this Amendment.
Section 2.3. Continuing Effect. Except as modified and amended hereby,
the Loan Agreement and other Loan Documents are and shall remain in full force
and effect in accordance with their terms.
Section 2.4. Representations and Warranties. Borrower hereby represents
and warrants to Administrative Agent and the Lenders that (i) except as has been
disclosed by Borrower to Administrative Agent in writing, all representations
and warranties made by Borrower in the Loan Agreement as of the date thereof are
true and correct as of the date hereof, as if such representations and
warranties were recited herein in their entirety and (ii) Borrower is not in
default of any covenant or agreement contained in the Loan Agreement.
Section 2.5. Payment of Expenses. Borrower agrees to pay to
Administrative Agent the reasonable attorneys' fees and expenses of
Administrative Agent's counsel and other expenses incurred by Administrative
Agent in connection with this Amendment.
Section 2.6. Binding Agreement. This Amendment shall be binding upon,
and shall inure to the benefit of, the parties' respective representatives,
successors and assigns.
Section 2.7. Ratification. Except as otherwise expressly modified by
this Amendment, all terms and provisions of the Loan Agreement, the Notes and
the other Loan Documents, shall remain unchanged and hereby are ratified and
confirmed and shall be and shall remain in full force and effect, enforceable in
accordance with their terms.
Section 2.8. No Defenses. Borrower and each Guarantor, by its execution
of this Amendment, hereby declares that it has no set-offs, counterclaims,
defenses or other causes of action against Administrative Agent or any Lender
arising out of the Credit Facility, the modification of the Credit Facility, any
documents mentioned herein or otherwise; and, to the extent any such set-offs,
counterclaims, defenses or other causes of action may exist, whether known or
unknown, such items are hereby waived by Borrower and each Guarantor.
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 2
<PAGE> 3
Section 2.9. Further Assurances. The parties hereto shall execute such
other documents as may be necessary or as may be required, in the opinion of
counsel to Administrative Agent, to effect the transactions contemplated hereby
and the liens and/or security interests of all other collateral instruments, as
modified by this Amendment. Borrower also agrees to provide to Administrative
Agent such other documents and instruments as Lenders reasonably may request in
connection with the modification of the Credit Facility effected hereby.
Section 2.10. Usury Savings Clause. Notwithstanding anything to the
contrary in this Amendment, the Notes or any other Loan Document, or in any
other agreement entered into in connection with the Notes or securing the
indebtedness evidenced by the Notes, whether now existing or hereafter arising
and whether written or oral, it is agreed that the aggregate of all interest and
other charges constituting interest, or adjudicated as constituting interest,
and contracted for, chargeable or receivable under the Notes or otherwise in
connection with the Notes shall under no circumstances exceed the maximum rate
of interest permitted by applicable law. In the event the maturity of the Notes
is accelerated by reason of an election by any of the holders thereof resulting
from a default thereunder or under any other document executed as security
therefor or in connection therewith, or by voluntary prepayment by the maker, or
otherwise, then earned interest may never include more than the maximum rate of
interest permitted by applicable law. If from any circumstance any holder of any
of the Notes shall ever receive interest or any other charges constituting
interest, or adjudicated as constituting interest, the amount, if any, which
would exceed the maximum rate of interest permitted by applicable law shall be
applied to the reduction of the principal amount owing on such Notes or on
account of any other principal indebtedness of the maker to the holders of such
Notes, and not to the payment of interest, or if such excessive interest exceeds
the unpaid balance of principal thereof and such other indebtedness, the amount
of such excessive interest that exceeds the unpaid balance of principal thereof
and such other indebtedness shall be refunded to the maker. All sums paid or
agreed to be paid to the holders of the Notes for the use, forbearance or
detention of the indebtedness of the maker to the holders of such Notes shall be
amortized, prorated, allocated and spread throughout the full term of such
indebtedness until payment in full for the purpose of determining the actual
rate on such indebtedness is uniform throughout the term thereof.
The terms "maximum amount" or "maximum rate" as used in this
Amendment or the Notes, or in any other agreement entered into in connection
with the Notes or securing the indebtedness evidenced by the Notes, whether now
existing or hereafter arising and whether written or oral, include, as to
Chapter 303 of the Texas Finance Code (and as same may be incorporated by
reference in other statutes of the State of Texas), but otherwise without
limitation, that rate based upon the "weekly ceiling"; provided, however, that
this designation shall not preclude the rate of interest contracted for, charged
or received in connection with the Credit Facility from being governed by, or
construed in accordance with, any other state or federal law, including but not
limited to, Public Law 96-221.
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 3
<PAGE> 4
Section 2.11. Non-Waiver of Events of Default. Neither this Amendment
nor any other document executed in connection herewith constitutes or shall be
deemed (a) a waiver of, or consent by Administrative Agent or any Lender to, any
default or event of default which may exist or hereafter occur under any of the
Loan Documents, (b) a waiver by Administrative Agent or any Lender of any of
Borrower's obligations under the Loan Documents, or (c) a waiver by
Administrative Agent or any Lender of any rights, offsets, claims, or other
causes of action that any Lender may have against Borrower.
Section 2.12. Enforceability. In the event the enforceability or
validity of any portion of this Amendment, the Loan Agreement, the Notes, or any
of the other Loan Documents is challenged or questioned, such provision shall be
construed in accordance with, and shall be governed by, whichever applicable
federal or Texas law would uphold or would enforce such challenged or questioned
provision.
Section 2.13. Counterparts. This Amendment may be executed in several
counterparts, all of which are identical, each of which shall be deemed an
original, and all of which counterparts together shall constitute one and the
same instrument, it being understood and agreed that the signature pages may be
detached from one or more of such counterparts and combined with the signature
pages from any other counterpart in order that one or more fully executed
originals may be assembled.
Section 2.14. Choice of Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE
EXTENT FEDERAL LAWS PREEMPT THE LAWS OF THE STATE OF TEXAS.
Section 2.15. Entire Agreement. This Amendment and the other Loan
Documents, contain the entire agreements between the parties relating to the
subject matter hereof and thereof. This Amendment and the other Loan Documents
may be amended, revised, waived, discharged, released or terminated only by a
written instrument or instruments, executed by the party against which
enforcement of the amendment, revision, waiver, discharge, release or
termination is asserted. Any alleged amendment, revision, waiver, discharge,
release or termination which is not so documented shall not be effective as to
any party.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER HEREIN CONTAINED AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 4
<PAGE> 5
[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURES FOUND ON FOLLOWING PAGES.]
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 5
<PAGE> 6
IN WITNESS WHEREOF, this Amendment is executed effective as of the date
first written above.
BORROWER:
MONARCH DENTAL CORPORATION,
a Delaware corporation
By:
Name:
Title:
ADMINISTRATIVE AGENT:
BANK OF AMERICA, N.A., a national banking
association, as Administrative Agent
By:
Name:
Title:
LENDERS:
BANK OF AMERICA, N.A., a national banking
association,
By:
Name:
Title:
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 6
<PAGE> 7
FLEET NATIONAL BANK,
a national banking association
By:
Name:
Title:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "Rabobank Nederland",
New York Branch
By:
Name:
Title:
By:
Name:
Title:
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 7
<PAGE> 8
CONSENT OF GUARANTORS
Each Guarantor hereby (a) acknowledges its consent to this Agreement and the
changes to the Credit Facility effected hereby, (b) ratifies and confirms all
terms and provisions of its respective Guaranty and the security instruments
relating to the Collateral , (c) agrees that such Guaranty and security
instruments are and shall remain in full force and effect, (d) acknowledges that
there are no claims or offsets against, or defenses or counterclaims to, the
terms and provisions of and the obligations created and evidenced by such
Guaranty or security instruments, (e) reaffirms all agreements and obligations
under such Guaranty and such security instruments with respect to the Credit
Facility, the Notes, this Agreement and all other documents, instruments or
agreements governing, securing or pertaining to the Credit Facility, as the same
may be modified by this Agreement, (f) and acknowledges that the Obligations
described in this Agreement are the guaranteed obligations under such Guaranty
and are the obligations secured by such security instruments and (g) represents
and warrants that all requisite corporate or partnership action necessary for it
to execute this Agreement has been taken.
EXECUTED as of the 9th day of March, 2000.
GUARANTORS:
Managed Dental Care Centers, Inc., a Texas corporation
Monarch Dental Associates (Arkansas), Inc., an Arkansas
corporation (f/k/a United Dental Care, Inc.)
Dental Care One (Monarch), Inc., an Ohio corporation
Midwest Dental Management, Inc., a Wisconsin corporation
Dental Centers of Indiana (Monarch), Inc., an Indiana corporation;
Midwest Dental Care, Mondovi, Inc., a Wisconsin corporation;
Midwest Dental Care, Sheboygan, Inc., a Wisconsin corporation;
Monarch Dental Management, Inc., a Texas corporation;
Three Peaks Dental Management, Inc., a Colorado corporation;
Monarch Dental Associates (Utah), Inc., a Utah corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
MacGregor Dental Associates, L.P., a Texas limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 8
<PAGE> 9
Monarch Dental Associates, L.P., a Texas limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Monarch Dental (Press) Associates, L.P., a Texas limited
partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Monarch Dental Associates (Midland/Odessa), L.P., a Texas
limited partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Monarch Dental Associates (Abilene), L.P., a Texas limited
partnership
By: Monarch Dental Management, Inc., a Texas
corporation, its general partner
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 9
<PAGE> 10
Monarch Dental Associates (Arizona), L.L.C., an Arizona
limited liability company
By: Monarch Dental Associates (Utah), Inc., a Utah
corporation, its manager
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Partners Dental Corporation, a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Valley Forge Dental Associates, Inc.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
VFD of Pennsylvania, Inc.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Horizon Group International, Inc.,
an Ohio corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 10
<PAGE> 11
Precise Dental Lab, Inc.,
an Ohio corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
VFD of Georgia, Inc.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
VFD of Pittsburgh, Inc.,
a Pennsylvania corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Pro Dent, Inc.,
a Pennsylvania corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
VFD Realty, Inc.,
a Delaware corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
SECOND AMENDMENT TO SECOND AMENDED
AND RESTATED LOAN AGREEMENT (Monarch Dental) Page 11
<PAGE> 1
EXHIBIT 10.30
WARRANT AGREEMENT
AMONG
MONARCH DENTAL CORPORATION,
BANK OF AMERICA, N.A.,
FLEET NATIONAL BANK,
AND
COOPERATIEVE CENTRALE RAIFFEISEN
-BOERENLEENBANK B.A., "Rabobank Nederland",
New York Branch
JANUARY 4, 2000
<PAGE> 2
ii
WARRANT AGREEMENT
This Warrant Agreement (the "Agreement"), dated as of January 4, 2000,
is by and among Monarch Dental Corporation, a Delaware corporation (the
"Company"), Bank of America, N.A., a national banking association ("Bank of
America"), Fleet National Bank, a national banking association ("Fleet") and
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "Rabobank Nederland", New
York Branch ("Rabobank") (each a "Holder" and collectively, the "Holders").
W I T N E S S E T H :
WHEREAS, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company has agreed to execute
and deliver this Agreement and to issue to the Holders the Warrants hereinafter
described;
WHEREAS, the Company and the Holders desire to set forth in this
Agreement, among other things, the form and provisions of the Warrant
Certificates, and the terms and conditions upon which they may be issued,
transferred, exchanged, replaced, redeemed and surrendered in connection with
the exercise and redemption of the Warrants;
NOW, THEREFORE, in consideration of the mutual representations,
warranties and covenants herein contained, and on the terms and subject to the
conditions herein set forth, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS . As used in this Agreement, the following
terms shall have the meanings set forth below:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b)
(c) "Affiliate" shall mean with respect to a specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" having meanings correlative to the foregoing.
(d)
(e) "Business Day" shall mean a day other than a Saturday, Sunday or legal
holiday in the State of Texas.
<PAGE> 3
2
(f)
(g) "Closing Date" shall mean the date hereof.
(h)
(i) "Commission" shall mean the Securities and Exchange Commission.
(j)
(k) "Common Stock" shall mean the common stock of the Company, par value $0.01
per share.
(l)
(m) "Common Stock Equivalents" shall mean all evidences of indebtedness, shares
of capital stock or other securities, rights, options or warrants that are
convertible into or exchangeable or exercisable for, with or without payment of
additional consideration of cash or property, shares of Common Stock or rights
to acquire shares of Common Stock, either immediately or upon the arrival of a
specified date or the happening of a specified event, at such date, other than
the Excluded Equivalents.
(n)
(o) "Demand Registration" shall have the meaning set forth in Section 7.01(a).
(p)
(q) [Intentionally Left Blank]
(r)
(s) "Excluded Equivalents" means rights, options or warrants to acquire shares
of Common Stock at a strike price greater than or equal to $10.00 per share.
(t)
(u) "Exercise Price" shall have the meaning set forth in Section 2.02.
(v)
(w) "Expiration Date" shall mean January 4, 2007.
(x)
(y) [Intentionally Left Blank]
(z)
(aa) "Fully Diluted Outstanding Common Stock" shall mean, at any date as of
which the number of shares thereof is to be determined, all shares of Common
Stock outstanding at such date, together with all Common Stock Equivalents
outstanding at such date.
(bb)
(cc) "Holder" and "Holders" shall have the meaning set forth in the introductory
paragraph of this Agreement.
(dd)
(ee) "Notice of Exercise" shall have the meaning set forth in Section 2.03(a).
(ff)
(gg) [Intentionally Left Blank]
(hh)
(ii) "Person" shall mean a corporation, an association, a trust, a partnership,
a joint venture, an organization, a business, an individual, a government or
political subdivision thereof or a governmental body.
<PAGE> 4
3
(jj)
(kk) "Required Institutional Debt" means either (i) Permitted Institutional Debt
(as defined in the Second Amended and Restated Loan Agreement dated as of June
30, 1999 among the Company and the Holders (the "Loan Agreement")) in an amount
not less than $25,000,000 (at least $10,000,000 of which shall be Permitted
Subordinate Institutional Debt (as defined in the Loan Agreement), or (ii)
Permitted Subordinate Institutional Debt in an amount not less than $15,000,000
(the "Required Amount").
(ll)
(mm) "Registration Expenses" shall mean all reasonable expenses incident to the
registration of the Underlying Common Stock pursuant to Article VII, including,
without limitation, all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Warrants and Underlying Common Stock, but not including filing fees, fees and
expenses of compliance with securities or Blue Sky laws or fees and
disbursements of counsel for the underwriters in connection with Blue Sky
qualifications and jurisdictions or Blue Sky compliance as requested by the
Holders and not requested by the underwriters), fronting expenses, printing
expenses (including, without limitation, expenses of printing prospectuses),
messenger and delivery expenses, internal expenses, (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the fees and expenses incurred in connection with
the listing of the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed, and fees and
disbursements of counsel for the Company and its independent certified public
accountants (including, without limitation, the expenses of any special audit or
"cold comfort" letters required by or incident to such performance), liability
insurance (if the Company elects to obtain such insurance), the reasonable fees
and expenses of any special experts retained by the Company in connection with
such registration, reasonable fees and expenses of other persons retained by the
Company, and the reasonable fees and expenses of one counsel for the Holders
(selected by the Holders), incurred in connection with each registration
hereunder (but not including any underwriting discounts or commissions
attributable to the sale of Underlying Common Stock).
(nn)
(oo) (u) "Subsidiaries" shall mean, with respect to the Company, any
corporation, partnership, joint venture or other legal entity of which the
Company owns, directly or indirectly, 50% or more of the stock or other equity
interests that generally entitle the holders thereof to vote for the election of
the board of directors or other governing body of such corporation or other
legal entity.
(pp)
(qq) (v) "Underlying Common Stock" shall mean the Common Stock acquired upon the
exercise of the Warrants carrying a legend identifying the stock as issued
pursuant to the exercise of the Warrants.
(rr)
(ss) (w) "Warrant" and "Warrants" shall have the meanings set forth in Section
2.01.
<PAGE> 5
4
(tt)
(uu) (x) "Warrant Assignment Form" shall have the meaning set forth in Section
6.01.
(vv)
(ww) (y) "Warrant Certificates" shall have the meaning set forth in Section
2.01.
(xx)
ARTICLE II
ISSUANCE AND EXERCISE OF WARRANTS
SECTION 2.01. AUTHORIZATION AND ISSUE OF WARRANTS. The Company has
authorized (a) the issuance of warrant certificates, in substantially the form
of Exhibit A attached hereto (the "Warrant Certificates"), granting rights to
purchase shares of Common Stock (herein, together with the rights to purchase
Common Stock thereby, sometimes called, individually, a "Warrant" and,
collectively, the "Warrants") by the Holders pursuant to this Agreement, and (b)
the issuance of such number of shares of Common Stock as will permit compliance
by the Company with its obligations to issue Common Stock pursuant to this
Agreement.
SECTION 2.02. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Company shall
issue to each Holder, on the date hereof, but subject to the vesting provisions
described below, Warrants as evidenced by the Warrant Certificates, which in the
aggregate shall entitle each Holder, subject to the terms set forth herein, to
purchase from the Company the number of shares of Common Stock set forth
opposite such Holders name on Schedule 2.02 (which the Company represents to
Holders constitutes, in the aggregate, three percent (3%) of the Fully Diluted
Outstanding Common Stock as of the date hereof), subject to the anti-dilution
provisions contained in Sections 8.02 and 8.03, for the exercise price of $0.01
per share (the "Exercise Price").
SECTION 2.03. EXERCISE OF WARRANTS.
(a) Manner of Exercise. Each Holder may, from and after the Closing
Date and until 5:00 p.m., Dallas, Texas time, on the Expiration Date, exercise
the Warrants evidenced by a Warrant Certificate which have vested as provided in
Section 2.07, on any Business Day, for all or part of the number of shares of
Common Stock purchasable thereunder through surrender of the Warrant Certificate
to the Company at its principal office, accompanied by (i) a duly executed
Notice of Exercise in substantially the form of Exhibit B attached hereto (the
"Notice of Exercise") and (ii) payment of the amount required for the purchase
of the Underlying Common Stock. The Company will within ten days after the
exercise of Warrants, at its expense, cause to be issued in the name of and
delivered to the exercising Holder (to the nearest full share) a certificate or
certificates for the number of fully paid and nonassessable shares of Underlying
Common Stock set forth in the applicable Notice of Exercise. Certificates for
such shares of Underlying Common Stock shall be dated as of the date of
surrender of the Warrant for exercise and the payment of the Exercise Price,
notwithstanding any delays in the actual execution, issuance or delivery of the
certificates for the shares so purchased, and such Holder
<PAGE> 6
5
shall be deemed for all purposes to be the record holder of the Underlying
Common Stock as of the date of such surrender and payment of the Exercise Price.
(b) Expiration of Warrants. Warrants that have not previously been
redeemed or exercised shall expire upon the Expiration Date.
(c) Exchange of Shares for Exercise Price. Each Holder at its option
may provide the Exercise Price under this Warrant by reducing the number of
shares for which the Warrant is otherwise exercisable by the number of shares
having fair market value equal to the Exercise Price. In such a case, delivery
of the Exercise Price shall be effected by such Holder's written notice to the
Company of such reduction. For purposes hereof, the sum of the average of any
publicly-reported closing bid and asked prices for the Common Stock on each of
the last ten (10) trading days prior to the date of exercise divided by ten
(10), shall be deemed to be the fair market value of the Common Stock.
SECTION 2.04. NO OBLIGATION TO EXERCISE WARRANTS. This Agreement does
not impose any obligation on any Holder to exercise Warrants.
SECTION 2.05. TAXES. The Company shall pay all expenses in connection
with, and all taxes and other governmental charges that may be imposed with
respect to, the issuance or delivery of any Underlying Common Stock, unless such
tax or charge is imposed by law upon any Holder, in which case such taxes or
charges shall be paid by such Holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Underlying Common Stock
issuable upon exercise of Warrants in any name other than that of the exercising
Holder, and in such case the Company shall not be required to issue or deliver
any stock certificate until such tax or other charge has been paid or it has
been established to the satisfaction of the Company that no such tax or other
charge is due.
SECTION 2.06. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional share of Common Stock upon the exercise of Warrants. As to
any fraction of a share which a Holder would otherwise be entailed to purchase
upon such exercise, such fraction shall be rounded upward or downward to the
nearest whole share.
SECTION 2.07. VESTING OF WARRANTS. The Warrants shall vest on the
Vesting Dates set forth on Schedule 2.02, unless the Required Institutional Debt
has closed and been fully funded by the specified Vesting Date. Upon the closing
and funding of the Required Institutional Debt, any Warrants which have not yet
vested (whether pursuant to the above described vesting schedule or as otherwise
provided herein) shall be canceled and of no effect and the Warrant Certificates
representing such Warrants shall be returned by each Holder to the Company for
cancellation. In the event Holders permit Borrower to close on Permitted
Subordinate Institutional Debt in an amount less than the Required Amount (the
"Actual Amount"), then in
<PAGE> 7
6
addition to the Warrants which have vested pursuant to the aforementioned
schedule, Holders shall become fully vested in Warrants equal to the product of
(1) a fraction, the numerator of which is the difference between $25,000,000 and
the Actual Amount, and the denominator of which is $25,000,000, times (2) the
balance of the Warrants which have not previously vested in the Holders under
the aforementioned schedule.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Holder as of the date hereof
as follows:
SECTION 3.01. CORPORATE ACTION; AUTHORIZATION. The execution, delivery
and performance by the Company of this Agreement and the Warrants and the
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action and (a) do not and will not violate or
conflict with (i) the Certificate of Incorporation or Bylaws of the Company, or
any amendments thereto, or (ii) any law, rule or regulation or any order, writ,
injunction or decree of any court, governmental authority, or arbitrator, the
effect of which will have a material adverse effect on the Company, and (b) do
not and will not conflict with, result in a breach of, or constitute a default
under, or result in the imposition of any lien upon any of the assets or rights
of the Company pursuant to the provisions of, any indenture, mortgage, deed of
trust, security agreement, franchise, permit, license, or other instrument or
agreement by which the Company or any of its respective properties is bound. The
shares of Underlying Common Stock to be issued upon exercise of the Warrants
have been duly and validly authorized and reserved for issuance, and when issued
in compliance with the terms of this Agreement and the Warrants, will be validly
issued, fully-paid and nonassessable and free of any preemptive rights. This
Agreement and the Warrants have been duly executed and delivered by the Company
and constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms, except as may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
SECTION 3.02. ORGANIZATION AND GOOD STANDING; QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own the properties
it owns, to execute and deliver this Agreement and the Warrants, and to
consummate the transactions contemplated hereby.
SECTION 3.03. CONSENTS. The Company has all material licenses,
permits, certificates, orders, approvals and authority from federal, state or
local governmental agencies that are necessary to conduct the businesses of the
Company, and no suspension or cancellation of any such material licenses,
permits, certificates, orders, approvals or authority is pending or, to the
<PAGE> 8
7
Company's knowledge, threatened; and the transactions contemplated by this
Agreement will not cause cancellation or suspension or have any effect upon any
of such material licenses, permits, certificates, orders, approvals or
authority. Neither the nature of the Company or of any of its Subsidiaries, or
of any of their respective businesses or properties, nor any relationship
between the Company or any Subsidiary and any other Person, nor any circumstance
in connection with the offer or issue of the Warrants and the Underlying Common
Stock is such as to require consent, approval or authorization of, or filing,
registration or qualification with, any governmental authority on the part of
the Company as a condition to the execution and delivery of this Agreement, the
Warrants and/or the issuance of the Underlying Common Stock, except as may be
necessary or advisable to effect compliance with federal and state securities
laws.
SECTION 3.04. CAPITALIZATION. The authorized capital stock of the
Company on the date hereof consists of (a) 2,000,000 shares of Preferred Stock,
of which none are issued and outstanding, and (b) 50,000,000 shares of Common
Stock, of which 13,157,362 shares are issued and outstanding. The Common Stock
and the Preferred Stock have the rights and preferences set forth in the
Certificate of Incorporation of the Company, a true, correct and complete copy
of which, together with the Bylaws of the Company, has heretofore been delivered
to the Holders. All of the capital stock of the Company outstanding as of the
date hereof has been validly issued, fully paid and non-assessable. Except as
provided in Schedule 3.04 hereof, no subscription, warrant, option or other
right to purchase or acquire any shares of any class of stock of the Company or
any security convertible into or exchangeable for any such shares, in each case
issued by or binding upon the Company, is outstanding on the date hereof. Except
as set forth in Schedule 3.04: (a) the Company is not obligated to redeem any
shares of capital stock of the Company; (b) the Company is not obligated to
register under the Act any securities of the Company; (c) no preemptive rights
exist with respect to the capital stock of the Company; and (d) there are no
agreements or arrangements between any securityholders of the Company or between
any securityholder of the Company and the Company related to the Company or its
capital stock.
SECTION 3.05. ACCURACY OF INFORMATION. The factual information
furnished by or on behalf of the Company to the Holders in connection with this
Agreement or any transaction contemplated hereby does not contain any untrue
statements of material fact or omit to state a material fact necessary in order
to make the statements made, in the light of the circumstances under which they
were made, not misleading.
ARTICLE IV
COVENANTS OF THE COMPANY
SECTION 4.01. RESERVATION FOR ISSUANCE. The Company shall reserve a
sufficient number of shares of authorized but unissued Common Stock for issuance
with respect to this Agreement and will refrain from taking any action that
would hinder the Company's ability to
<PAGE> 9
8
perform its responsibilities under this Agreement. Further, the Company shall
reserve such additional number of shares of authorized but unissued Common Stock
for issuance from time to time as the number of shares the Warrants evidence the
right to purchase increases as a result of additional issuances of shares or
adjustments as provided in this Agreement.
SECTION 4.02. DIVIDENDS. In the event that the Company shall declare
or pay dividends to its stockholders other than dividends payable in Common
Stock, the Company shall keep in an escrow account, for the benefit of each
Holder, an amount equal to the amount that such Holder would have been entitled
to upon payment if such Holder had exercised the Warrants immediately prior
thereto, to be paid to such Holder (together with all accrued interest thereon)
upon exercise of the Warrants. In the event that a Holder does not exercise all
or part of the Warrants prior to the Expiration Date, the amount in the escrow
account that had been set aside with respect to Underlying Common Stock subject
to unexercised Warrants shall remain the property of the Company.
SECTION 4.03. PROHIBITED ACTIONS. Without the prior written consent of
the Holders, the Company shall not change the par value of the Common Stock from
$0.01 per share.
ARTICLE V
INVESTMENT INTENT
SECTION 5.01. INVESTMENT INTENT; RESTRICTED SECURITIES. Each Holder
represents and warrants that it is acquiring the Warrants and shall be acquiring
the Underlying Common Stock solely for its own account and not with a view to or
for resale in connection with any distribution or public offering thereof within
the meaning of any securities laws and regulations, unless such distribution or
offering is registered under the Act or any exemption from such registration is
available. Each Holder realizes that the resale of the Warrants and the
Underlying Common Stock is restricted by federal and state securities laws and,
accordingly, the Warrants and the Underlying Common Stock must be held
indefinitely unless the resale thereof is subsequently registered under the Act,
or an exemption from such registration is available. Each Holder realizes that
the grant of the Warrants and the sale of the Underlying Common Stock to such
Holder have not been registered under the Act or under any state securities laws
by reason of a specific exemption under the provisions of the Act that may
depend in part upon the such Holder's "investment intent". Accordingly, the
economic risk of the acquisition of such Warrants and Underlying Common Stock
must be borne by the Holders indefinitely unless the resale of the Warrants or
the Underlying Common Stock is subsequently registered under the Act or an
exemption from such registration is available. Each Holder acknowledges and
understands that the Warrants and the Underlying Common Stock are "restricted
securities" as that term is defined in Rule 144 under the Act and are subject to
all of the terms and provisions thereof. Each Holder acknowledges and consents
that the certificates for the Warrants will be legended substantially as
follows:
<PAGE> 10
9
THE SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAS
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAW AND
SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT (1) REGISTRATION UNDER THE ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR (2) QUALIFICATION
FOR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
THE TRANSFER OF THIS WARRANT IS SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT DATED AS OF JANUARY 4, 2000
AMONG THE COMPANY BANK OF AMERICA, N.A., A NATIONAL BANKING
ASSOCIATION, FLEET NATIONAL BANK, A NATIONAL BANKING
ASSOCIATION AND COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH, AS
MODIFIED AND SUPPLEMENTED FROM TIME TO TIME, AND NO TRANSFER
OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNTIL SUCH
CONDITIONS HAVE BEEN FULFILLED. A COPY OF THE FORM OF SUCH
AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL
EXECUTIVE OFFICE OF THE COMPANY. THE HOLDER OF THIS
CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE
BOUND BY THE PROVISIONS OF SUCH AGREEMENT.
Each Holder acknowledges and consents that the certificates for the Underlying
Common Stock will be, when issued, legended substantially as follows:
THE SALE OF THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAW AND
SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE WARRANT
AGREEMENT AND ONLY WITH (1) REGISTRATION UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR (2) QUALIFICATION FOR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
<PAGE> 11
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ARTICLE VI
TRANSFER OF WARRANTS
SECTION 6.01. TRANSFER. Subject to the terms hereof, the Warrants and
all rights hereunder and thereunder are transferable, in whole or in part, on
the books of the Company maintained for such purpose at the Company's principal
office by each Holder, upon surrender of the Warrant Certificate to the Company
at its principal office, accompanied by (i) a duly executed form of warrant
assignment, substantially in the form of Exhibit C attached hereto (the "Warrant
Assignment Form"), and (ii) payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. Upon any partial transfer the
Company will issue and deliver to the assigning Holder a new Warrant or
Certificate or Certificates with respect to the Warrants not so transferred.
ARTICLE VII
REGISTRATION
SECTION 7.01. DEMAND REGISTRATION.
(a) Generally. No more than two (2) times during the Term, each Holder
holding, in the aggregate, Warrants to purchase 65,505 shares of the
Underlying Common Stock as of the date hereof, shall have the right to make
written request to the Company with respect to registration under the Act of all
or any part of its Underlying Common Stock (each, a "Demand Registration"), and
the Company will pay Registration Expenses with respect to such Demand
Registration. The Company will, promptly following the receipt of a Demand
Request notice, prepare and file, and use its commercially reasonable efforts to
prosecute to effectiveness, an appropriate filing with the Commission of a
registration statement covering such Underlying Common Stock and the proposed
sale or distribution thereof under the Act. The Company shall maintain the
effectiveness of any registration statement filed hereunder for a period ending
on the earlier of 180 days (excluding any days on which a Holder was prohibited
from selling by virtue of a Delay Notice delivered under Section 7.04(b)) or
until all offered shares are sold pursuant to such registration statement.
(b) Incomplete Public Offerings, Etc. The Company shall have the right
to postpone the filing or effectiveness of any Demand Registration for a
reasonable period of time, but not in excess of 105 days, if (i) the Company is
conducting or is actively pursuing a public offering, (ii) the Company has been
advised by legal counsel that such filing or effectiveness would require
disclosure of a material financing, acquisition or other corporate transaction,
and the Board of
<PAGE> 12
11
Directors of the Company determines in good faith that such disclosure is not in
the best interests of the Company and its stockholders or (iii) the Board of
Directors of the Company determines in good faith that there is a valid business
purpose or reason for delaying filing or effectiveness.
(c) No Right of Company or Other Person to Piggy-back on Required
Registrations. Neither the Company nor any Person (other than Holders) owning
any of its securities shall have the right to include any of the Company's
securities in a registration statement initiated as a Demand Registration under
this Section 7.01, unless (i) such securities are of the same class as the
Underlying Common Stock being registered, (ii) if such Demand Registration is an
underwritten offering, the Company or such Persons, as applicable, agree in
writing to sell their securities on the same terms and conditions as apply to
the Underlying Common Stock being sold and (iii) the inclusion of any of the
Company's securities could not reasonably be expected to affect the number of
securities or offering price of such securities to be sold by such Holder. If
any Persons owning any securities of the Company register securities of the
Company in a Demand Registration (in accordance with the provisions of this
Section 7.01(e)), such Persons shall pay the fees and expenses of counsel to
such Persons and their pro rata share of the Registration Expenses if the
Registration Expenses for such registration are not paid by the Company for any
reason.
(d) Selection of Underwriters and Counsel, Etc. If a Demand
Registration involves an underwritten offering: (i) the Company shall have the
right to select the investment banker or bankers and manager or managers to
administer the offering (provided that such investment bankers and managers must
be reasonably satisfactory to the Holders); and (ii) the Holders shall have the
right to select the counsel to represent the Holders.
(e) Limitations on Demand Registrations. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to honor a request
for a Demand Registration in connection with any request for a Demand
Registration pursuant to which a registration statement would be declared
effective prior to the expiration of 365 days following the last effective date
of any previous registration statement pursuant to this Section 7.01.
SECTION 7.02. OTHER REGISTRATION.
(a) Piggyback Registrations. If the Company shall propose the
registration on an appropriate form under the Act of the sale of any of its
securities, for itself or for any other securityholder of the Company (other
than a registration statement on Form S-4 or S-8, or any form substitution
therefor), the Company shall, in respect of each such proposed registration
occurring after the Closing Date, give the Holders written notice, or
telegraphic or telephonic notice followed as soon as practicable by written
confirmation thereof, of such proposed registration. Upon written notice or
telegraphic or telephonic notice of the Holders followed as soon as practicable
by written confirmation thereof, given to the Company within ten (10) Business
Days after the giving of such notice of a proposed offering by the Company, the
<PAGE> 13
12
Company shall use its commercially reasonable efforts to include or cause to be
included in any registration statement related to such proposed offering the
sale of all or such portion of the Underlying Common Stock as a Holder may
request; provided, however, that the Company may at any time withdraw or cease
proceeding with any such registration if it shall at the same time withdraw or
cease proceeding with the registration of the sale of the securities originally
proposed to be registered; and provided further, however, that if the Company is
advised in writing in good faith by any managing underwriter of the Company's
securities being offered in an underwritten public offering pursuant to such
registration statement that the amount to be sold by Persons other than the
Company (collectively, the "Selling Stockholders") is greater than the amount
which can be offered without adversely affecting the offering, the Company may
reduce the amount offered for the accounts of Selling Stockholders (including
Holders) to a number deemed satisfactory by such managing underwriter and shares
to be excluded shall be determined in the following sequence: (i) first,
securities held by any Persons not having any such contractual, incidental
registration rights, and (ii) second, the securities sought to be registered by
Selling Stockholders (including the Holders) on a pro rata basis in accordance
with the total number of securities sought to be registered by all Selling
Stockholders. In the event that the proposed registration by the Company is, in
whole or in part, an underwritten public offering of Common Stock, any request
pursuant to this Section 7.02 to register shall specify that such Underlying
Common Stock is to be included in the underwriting on the same terms and
conditions as the shares of Common Stock, if any, otherwise being sold through
underwriters under such registration.
(b) Expenses. All expenses, disbursements and fees of any registration
pursuant to this Section 7.02 shall be borne by the Company, except that the
Holders shall bear underwriting commissions and discounts attributable to the
shares of Underlying Common Stock being sold by the Holders and the fees and
expenses of separate counsel for the Holders, if any.
SECTION 7.03. COMPANY'S OBLIGATIONS IN REGISTRATION. In the event any
Holder participates in an offering of Underlying Common Stock in a registration
statement pursuant to Section 7.01 or Section 7.02, the Company shall:
(a) notify such Holder as to the filing thereof and of all amendments
or supplements thereto filed prior to the effective date of such registration
statement;
(b) notify such Holder immediately, and confirm the notice in writing,
(i) when the registration statement becomes effective, (ii) of the issuance by
the Commission of any stop order or of the initiation, or the threatening, of
any proceedings for that purpose, (iii) of the receipt by the Company of any
notification with respect to the suspension of qualification of the Underlying
Common Stock for sale in any jurisdiction or of the initiation, or the
threatening, of any proceedings for that purpose and (iv) of the receipt of any
comments, or requests for additional information, from the Commission or any
state regulatory authority. If the Commission or any state regulatory authority
shall enter such a stop order or order suspending
<PAGE> 14
13
qualification at any time, the Company will promptly use its commercially
reasonable efforts to obtain the lifting of such order;
(c) during any time when a prospectus is required to be delivered under
the Act during the period required for the distribution of the Underlying Common
Stock, use its commercially reasonable efforts to comply with all requirements
imposed upon it by the Act, as hereafter amended, and by the rules and
regulations promulgated thereunder, so far as necessary to permit the
continuance of sales of or dealings in the Underlying Common Stock pursuant to a
prospectus complying with Section 10(a)(3) of the Act. If at any time when a
prospectus relating to the Underlying Common Stock is required to be delivered
under the Act and any event shall have occurred as a result of which, in the
opinion of counsel for the Company, the prospectus relating to the Underlying
Common Stock as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend such prospectus to comply with the Act and the rules and regulations of
the Commission promulgated thereunder, the Company will promptly prepare and
file with the Commission an appropriate amendment or supplement in form
satisfactory to the Company's counsel;
(d) use its commercially reasonable efforts, in cooperation with such
Holder, at or prior to the time the registration statement becomes effective, to
register or qualify the Underlying Common Stock for offering and sale under the
securities laws relating to the offering or sale of the Underlying Common Stock
in such jurisdictions as such Holder may reasonably designate and to continue
the qualifications in effect so long as required for purposes of the sale of the
Underlying Common Stock; provided that no such qualification shall be required
in any jurisdiction where, as a result thereof, the Company would be subject to
service of process for all purposes. In each jurisdiction where such
qualification shall be effected, the Company will, unless such Holder agrees
that such action is not at the time necessary or advisable, file and make such
statements or reports at such times as are or may reasonably be required by the
laws of such jurisdiction;
(e) use the Company's commercially reasonable efforts to cause the
independent certified public accountants of the Company to deliver to such
Holder, and to the underwriters if the Underlying Common Stock is being sold
through underwriters, letters on the date that the registration statement
becomes effective and on the date the Underlying Common Stock is delivered to
the underwriters for sale pursuant to such registration or, if the Underlying
Common Stock is not being sold through underwriters, on the date that the
registration statement becomes effective, stating that they are independent
certified public accountants within the meaning of the Act and the rules and
regulations of the Commission thereunder, and that, in their opinion, the
financial statements and other financial data of the Company included in the
registration statement or prospectus, or any amendment or supplement thereto,
comply as to form in all material respects with the applicable accounting
requirements of the Act, and such other
<PAGE> 15
14
financial matters as the underwriter, if any, or such Holder may reasonably
request. If any such letter or letters are requested by a Holder in an offering
other than an underwritten offering, such Holder or Holders shall reimburse the
Company the actual cost of obtaining such letter or letters;
(f) after the effective date of such registration statement, prepare,
and promptly notify such Holder of the proposed filing of, and promptly file
with the Commission, each and every amendment or supplement thereto or to any
prospectus forming a part thereof as may be necessary to make any statements
therein not misleading in any material respect;
(g) furnish to such Holder, as soon as available, copies of any such
registration statement and each preliminary or final prospectus, or supplement
or amendment prepared pursuant thereto, all in such quantities as such Holder
may from time to time reasonably request in order to facilitate the public sale
or other disposition of the Underlying Common Stock;
(h) make such representations and warranties to any underwriter of the
Underlying Common Stock, and use the Company's best efforts to cause the
Company's counsel to render, at the time or times of the letters referred to in
subparagraph (e) above, such opinions to such underwriter, if any, as such
underwriter may reasonably request; and
(i) pay all Registration Expenses incident to the performance of the
Company's obligations to the extent required by this Article VII.
SECTION 7.04. AGREEMENTS BY THE HOLDERS. (a) Obligations. In
connection with the filing of a registration statement pursuant to this Article
VII, if a Holder participates in the offering of the Underlying Common Stock,
such Holder shall:
(i) furnish the Company all material information reasonably requested
by the Company concerning such Holder and the proposed method of sale or other
disposition of the Underlying Common Stock and such other information and
undertakings as shall be reasonably required in connection with the preparation
and filing of any such registration statement covering the sale of all or part
of the Underlying Common Stock and in order to ensure full compliance with the
Act and the rules and regulations of the Commission thereunder;
(ii) if the Company is at the time entering into an underwriting
agreement covering the sale of its Common Stock, enter into an underwriting
agreement in customary form with the same underwriter or underwriters who are
parties to such underwriting agreement with the Company, provided that the sales
of Underlying Common Stock by such Holder and the Company thereunder are at the
same price and upon the same terms and conditions; and
(iii) cooperate in good faith with the Company and its underwriters, if
any, in connection with such registration, including placing the shares of
Underlying Common Stock to be included in such registration statement in escrow
or custody to facilitate the sale and distribution thereof.
<PAGE> 16
15
(iv) each Holder holding at least 1% of the Fully-Diluted Outstanding
Common Stock agrees, that if requested by the Company and an underwriter of
Common Stock in connection with any public offering of the Company, not to sell
or otherwise transfer or dispose of any shares held by it for such period, not
to exceed ninety (90) days following the effective date of the relevant
registration statement in connection with any other public offering of common
stock, as such underwriter shall specify reasonably and in good faith (provided
that each officer, director and other holder of 1% of the Fully-Diluted
Outstanding Common Stock also so agree).
(b) Black-Out Periods. The Holders agree that they shall not sell any
shares of the Underlying Common Stock pursuant to any effective registration
statement during any period of time when, but only so long as, the Company
notifies the Holders (a "Delay Notice") that the Company is in possession of
material non-public information that, in the exercise of its reasonable judgment
based on the advice of its counsel, would be required to be disclosed in a
registration statement (or any amendment or post-effective amendment thereto) in
order to comply with Commission requirements, which material information may
relate, including, without limitation, to a financing project or a pending
acquisition, merger or other material corporate reorganization to which the
Company is or is expected to be a party; provided, however, that the Company
shall advise the Holders in writing as soon as any such delay is no longer
applicable; provided further that the Holders shall only be prohibited from so
selling any shares of Underlying Common Stock for up to 45 consecutive days (a
"Delay Period") following the receipt of a Delay Notice and any two Delay
Periods must be at least 30 days apart during which time the Holders shall be
permitted to sell shares of Underlying Common Stock pursuant to an effective
registration statement.
SECTION 7.05. INDEMNIFICATION; CONTRIBUTION.
(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless each Holder, its officers, directors, agents, employees,
representatives and each person or entity who controls such Holder (within the
meaning of the Act), against all losses, claims, damages, liabilities and
expenses arising out of or based upon any untrue or alleged untrue statement of
material fact contained in any registration statement, any amendment or
supplement thereto, any prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, except insofar as the same arise out of or
are based upon any such untrue statement or omission based upon information with
respect to the Holders furnished to the Company by the Holders, or the failure
of the Holders to deliver a prospectus in which such statements or omissions
were corrected. In connection with an underwritten offering, the Company will
indemnify the underwriters thereof, their officers and directors and each person
who controls such underwriters (within the meaning of the Act) to the same
extent as provided above with respect to the sale of Underlying Common Stock by
the Holders.
<PAGE> 17
16
(b) Indemnification by the Holders. In connection with any registration
statement in which a Holder is participating, such Holder will furnish to the
Company in writing such information with respect to the name and address of such
Holder, the amount of Underlying Common Stock held by such Holder, and such
other information as is required by the Company for use in connection with any
such registration statement or prospectus and agrees to indemnify, to the extent
permitted by law, the Company, its directors and officers and each person or
entity who controls the Company (within the meaning of the Act) against any
losses, claims, damages, liabilities and expenses arising out of or based upon
any untrue statement of material fact contained in any registration statement,
any amendment or supplement thereto, any prospectus or preliminary prospectus or
any omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent that such
untrue statement or omission is contained in any information with respect to the
Holders furnished to the Company by the Holders.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such person of any written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which such Person will claim indemnification or contribution
pursuant to this Agreement. If the Company is to be the indemnifying party,
unless in the reasonable judgment of the indemnified party (i) a conflict of
interest may exist between the indemnified party and the Company with respect to
a claim or (ii) the named parties to any action, suit, proceeding or
investigation (including any impleaded parties) include both the Company and an
indemnified party, and such indemnified party shall have been advised by counsel
that there may be one or more legal defenses available to it that are different
from or additional to those available to the Company, the indemnified party
shall permit the Company to assume the defense of such claim with counsel
reasonably satisfactory to such indemnified party. Whether or not such defense
is assumed by the Company, the Company will not be subject to any liability for
any settlement made without its consent. No indemnifying party will consent to
entry of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of such claim or
litigation. If the Company is not entitled to, or elects not to, assume the
defense of a claim, it will not be obligated to pay the fees and expenses of
more than one counsel with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the Company shall be obligated to pay the fees and
expenses of one additional counsel.
(d) Contribution. If the indemnification provided for in this Section
7.05 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
<PAGE> 18
17
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any statement of a material fact or omission or
alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 7.05(c), any legal or other fees or expenses reasonably incurred by such
party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 7.05(d) were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 7.05(d), no Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
If indemnification is available under this Section 7.05, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Section 7(a) and (b) without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable consideration
provided for in this Section 7.05(d).
SECTION 7.06. OTHER REGISTRATION RIGHTS. The Company covenants that it
shall not grant any registration rights to any Person which could conflict or be
inconsistent with the provisions of Article VII or which would otherwise
adversely affect the rights of the Holders under this Warrant Agreement. If the
Company shall at any time provide to any Person rights with respect to the
registration of securities of the Company under the Act which are, in the sole
judgment of the Holders, on terms or conditions more favorable to such Person
than the terms and conditions provided in this Article VII, the Company shall
provide (by way of amendment to this Agreement or otherwise) such more favorable
terms or conditions to the Holders. In the event of a conflict or inconsistency,
the provisions of this Article VII shall prevail.
SECTION 7.07. TERMINATION. The rights granted under Sections 7.01 and
7.02 shall terminate, with respect to any Holder, upon the earlier of (i) sale
of all of the Underlying Common Stock owned by such Holder under a registration
statement and (ii) the date upon which the Holders may sell all shares of
Underlying Common Stock in a single three month period under Rule 144 as
promulgated under the Securities Act of 1933, as amended, or such comparable
successor statute or rule thereto.
<PAGE> 19
18
ARTICLE VIII
ADJUSTMENT OF WARRANTS
SECTION 8.01. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER,
ETC. In case of any reorganization or consolidation of the Company with, or any
merger of the Company with or into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation) or in
case of any sale or transfer (whether in one or more transactions) of all or
substantially all of the assets of the Company, the corporation resulting from
such reorganization or consolidation or surviving such merger or to which such
sale or transfer shall be made, as the case may be, shall make suitable
provision (which shall be fair and equitable to the Holders) and shall either
(i) assume the obligations of the Company hereunder (by written instrument
executed and mailed to the Holders) pursuant to which, upon exercise of Warrants
at any time after the consummation of such reorganization, consolidation, merger
or conveyance, or (ii) make suitable provision in connection with the closing of
such reorganization, consolidation, merger or conveyance such that in the case
of either clause (i) or (ii) the Holders shall be entitled to receive the same
amount of cash, stock or other securities or property that such Holder would
have been entitled to receive if such Holder had exercised the Warrants
immediately prior thereto.
SECTION 8.02. ADJUSTMENT OF NUMBER OF WARRANT SHARES ISSUABLE. The
number of shares of Common Stock issuable upon the exercise of the Warrants (the
"Exercise Rate") is subject to adjustment from time to time upon the occurrence
of the events enumerated in this Section 8.02 and under the circumstances
described in Section 8.03. For purposes of this Section 8.02, "Common Stock"
means shares now or hereafter authorized of any class of common stock of the
Company and any other stock of the Company, however designated, that has the
right (subject to any prior rights of any class or series of preferred stock) to
participate in any distribution of the assets or earnings of the Company without
limit as to per share amount.
(a) Adjustment for Change in Capital Stock.
If the Company:
1. pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock;
2. subdivides its outstanding shares of Common Stock into a
greater number of shares;
3. combines its outstanding shares of Common Stock into a
smaller number of shares;
4. makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock, or
<PAGE> 20
19
5. issues by reclassification of its Common Stock any shares
of its capital stock;
then the Exercise Rate in effect immediately prior to such action shall be
proportionately adjusted so that the holder of the Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which such holder would have owned immediately following the action if
such Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification. If, after an
adjustment, a holder of a Warrant upon exercise may receive shares of two or
more classes of capital stock of the Company, the Company shall determine the
allocation of the adjusted Exercise Rate between the classes of capital stock.
After such allocation, the exercise privilege and the Exercise Rate of each
class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this Section. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) Adjustment for Rights Issue. If the Company issues any rights,
options or warrants entitling any person to subscribe for Common Stock or
securities convertible into, or exchangeable or exercisable for, Common Stock at
an offering price (or with an initial conversion, exchange or exercise price
plus such offering price) which is less than the Current Market Price per share
of Common Stock on the record date for such issuance (all of the foregoing,
"Rights"), the Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
-----------
O + N x P
-----
M
where:
E' = the adjusted Exercise Rate.
E = the current Exercise Rate.
O = the number of shares of Common Stock outstanding
on the record date.
N = the number of additional shares of Common Stock
offered.
P = the offering price per share of the additional
shares.
M = the Current Market Price per share of Common
Stock on the record date.
<PAGE> 21
20
The adjustment shall be made successively whenever any such Rights are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the Rights in the case of
Rights to be issued to the holders of Common Stock. To the extent that shares of
Common Stock are not delivered after the expiration of such rights or Warrants,
the Exercise Rate shall be readjusted to the Exercise Rate which would otherwise
be in effect had the adjustment made upon the issuance of such rights or
warrants been made on the basis of delivery of only the number of shares of
Common Stock actually delivered. In the event that such rights or warrants are
not so issued, the Exercise Rate shall again be adjusted to be the Exercise Rate
which would then be in effect if such date fixed for determination of
shareholders entitled to receive such rights or Warrants had not been so fixed.
(c) Adjustment for Other Distributions. If the Company distributes to
all holders of its Common Stock any of its assets (including but not limited to
cash), debt securities, preferred stock or any rights or Warrants to purchase
any such securities, the Exercise Rate shall be adjusted in accordance with the
formula:
E' = E x M
-----
M-F
where:
E' = the adjusted Exercise Rate.
E = the current Exercise Rate.
M = the Current Market Price per share of Common
Stock on the record date.
F = the fair market value on the record date of the
assets, securities, rights or warrants
applicable to one share of Common Stock. The
Board of Directors shall determine the fair
market value pursuant to Section 8.02(m) based
upon the trading prices of publicly traded
securities where applicable.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive the distribution.
This subsection does not apply to rights, options or warrants referred to in
subsection (b) of this Section 8.02.
(d) Adjustment for Common Stock Issue. If the Company issues shares of
Common Stock for a consideration per share less than the Current Market Price
per share on the date the Company fixes the offering price of such additional
shares, the Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
-------------
O + N x P
-----
M
<PAGE> 22
21
where:
E' = the adjusted Exercise Rate.
E = the then current Exercise Rate.
O = the number of shares outstanding immediately
prior to the issuance of such additional shares.
N = the number of additional shares of Common Stock
issued.
P = the aggregate consideration received per share
for the issuance of such additional shares.
M = the Current Market Price per share on the date
of issuance of such additional shares.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance.
This subsection (d) does not apply to:
(1) any of the transactions described in subsections (a), (b), (c)
and (e) of this Section 8.02,
(2) the exercise of the Warrant, or the conversion or exchange of
other securities convertible or exchangeable for Common Stock,
(3) Common Stock upon the exercise of rights or warrants issued to
the holders of Common Stock,
(4) Common Stock issued to shareholders of any person that is not
affiliated with the Company and that merges into the Company
or a subsidiary of the Company in proportion to their stock
holdings of such person immediately prior to such merger, upon
such merger.
(e) Adjustment for Convertible Securities Issue. If the Company issues
any securities convertible into or exchangeable for Common Stock (other than
securities issued in transactions described in subsections (b) and (c) of this
Section 8.02) for a consideration per share of Common Stock initially
deliverable upon conversion or exchange of such securities less than the Current
Market Price per share on the date of issuance of such securities, the Exercise
Rate shall be adjusted in accordance with the formula:
E' = E x O + N
-------------
O + N x P
-----
M
<PAGE> 23
22
where:
E' = the adjusted Exercise Rate.
E = the then current Exercise Rate.
O = the number of shares outstanding immediately
prior to the issuance of such securities.
N = the maximum number of shares deliverable upon
conversion of or in exchange for such securities
at the initial conversion or exchange rate.
P = the aggregate consideration received for the
issuance of each such security.
M = the Current Market Price per share on the date
of issuance of such securities.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance.
If all of the Common Stock deliverable upon conversion or exchange of
such securities has not been issued when such securities are no longer
outstanding, then the Exercise Rate shall promptly be readjusted to the Exercise
Rate which would then be in effect had the adjustment upon the issuance of such
securities been made on the basis of the actual number of shares of Common Stock
issued upon conversion or exchange of such securities.
This subsection (e) does not apply to convertible securities issued to
shareholders of any person that is not affiliated with the Company and that
merges into the Company, or with a subsidiary of the Company, in proportion to
their stock holdings of such person immediately prior to such merger, upon such
merger.
(f) Current Market Price. The current market price per share of Common
Stock (the "Current Market Price") on any date is: (i) if the Common Stock is
not registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the value of the Common Stock as determined by an independent,
nationally recognized investment banking firm experienced in valuation matters
chosen by the Company and reasonably satisfactory to the Warrant holder;
provided, however that the current market value shall be determined by the Board
of Directors of the Company, acting in good faith (which valuation shall be to
the reasonable satisfaction of the Warrant holder), with respect to any Common
Stock issued by the Board of Directors pursuant to a stock option plan for
directors, officers, and consultants or advisers of the Company; and provided
further that the Board of Directors shall have such authority referred to in the
immediately preceding proviso with regard to no more than five percent (5%) of
the authorized Common Stock in the aggregate and the current market value of any
Common Stock in excess of such amount shall be determined as otherwise set forth
in this Section 8.02(f), or (ii) if the Common Stock is registered under the
Exchange Act, the average of
<PAGE> 24
23
the Quoted Prices of the Common Stock for 30 consecutive trading days commencing
45 trading days before the date in question or, if the Common Stock has been
registered for less than 30 consecutive trading days, the average of the Quoted
Prices for all the trading days of the Common Stock. The "Quoted Price" of the
Common Stock is the last reported sales price of the Common Stock as reported by
the NASDAQ National Market System, or if the Common Stock is listed on a
securities exchange, the last reported sales price of the Common Stock on such
exchange which shall be for consolidated trading if applicable to such exchange,
or if neither so reported or listed, the last reported bid price of the Common
Stock. In the absence of one or more such quotations, the Board of Directors of
the Company shall determine the Current Market Price pursuant to Section 8.02(m)
in good faith on the basis of such quotations.
(g) Consideration Received. For purposes of any computation respecting
consideration received pursuant to subsections (d) and (e) of this Section 8.02,
the following shall apply:
1. in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the
amount of such cash, provided that in no case
shall any deduction be made for any commissions,
discounts or other expenses incurred by the
Company for any underwriting of the issue or
otherwise in connection therewith;
2. in the case of the issuance of shares of Common
Stock for a consideration in whole or in part
other than cash, the consideration other than
cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board
of Directors pursuant to Section 8.02(m), based
upon the trading prices of publicly traded
securities where appropriate (irrespective of
the accounting treatment thereof), and described
in a resolution of the Board of Directors of the
Company; and
3. in the case of the issuance of securities
convertible into or exchangeable for shares, the
aggregate consideration received therefor shall
be deemed to be the consideration received by
the Company for the issuance of such securities
plus the additional minimum consideration, if
any, to be received by the Company upon the
conversion or exchange thereof (the
consideration in each case to be determined in
the same manner as provided in clauses (1) and
(2) of this subsection).
(h) When De Minimis Adjustment May Be Deferred. No adjustment in the
Exercise Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Rate. Any adjustments that are not made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section shall be made to the nearest share.
<PAGE> 25
24
(i) When No Adjustment Required. No adjustment need be made for rights
to purchase Common Stock pursuant to a Company plan for reinvestment of
dividends or interest. No adjustment need be made for a change in the par value
or no par value of the Common Stock. To the extent the Warrant becomes
convertible into cash, no adjustment need be made thereafter as to the cash.
Interest will not accrue on the cash. No adjustment need be made under this
Section 8.02 for securities issued (up to a maximum of 6% of the Fully Diluted
Outstanding Common Stock) to the holders of the Required Institutional Debt.
(j) Notice of Adjustment. Whenever the Exercise Rate is adjusted, the
Company shall provide the notices required by Section 8.04 hereof.
(k) Voluntary Increase. The Company from time to time may increase the
Exercise Rate by any amount for any period of time if the period is at least 20
days and if the increase is irrevocable during the period. Whenever the Exercise
Rate is increased, the Company shall mail to the Warrant holder a notice of the
increase. The Company shall mail the notice at least 15 days before the date the
increased Exercise Rate takes effect. The notice shall state the increased
Exercise Rate and the period it will be in effect. An increase of the Exercise
Rate does not change or adjust the Exercise Rate otherwise in effect for
purposes of subsections (a), (b), (c), (d) and (e) of this Section 8.02.
(l) Notice of Certain Transactions. If:
1. the Company takes any action that would require
an adjustment in the Exercise Rate pursuant to
subsections (a), (b), (c), (d) or (e) of this
Section 8.02; or
2. there is a liquidation or dissolution of the
Company, then the Company shall mail to the
Warrant holder a notice stating the proposed
record date for a dividend or distribution or
the proposed effective date of a subdivision,
combination, reclassification, consolidation,
merger, transfer, lease, liquidation or
dissolution. The Company shall mail the notice
at least 15 days before such date. Failure to
mail the notice or any defect in it shall not
affect the validity of the transaction.
(m) Company Determination. Any determination that the Company or its
Board of Directors must make pursuant to this Agreement shall be made in good
faith and shall be binding on the Warrant holder, except as set forth herein.
The Company shall give the holder of the Warrant written notice of any such
determination by the Company or its Board of Directors.
SECTION 8.03. NO DILUTION OR IMPAIRMENT, CAPITAL AND OWNERSHIP
STRUCTURE. If any event shall occur as to which the provisions of Section 8.02
are not strictly applicable but the
<PAGE> 26
25
failure to make any adjustment would adversely affect the purchase rights
represented by the Warrant in accordance with the essential intent and
principles of such Section, then, in each such case, the Company shall appoint,
at its own expense, an investment banking firm of recognized national standing
that does not have a direct or material indirect financial interest in the
Company or any of its subsidiaries, who has not been, and, at the time it is
called upon to give independent financial advice to the Company, is not (and
none of its directors, officers, employees, affiliates or shareholders are) a
promoter, director or officer of the Company or any of its subsidiaries, which
shall give their opinion upon the adjustment, if any, on a basis consistent with
the essential intent and principles established in Section 8.02, necessary to
preserve, without dilution, the purchase rights, represented by this Warrant.
Upon receipt of such opinion, the Company will promptly mail a copy thereof to
the holder of the Warrant and shall make the adjustments described therein. The
Company will not, by amendment of its articles of incorporation or through any
consolidation, merger, reorganization, transfer of assets, 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 of the Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of the Warrant against dilution or other impairment.
Without limiting the generality of the foregoing, the Company (1) will take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock on
the exercise of the Warrant from time to time outstanding and (2) will not take
any action which results in any adjustment of the Exercise Rate if the total
number of Warrant Shares issuable after the action upon the exercise of the
Warrant would exceed the total number of shares of Common Stock then authorized
by the Company's articles of incorporation and available for the purposes of
issue upon such exercise. A consolidation, merger, reorganization or transfer of
assets involving the Company covered by Section 8.01 shall not be prohibited by
or require any adjustment under this Section 8.03.
SECTION 8.04. NOTICES TO THE WARRANT HOLDER. Upon any adjustment of the
Exercise Rate pursuant to Section 8.02, the Company shall promptly thereafter
cause to be delivered, by first-class mail, postage prepaid, to the registered
holder of the Warrant Certificate at his address appearing on the Warrant
register a certificate of an Officer of the Company setting forth the Exercise
Rate after such adjustment and setting forth in reasonable detail the method of
calculation and the facts upon which such calculations are based and setting
forth the number of Warrant Shares (or portion thereof) issuable after such
adjustment in the Exercise Rate, upon exercise of the Warrant and payment of the
Exercise Price. Where appropriate, such notice may be given in advance and
included as a part of the notice required to be mailed under the other
provisions of this Section 8.04.
<PAGE> 27
26
In case:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants;
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other than
cash dividends or cash distributions payable out of consolidated earnings or
earned surplus or dividends payable in shares of Common Stock or distributions
referred to in subsection (a) of Section 8.02 hereof);
(c) of any consolidation or merger to which the Company is a party and
for which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrant (other than a change in par value, or from no par
value to par value, or as a result of a subdivision or combination), or a tender
offer or exchange offer for shares of Common Stock;
(d) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company; or
(e) the Company proposes to take any action which would require an
adjustment of the Exercise Rate pursuant to Section 8.02; then the Company shall
cause to be given to the registered holder of the Warrant Certificate at his or
her address appearing on the Warrant register, at least 20 days (or 10 days in
any case specified in clauses (a) or (b) above) prior to the applicable record
date hereinafter specified, or promptly in the case of events for which there is
no record date, by first-class mail, postage prepaid, a written notice stating
(i) the date as of which any such subdivision, combination or reclassification
is to be made, or (ii) the date as of which the holders of record of shares of
Common Stock to be entitled to receive any such dividends, rights, options,
warrants or distribution are to be determined, or (iii) the initial expiration
date set forth in any tender offer or exchange offer for shares of Common Stock,
or (iv) the date on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up is expected to become effective or
consummated, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange such shares for securities
or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up. The failure to give the notice required by this Section 8.04 or any defect
therein shall not affect the legality or validity of any distribution, right,
option, warrant, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action.
Nothing contained in this Agreement or in the Warrant Certificate shall
be construed as conferring upon the holder thereof the right to vote or to
consent or to receive notice as
<PAGE> 28
27
shareholders in respect of the meetings of shareholders or the election of
Directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company.
ARTICLE IX
HOLDERS' RIGHTS
SECTION 9.01. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT
CERTIFICATES. If any Warrant Certificate shall become lost, stolen, mutilated or
destroyed, the Company shall, on such reasonable terms as to indemnity or
otherwise as it may impose, including without limitation the delivery by a
Holder to the Company (at such Holder's expense) of an affidavit of lost
instrument and an indemnity agreement, issue a new Warrant Certificate of like
denomination, tenor and date as the Warrant Certificate so lost, stolen,
mutilated or destroyed. Any such new Warrant Certificate shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant Certificate shall be at any time
enforceable by anyone.
SECTION 9.02. RIGHTS OF WARRANT HOLDERS. No Warrant Certificate shall
entitle the holder thereof to any of the rights of a stockholder of the Company,
including without limitation the right to vote, to receive dividends and other
distributions, to receive any notice of, or to attend, meetings of stockholders
or any other proceedings of the Company, except as expressly provided herein.
<PAGE> 29
28
ARTICLE X
MISCELLANEOUS
SECTION 10.01. AMENDMENT AND WAIVER. Any term, covenant, agreement or
condition in this Agreement may be amended, or compliance therewith be waived
(either generally or in a particular instance and either retroactively or
prospectively), by a written instrument or written instruments executed by the
Company and the Holders.
SECTION 10.02. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES.
Except as otherwise provided herein, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties hereto. Neither this Agreement nor any other agreement
contemplated hereby shall be deemed to confer upon any Person not a party hereto
or thereto any rights or remedies hereunder or thereunder except for successors
or assigns of the parties hereto.
SECTION 10.03. ENTIRE AGREEMENT. This Agreement and the agreements
contemplated hereby constitute the entire agreement of the parties regarding the
subject matter hereof, and supersede all prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
SECTION 10.04. SEVERABILITY. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provision shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
SECTION 10.05. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
The representations and warranties and covenants contained herein shall survive
the execution of this Agreement and the purchase of the Underlying Common Stock,
if any, and continue indefinitely and all statements contained in any
certificate, exhibit or other instrument delivered by or on behalf of the
Company or Holders pursuant to this Agreement shall be deemed to have been
representations and warranties by the Company or the Holders, as the case may
be. After the purchase of the Underlying Common Stock, the Holders shall
continue to be entitled with respect to such shares to all rights to which it
would have been entitled as a Holder under this Agreement. The Company will, at
the time of each exercise of Warrants upon the request of a Holder, acknowledge
in writing, in form reasonably satisfactory to such Holder, its continuing
obligation to afford to such Holder all such rights; provided, however, that if
such Holder shall
<PAGE> 30
29
fail to make any such request, such failure shall not affect the continuing
obligation of the Company to afford to such Holder all such rights.
SECTION 10.06. GOVERNING LAW. This Agreement and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the substantive laws (but not the rules governing
conflicts of laws) of the State of Delaware.
SECTION 10.07. CAPTIONS. The captions in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of the
terms or provisions hereof.
SECTION 10.08. NOTICE. Any notice or communication hereunder or in any
agreement entered into in connection with the transactions contemplated hereby
must be in writing and given by depositing the same in the United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person, by
overnight courier or by facsimile transmission. Such notice shall be deemed
received on the date on which it is hand-delivered, delivered by overnight
courier or received by facsimile transmission or on the third Business Day
following the date on which it is so mailed. For purposes of notice, the
addresses of the parties shall be:
If to the Company:
MONARCH DENTAL CORPORATION
4201 Spring Valley Road, Suite 320
Dallas, Texas 75244
Attention: Chief Executive Officer
With a copy to:
GOODWIN, PROCTER & HOAR, LLP Exchange Place Boston,
Massachusetts 02109-2881 Attention: John R. LeClaire, P.C.
If to Bank of America:
BANK OF AMERICA, N.A.
901 Main Street, 7th Floor
Dallas, Texas 75202
Attention: Nathan McClellan
With a copy to:
JACKSON WALKER L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Attention: Michael P. Haggerty
<PAGE> 31
30
If to Fleet:
FLEET NATIONAL BANK
One Federal Street, Mail Stop: MA OF D07B
Boston, Massachusetts 02110
Attention: Ginger C. Stolzenthaler
If to Rabobank:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. "Rabobank
Nederland", New York branch
245 Park Avenue
New York, NY 10167-0062
Attention: Corporate Services
With a copy to:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. "Rabobank
Nederland", New York branch
13355 Noel Road, Suite 1000
Dallas, Texas 75240-6645
Attention: David Thomas
And a copy to:
JENKENS & GILCHRIST
1445 Ross Avenue
Suite 3200
Dallas, Texas 75202
Attention: Terry G. Freeman
Any party may change its address for notice by written notice given to the other
parties in accordance with this Section.
SECTION 10.09. COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURES FOUND ON FOLLOWING PAGES.]
<PAGE> 32
31
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
HOLDERS:
BANK OF AMERICA, N.A., a national banking
association,
By:
Name:
Title:
FLEET NATIONAL BANK,
a national banking association
By:
Name:
Title:
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A., "Rabobank Nederland",
New York Branch
By:
Name:
Title:
By:
Name:
Title:
COMPANY:
MONARCH DENTAL CORPORATION
By:
Name:
Title:
<PAGE> 33
EXHIBIT A
THE SALE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE
SECURITIES LAW AND SUCH WARRANTS MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT (1) REGISTRATION UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR (2) QUALIFICATION FOR AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
THE TRANSFER OF THIS WARRANT IS SUBJECT TO THE CONDITIONS SPECIFIED IN A WARRANT
AGREEMENT DATED AS OF JANUARY 4, 2000 AMONG THE COMPANY, BANK OF AMERICA, N.A.,
A NATIONAL BANKING ASSOCIATION, FLEET NATIONAL BANK, A NATIONAL BANKING
ASSOCIATION AND COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH AS MODIFIED AND SUPPLEMENTED FROM TIME TO TIME, AND
NO TRANSFER OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS
HAVE BEEN FULFILLED. A COPY OF THE FORM OF SUCH AGREEMENT IS ON FILE AND MAY BE
INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY. THE HOLDER OF THIS
CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY THE
PROVISIONS OF SUCH AGREEMENT.
No.__ Certificate for Warrants
MONARCH DENTAL CORPORATION
COMMON STOCK PURCHASE WARRANT CERTIFICATE
THIS CERTIFIES that ______________ or registered assigns is the
registered holder (the "Holder") of Warrants (the "Warrants") that collectively
represent the right to purchase, prior to expiration, __________ shares of
common stock (the "Common Stock") of Monarch Dental Corporation, a Delaware
corporation (the "Company"), subject to the dilution protection provisions
contained in Section 8.02 and 8.03 of the Warrant Agreement (as hereinafter
defined) at the exercise price of $0.01 per share (the "Exercise Price"), as
set forth in the Warrant Agreement, by the Holder surrendering this Warrant
Certificate, with the form of Notice of Exercise duly executed, at the Company's
principal office, and by paying in full the
<PAGE> 34
2
Exercise Price, plus any transfer taxes as provided in the Warrant Agreement.
Payment of the Exercise Price may be made at the option of the Holder by
certified check or money order payable to the order of the Company. Terms used
herein but not otherwise defined shall have the meanings ascribed thereto in
that certain Warrant Agreement, of even date herewith, between the Company and
Holder.
This Warrant is issued pursuant to the Warrant Agreement, and all
rights of the holder of this Warrant are further governed by, and subject to the
terms and provisions of, the Warrant Agreement, to all of which terms and
provisions the Holder consents by acceptance hereof. Copies of the Warrant
Agreement and any amendments thereto are available upon request to the Company.
The holder of this Warrant shall be entitled to the benefits, rights and
privileges provided under the Warrant Agreement. If any provision herein
conflicts with a provision in the Warrant Agreement, the provision in the
Warrant Agreement shall apply.
The Warrants are subject to expiration pursuant to the terms of the
Warrant Agreement.
Prior to expiration, subject to any applicable laws, rules or
regulations restricting transferability and to any restriction or
transferability that may appear in the Warrant Agreement, the Holder shall be
entitled to transfer this Warrant Certificate in whole or in part upon surrender
of this Warrant Certificate at the principal office of the Company by the
Holder, accompanied by a duly executed Warrant Assignment Form. Upon any such
transfer, a new Warrant Certificate or Certificates representing the same
aggregate number of Warrants will be issued in accordance with instructions in
the Warrant Assignment Form.
Prior to expiration, subject to the foregoing and to the provisions of
the Warrant Agreement, the Holder shall be entitled to exchange this Warrant
Certificate, with or without other Warrant Certificates, for another Warrant
Certificate or Warrant Certificates for the same aggregate number of Warrants,
upon surrender of this Warrant Certificate by the Holder at the principal office
of the Company.
The Holder has the right to require the Company to purchase the
Warrants represented by this Warrant Certificate, or the shares purchased upon
exercise of the Warrants, pursuant to the terms of the Warrant Agreement.
This Warrant Certificate shall not entitle the registered Holder to any
of the rights of a stockholder of the Company, including without limitation the
right to vote, to receive dividends and other distributions, or to attend or
receive any notice of meetings of stockholders or any other proceedings of the
Company unless specifically provided in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed.
MONARCH DENTAL CORPORATION
By:
Name:
Title:
<PAGE> 35
3
EXHIBIT B
NOTICE OF EXERCISE
,
------------- ----
To Monarch Dental Corporation:
The undersigned ___________________________, pursuant to the provisions
of the attached Warrant Certificate, hereby elects to purchase _____% of the
Fully Diluted Outstanding Common Stock of Monarch Dental Corporation evidenced
by the attached Warrant Certificate. I have enclosed with this Notice payment of
the amount required to purchase such shares pursuant to the terms of the Warrant
Agreement.
Unless otherwise provided in the Warrant Agreement, if I have not
executed this Notice for all of the shares of Common Stock purchasable pursuant
to the Warrant, I am entitled to have, and you will promptly deliver to me, a
new Warrant Certificate issued, of the same tenor as the Warrant Certificate
surrendered herewith, for the purchase of the remaining shares.
Mailing address for stock certificate(s) or funds unless otherwise
ordered:
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Very truly yours,
-------------------------------------
<PAGE> 36
4
EXHIBIT C
WARRANT ASSIGNMENT FORM
-------------,---
ASSIGNMENT IN FULL
FOR VALUE RECEIVED, ___________________________ hereby sells, assigns
and transfers unto ___________________________ all Warrants to purchase shares
of Common Stock of the Company as evidenced by the attached Warrant Certificate
and does irrevocably constitute and appoint ___________________________ ,
attorney, to transfer such Warrants on the books of the Company, with full power
of substitution in the premises.
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, ___________________________ hereby sells, assigns
and transfers unto ___________________________ Warrants to purchase ____% of the
Fully Diluted Outstanding Common Stock of the Company as evidenced by the
attached Warrant Certificate together with all rights therein, and does
irrevocably constitute and appoint ___________________________, attorney, to
transfer that part of the such Warrants on the books of the Company, with full
power of substitution in the premises.
Under the provisions of the Warrant Agreement, if the undersigned has
not executed this assignment for all of the shares of Common Stock purchasable
pursuant to the Warrant Certificate, the undersigned is entitled to have a new
Warrant Certificate issued, of the same tenor as the Warrant Certificate
surrendered hereby, for the purchase of the remaining shares not subject to this
assignment. The new Warrant Certificates should be mailed to the following
addresses:
Address of Assignor:
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
Address of Assignee:
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
Very truly yours,
--------------------------------------
<PAGE> 37
5
AGREEMENT TO BE BOUND BY TERMS
OF WARRANT AGREEMENT
_______________________, the Assignee set forth above, hereby agrees to
be bound by the terms of the Warrant Agreement pursuant to which the Warrants
were issued.
Dated:
-------------------------
<PAGE> 38
6
Schedule 2.02
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Certificate Number Holder Number of Shares Vesting Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Bank of America 36,183 March 31, 2000
- --------------------------------------------------------------------------------------------------------------------
2 Fleet 17,763 March 31, 2000
- --------------------------------------------------------------------------------------------------------------------
3 Rabobank 11,842 March 31, 2000
- --------------------------------------------------------------------------------------------------------------------
4 Bank of America 36,183 April 30, 2000
- --------------------------------------------------------------------------------------------------------------------
5 Fleet 17,763 April 30, 2000
- --------------------------------------------------------------------------------------------------------------------
6 Rabobank 11,842 April 30, 2000
- --------------------------------------------------------------------------------------------------------------------
7 Bank of America 36,183 May 31, 2000
- --------------------------------------------------------------------------------------------------------------------
8 Fleet 17,763 May 31, 2000
- --------------------------------------------------------------------------------------------------------------------
9 Rabobank 11,842 May 31, 2000
- --------------------------------------------------------------------------------------------------------------------
10 Bank of America 108,547 June 30, 2000
- --------------------------------------------------------------------------------------------------------------------
11 Fleet 53,286 June 30, 2000
- --------------------------------------------------------------------------------------------------------------------
12 Rabobank 35,524 June 30, 2000
- --------------------------------------------------------------------------------------------------------------------
Total 394,721
---------------------------
March 28, 2000
</TABLE>
<PAGE> 1
EXHIBIT 11.1
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
------- --------
<S> <C> <C>
Net income (loss) $ 6,581 $ (424)
======= ========
Weighted average common shares outstanding 12,507 10,805
Weighted average common equivalent shares outstanding 7 --
------- --------
Weighted average common and common equivalent
shares outstanding 12,514 10,805
======= ========
NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) $ 0.53 $ (0.04)
======= ========
NET INCOME (LOSS) PER SHARE - ASSUMING DILUTION:
Net income (loss) $ 0.53 $ (0.04)
======= ========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of income data for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995, and the selected consolidated
balance sheet data at December 31, 1999, 1998, 1997, 1996 and 1995, have been
derived from the Consolidated Financial Statements of Monarch Dental Corporation
(the "Company") that have been audited by Arthur Andersen LLP, independent
public accountants. The following selected consolidated financial information
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Patient revenue, net $ 204,070 $ 129,601 $ 68,619 $ 35,980 $ 13,223
Operating expenses:
Provider salaries and benefits 67,089 40,283 21,179 10,527 3,978
Clinical and other salaries and benefits 53,195 36,556 18,803 9,386 3,214
Dental supplies 10,386 6,898 4,282 2,216 833
Laboratory fees 9,888 5,954 2,902 1,648 633
Occupancy 10,066 7,265 3,709 1,937 471
Advertising 3,073 2,436 1,781 1,210 710
Other operating expenses 22,031 17,855 7,944 4,839 1,422
Depreciation and amortization 10,549 9,863 2,938 1,430 293
--------- --------- --------- --------- ---------
186,277 127,110 63,538 33,193 11,554
--------- --------- --------- --------- ---------
Operating income 17,793 2,491 5,081 2,787 1,669
Interest expense, net 7,687 2,872 1,545 1,687 87
Minority interest in combined subsidiaries 225 12 46 -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item 9,881 (393) 3,490 1,100 1,582
Income taxes(1) 3,300 31 1,355 425 --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 6,581 (424) 2,135 675 1,582
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $167 -- -- (264) -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 6,581 $ (424) $ 1,871 $ 675 $ 1,582
========= ========= ========= ========= =========
Pro forma net income(1) -- -- -- -- $ 970
Net income (loss) per common share(2):
Income (loss) before extraordinary item $ 0.53 $ (0.04) $ 0.34 $ 0.24
Extraordinary item -- -- (0.05) --
--------- --------- --------- ---------
Net income (loss) $ 0.53 $ (0.04) $ 0.29 $ 0.24
Net income (loss) per common share - assuming dilution(2):
Income (loss) before extraordinary item $ 0.53 $ (0.04) $ 0.26 $ 0.13
Extraordinary item -- -- (0.04) --
--------- --------- --------- ---------
Net income (loss) $ 0.53 $ (0.04) $ 0.22 $ 0.13
Weighted average common shares outstanding - basic 12,507 10,805 6,369 2,846
Weighted average common and common
equivalent shares outstanding - diluted 12,514 10,805 8,346 5,077
</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 year ended
December 31, 1995, at an assumed effective tax rate of 38.7%.
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements. Due to the effect of the reorganization that occurred on
February 6, 1996 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.
1
<PAGE> 2
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 3,921 $ 3,993 $ 2,975 $ 1,059 $ 760
Working capital (deficit) (8,822) (13,902) 1,337 (3,995) 349
Total assets 178,944 167,418 64,592 32,906 3,182
Long-term debt, less current
maturities 77,183 71,328 11,200 18,769 1,077
Redeemable equity securities -- -- -- 9,711 --
Total stockholders' equity (deficit) 66,594 57,463 41,966 (5,408) 623
</TABLE>
2
<PAGE> 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities and Exchange Act of 1934, including statements under
"Liquidity and Capital Resources" regarding the availability of cash from
operations to fund core operations, interest expense, nonrecurring and
contingency payments and obligations under the Company's short-term note,
statements regarding extensions of the short-term note and availability of
additional credit, statements regarding the sufficiency of cash in the third and
fourth quarters of 2000, statements regarding the possible issuance of debt or
equity securities, statements concerning a possible sale of the Company and
related activities, statements regarding alternative financing strategies, and
statements regarding availability of additional sources of liquidity and of any
failure to raise necessary funding. The Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include, among others, risks
associated with availability and consummation of financing or strategic
transactions, risks associated with liquidity and cash flow, risks associated
with implementation of strategic initiatives, risks associated with integration
of acquired companies, risks associated with the change of status or departure
of key management personnel, risks associated with the constantly changing
health care environment, the pace of development and acquisition activity, the
reimbursement rates for dental services, and other risks detailed in the
Company's Securities and Exchange Commission filings. These and other risk
factors are listed below under the caption "Certain Factors That May Affect
Future Results."
OVERVIEW
The Company manages dental group practices in selected markets located
in Texas, Wisconsin, Pennsylvania, Virginia, Ohio, Arkansas, Utah, Colorado,
Georgia, New Jersey, Florida, Indiana, Arizona and New Mexico. The managed
dental facilities (each, a "Dental Office" and collectively, 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. The Company then seeks to use the acquired
dental group practice as a "pedestal" from which to expand within the newly
entered market.
The Company has grown rapidly in recent years. Patient revenue, net
increased from $68.6 million in 1997 to $129.6 million in 1998, an increase of
88.9%, and increased to $204.1 million in 1999, representing an increase of
57.5% over 1998. Since 1997 the Company increased the number of markets in which
it operates from eight to 20 through acquisitions and increased the number of
Dental Offices it manages from 99 to 190 through acquisitions and the opening of
new offices, as shown in the table below.
<TABLE>
<CAPTION>
1999 1998(1) 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Offices at beginning of period 192 99 53 12 10
De novo offices -- 7 7 2 2
Acquired offices 7 88 39 39 --
Closed offices (9) (2) -- -- --
---- ---- ---- ---- ----
Offices at end of period 190 192 99 53 12
==== ==== ==== ==== ====
</TABLE>
(1) Includes two less acquired offices due to two office closings prior to the
Valley Forge Dental Associates, Inc. acquisition.
The rapid growth of the Company has and will continue to place strains
on the Company's management, operations and systems. It has also resulted in
substantially increased operating expenses, including expense levels associated
with the operation of the Dental Offices (mainly salaries, benefits and other
expenses) as well as increased depreciation and amortization and interest
expense. The Company demonstrated improved profitability in
3
<PAGE> 4
1999 as a result of internal growth, improved operations from underperforming
markets, cost control initiatives, the successful integration of acquired
practices and the closure of nine unprofitable Dental Offices. However, there
can be no assurance that the Company will be able to continue this improved
profitability through these management initiatives. There also can be no
assurance that difficulties associated with the Company's rapid growth will not
adversely affect its operations.
The Company's 1999 results of operations were materially affected by
two items recorded in the second quarter and two items recorded in the fourth
quarter, which in the aggregate increased net income $2.3 million, or
approximately $0.18 per share. In the second quarter, a $1.0 million charge was
recorded related to the settlement of a dispute with the former shareholders of
an acquired company. This amount was offset by a $1.0 million reduction in
liabilities related to a favorable outcome of a dispute with a former owner of
an acquired dental practice. In the fourth quarter, a $2.9 million credit, net
of related legal expenses, was recorded in conjunction with a settlement of a
dispute with the sellers of an affiliated dental practice. This credit was
offset by an income tax adjustment of $588,000 relating to goodwill amortization
that is not deductible for tax purposes.
The Company's 1998 results of operations were also materially affected
by unusual charges recorded in the fourth quarter of $7.7 million in the
aggregate on a pre-tax basis ($4.9 million after tax). These charges include
$1.6 million associated with the change of status of Dr. Warren F. Melamed, the
Company's founder, who is no longer an employee but remains as a non-employee
Chairman of the Board, $3.3 million relating to goodwill impairments associated
with the closure of certain Dental Offices in Houston and Austin, Texas and
Arkansas, $1.8 million in litigation expenses related to the settlement of a
dispute with the former shareholders of an acquired company and the settlement
of a dispute with a former owner of an acquired dental practice and $1.0 million
associated with non-impairment expenses incurred in conjunction with the closing
of the aforementioned Dental Offices.
4
<PAGE> 5
Acquisitions. Beginning with the acquisition of MacGregor Dental
Centers in February 1996, the Company has conducted an active program to
identify dental group practices outside of the Dallas-Fort Worth market as
potential acquisition candidates with a view to expanding the Company's
operations into new markets. Since December 31, 1995, the Company has completed
the following acquisitions:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DATE EFFECTIVE DATE
DENTAL GROUP PRACTICE / MARKET DENTAL OFFICES DENTISTS (1) FOUNDED OF ACQUISITION
- ------------------------------ -------------- ------------ --------- --------------
<S> <C> <C> <C> <C>
1996 in-markets 1 1 1981 October 1996
1997 in-markets 4 4 Various Various
1998 in-markets 7 7 Various Various
1999 in-markets 7 9 Various Various
MacGregor Dental Centers, Houston 15 42 1962 February 1996
Midwest Dental Care, Wisconsin 22 36 1975 September 1996
Convenient Dental Care, Arkansas 1 6 1982 November 1996
Arkansas Dental Health, Arkansas 3 7 1984 January 1997
United Dental Care, Arkansas 9 15 1990 April 1997
Dental Centers of Indiana, Indiana 11 14 1980 August 1997
J.B. Hays, Arkansas 1 6 1994 October 1997
Three Peaks Dental Management, Colorado 6 10 1990 November 1997
Press Family Dental, San Antonio 3 14 1971 November 1997
Dental America, Midland - Odessa 2 4 1994 December 1997
Dental Care One, Ohio 8 14 1979 March 1998
Managed Dental Care Centers, Austin & New
Mexico 9 10 1995 June 1998
Valley Forge Dental Associates, Various 55 130 1995 September 1998
Talbert Dental, Arizona and Utah 10 32 1973 September 1998
</TABLE>
- -----------------
(1) Includes full-time general dentists and specialists employed by or under
contract with the Company (in the case of Midwest) or the applicable
professional corporation (in the case of each dental group practice other
than Midwest).
For information concerning the purchase prices for these acquisitions, each of
which was accounted for as a purchase, reference is made to Note 3 of the
Company's Consolidated Financial Statements included herein.
The Company has financed its rapid expansion through acquisitions with
a combination of debt and equity issuances. As a result of its acquisitions, the
amount of intangible assets on the Company's consolidated balance sheets has
increased from $123.2 million at December 31, 1998 to $132.5 million at December
31, 1999; this has resulted and will continue to result in an increase in the
Company's amortization expense relative to historic levels. In addition,
outstanding total indebtedness has increased from $76.1 million at December 31,
1998 to $86.7 million at December 31, 1999; this has resulted and will continue
to result in increased interest expense relative to historic levels.
During 1999, as a result of its focus on internal operations and the
uncertain availability of additional capital, the pace of acquisitions was
significantly reduced. The Company continues to review acquisitions in selected
existing markets on an opportunistic basis when and as opportunities arise and
to the extent the Company has available capital. Further expansion through
acquisitions is likely to require additional borrowings and unless a substantial
increase in the current market price of the Company's common stock permits the
raising of additional capital in the equity markets, there can be no assurance
that such capital will be available. The Company may decide to refinance all or
a portion of existing indebtedness with longer term indebtedness having lower
amortization requirements but higher interest payments, which would result in
higher levels of interest expense in the future.
5
<PAGE> 6
Existing Market Development. The Company commenced operations in 1983
with a group dental practice in Dallas. From its founding in 1983 through
December 31, 1999, the Company opened 27 additional Dental Offices on a de novo
basis (21 in Dallas-Fort Worth, three in Houston, two in San Antonio and one in
Indiana.) The Company completed its first acquisition of a solo practice in an
existing market (Dallas-Fort Worth) in October 1996. The Company purchased four
solo practices in existing markets (three in Dallas-Fort Worth and one in
Houston) in 1997. The Company purchased seven solo practices in existing markets
(one in Dallas-Fort Worth, two in Indiana, two in San Antonio, one in Wisconsin
and one in Midland-Odessa) in 1998 and in 1999 purchased seven solo practices in
existing markets (three in Dallas-Fort Worth, three in Wisconsin and one in
Georgia). Patient revenue, net from the Company's Dallas-Fort Worth operations
increased $6.3 million, or 34.4%, to $24.6 million in 1997, increased $8.8
million, or 35.5%, to $33.4 million in 1998 and increased $12.3 million, or
36.9%, to $45.7 million in 1999. Operating income for the Company's Dallas-Fort
Worth operations increased $542,000, or 18.8%, to $3.4 million in 1997,
increased $1.8 million, or 52.2%, to $5.2 million in 1998 and increased $3.3
million, or 63.2%, to $8.5 million in 1999. 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 sixteen de novo Dental
Offices opened since January 1, 1996 was approximately $280,000, which includes
the cost of equipment, leasehold improvements and working capital associated
with the initial operations. Eleven de novo Dental Offices opened since January
1, 1996 began contributing operating income to the Company within three months
of opening. The remaining five de novo Dental Offices opened since January 1,
1996 began contributing operating income to the Company within four, five, five,
seven and fifteen months, respectively, 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
and inventory costs) in connection with the establishment of a de novo Dental
Office as these costs are incurred.
COMPONENTS OF REVENUE AND EXPENSES
Under the Management Agreements, the Company establishes a "controlling
financial interest" as defined by EITF 97-2, "Application of FASB No. 94 and APB
No. 16 to Physician Practice Management Entities and Certain Other Entities
under Contractual Management Arrangement" ("EITF 97-2") in its affiliated dental
group practices. In addition, the Company has nominee shareholder arrangements
with certain of the dental group practices as defined by EITF 97-2. For these
reasons, the Company consolidates the financial statements of the dental group
practices. The Company's 1997 and prior year consolidated financial statements
have been restated to conform with the provisions of EITF 97-2. The restatement
affected the display of previously reported revenues, and amounts retained by
the dental group practices and general and administrative expenses only and did
not affect the Company's 1997 and prior year financial position, results of
operations or cash flows.
Patient revenue, net ("Revenue") represents the revenue of the
professional dental corporations managed by the Company ("P.C.s") or the Company
(in states in which ownership of dental practices by the Company is permitted),
reported at estimated realizable amounts, received from third-party payors and
patients for dental services rendered at the Dental Offices. Operating expenses
consist of the expenses incurred by the Company or the P.C.s in connection with
the operation and management of the Dental Offices. These include salaries and
benefits paid to dentists and hygienists by the P.C.s or by the Company in
states in which it operates and in which ownership of dental practices by the
Company is permitted (currently Wisconsin), salaries and benefits for personnel
other than dentists and hygienists, dental supplies, dental laboratory fees,
occupancy costs, advertising, equipment leases, management information systems
and other expenses related to dental practice operations, as well as
depreciation and amortization expense.
The Company's Revenue is derived principally from fee-for-service
Revenue and Revenue from capitated managed dental care plans. Fee-for-service
Revenue consists of Revenue of the P.C.s or the Company (in states in which the
ownership of dental practices by the Company is permitted) received from
indemnity dental plans, preferred provider plans and direct payments by patients
not covered by any third-party payment arrangement. Managed dental care Revenue
consists of Revenue of the P.C.s or the Company (in states in which the
ownership of dental practices by the Company is permitted) received from
capitated managed dental care plans, including capitation payments and patient
co-payments. Capitated managed dental care contracts are between dental benefits
organizations, the Company and the
6
<PAGE> 7
P.C.s (except in Wisconsin). Under the Management Agreements, the Company
negotiates and administers these contracts on behalf of the P.C.s. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them. This arrangement
shifts the risk of utilization of these services to the dental group practice
providing the dental services. Because the Company assumes responsibility under
the Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of the
P.C.s associated with the provision of dental services at the Dental Offices
(other than compensation and benefits of dentists and hygienists), the risk of
over-utilization of dental services at the Dental Offices under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive co-payments for more complicated or elective procedures. In
contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided.
The Company seeks to increase fee-for-service business at the Dental
Offices by increasing the size of existing offices, opening new offices and
advertising. The Company seeks to supplement this fee-for-service business with
Revenue from contracts with capitated managed dental care plans. Fee-for-service
Revenue accounted for 58.3%, 59.8%, and 62.0% of the Company's total Revenue for
1999, 1998 and 1997, respectively. Managed dental care Revenue increased as a
percentage of Revenue to 41.7% in 1999 from 40.2% in 1998 and 38.0% in 1997 due
to the acquisitions of dental practices with higher managed care Revenue
relative to total Revenue. 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.
The relative percentage of the Company's Revenue derived from
fee-for-service business and capitated managed dental care contracts varies from
market to market depending on the availability of capitated managed dental care
contracts in any particular market and the Company's ability to negotiate
favorable terms in such contracts. In addition, the profitability of managed
dental care Revenue varies from market to market depending on the level of
capitation payments and co-payments in proportion to the level of benefits
required to be provided. Variations in the relative penetration and popularity
of capitated managed dental care from market to market make it difficult to
determine whether the Company's experience in new markets will be consistent
with its experience in existing markets. 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 existing markets.
7
<PAGE> 8
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 that follows should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Patient revenue, net 100.0% 100.0% 100.0%
Operating expenses:
Provider salaries and benefits 32.9 31.1 30.9
Clinical and other salaries and benefits 26.1 28.2 27.4
Dental supplies 5.1 5.3 6.2
Laboratory fees 4.8 4.6 4.2
Occupancy 4.9 5.6 5.4
Advertising 1.5 1.9 2.6
Other operating expenses 10.8 13.8 11.6
Depreciation and amortization 5.2 7.6 4.3
------ ------ ------
91.3 98.1 92.6
------ ------ ------
Operating income 8.7 1.9 7.4
Interest expense, net 3.8 2.2 2.2
Minority interest 0.1 -- 0.1
------ ------ ------
Income (loss) before income taxes and
extraordinary item 4.8 (0.3) 5.1
Income taxes 1.6 -- 2.0
------ ------ ------
Income (loss) before extraordinary item 3.2 (0.3) 3.1
Extraordinary loss, net of applicable
tax benefit -- -- 0.4
------ ------ ------
Net income (loss) 3.2% (0.3)% 2.7%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Patient revenue, net. Revenue increased to $204.1 million for 1999 from
$129.6 million for 1998, an increase of $74.5 million, or 57.5%. This increase
resulted primarily from the acquisitions of Valley Forge Dental Associates, Inc.
("Valley Forge") and Talbert Medical Management Corporation ("Talbert") in
September 1998 which provided eight additional months of Revenue (approximately
$55.0 million) in 1999. Dental Offices in the ten remaining markets, namely
Dallas-Fort Worth, Houston, Wisconsin, Arkansas, Indiana, Colorado, San Antonio,
Midland-Odessa, Dayton and New Mexico (the "existing markets") contributed $19.5
million of the increase in Revenue in 1999 resulting primarily from the
expansion or relocation of twenty-two existing Dental Offices and the
acquisition of seven dental practices offset by nine Dental Office closures.
Fee-for-service Revenue (i.e., Revenue derived from indemnity dental
plans, preferred provider plans and direct payments by patients not covered by
any third-party payor) increased to $119.0 million for 1999 from $77.5 million
for 1998, an increase of $41.5 million, or 53.6%. This increase resulted
primarily from the acquisitions of Valley Forge and Talbert in September 1998
which provided eight additional months of fee-for-service Revenue (approximately
$29.6 million) in 1999. In existing markets, fee-for-service Revenue increased
to $76.6 million for 1999
8
<PAGE> 9
from $64.7 million for 1998, representing an increase of $11.9 million, or
18.5%. Existing market growth resulted primarily from the expansion or
relocation of twenty-two existing Dental Offices and the acquisition of seven
dental practices offset by nine Dental Office closures. Managed dental care
Revenue (i.e., Revenue from capitated managed dental care plans, including
capitation payments and patient co-payments) increased to $85.1 million for 1999
from $52.1 million for 1998, an increase of $33.0 million, or 63.2%. This
increase resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of managed dental care
Revenue (approximately $25.5 million) in 1999. In existing markets, managed
dental care Revenue increased to $47.9 million for 1999 from $40.4 million for
1998, an increase of $7.5 million or 18.5%. The increase in existing markets
resulted primarily from the expansion or relocation of twenty-two existing
Dental Offices and the acquisition of seven dental practices offset by nine
Dental Office closures. As a percent of Revenue, fee-for-service Revenue
decreased to 58.3% from 59.8% for 1999 and 1998, respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $67.1 million for 1999 from $40.3 million for 1998, an increase of
$26.8 million, or 66.5%. This increase resulted primarily from the acquisitions
of Valley Forge and Talbert in September 1998 which provided eight additional
months of provider salaries and benefits expense (approximately $19.2 million)
in 1999. In existing markets, provider salaries and benefits expense increased
$7.6 million due to the expansion or relocation of twenty-two existing Dental
Offices, the acquisition of seven dental practices and increased dentist and
hygienist compensation as a result of a higher level of production at the Dental
Offices offset by nine Dental Office closures. As a percent of Revenue, provider
salaries and benefits expense increased to 32.9% from 31.1% for 1999 and 1998,
respectively. This increase was due principally to higher compensation levels
relative to Revenue at certain acquired companies.
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $53.2 million for 1999 from $36.6 million for
1998, an increase of $16.6 million, or 45.5%. This increase resulted primarily
from the acquisitions of Valley Forge and Talbert in September 1998 which
provided eight additional months of clinical and other salaries and benefits
expense (approximately $12.4 million) in 1999. In existing markets, clinical and
other salaries and benefits expense increased $4.2 million due to the expansion
or relocation of twenty-two existing Dental Offices and the acquisition of seven
dental practices offset by a $1.6 million (pretax) unusual charge in the fourth
quarter of 1998 representing a change in employment status of Dr. Warren F.
Melamed, the Company's founder and former President and Chief Dental Officer
("Dr. Melamed"). As a percent of Revenue, clinical and other salaries and
benefits expense decreased to 26.1% from 28.2% for 1999 and 1998, respectively.
This decrease was due principally to certain acquired companies having lower
clinical and other salaries and benefits expense as a percent of Revenue than
the Company's existing operations and to the $1.6 million unusual charge
recorded in the fourth quarter of 1998.
Dental supplies. Dental supplies expense increased to $10.4 million for
1999 from $6.9 million for 1998, an increase of $3.5 million, or 50.6%. This
increase resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of dental supplies expense
(approximately $2.7 million) in 1999. In existing markets, dental supplies
expense increased $771,000 due to the expansion or relocation of twenty-two
existing Dental Offices, the acquisition of seven dental practices and increased
production at the Dental Offices partially offset by nine Dental Office closures
and the leveraging of supply contracts against expansion in existing markets. As
a percent of Revenue, dental supplies expense decreased to 5.1% from 5.3% for
1999 and 1998, respectively. This decrease was due principally to the leveraging
of supply contracts with expansion in existing markets and to certain acquired
companies having lower dental supplies expense as a percent of Revenue than the
Company's existing operations.
Laboratory fees. Laboratory fee expense increased to $9.9 million for
1999 from $6.0 million for 1998, an increase of $3.9 million, or 66.1%. This
increase resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of laboratory fee expense
(approximately $2.8 million) in 1999. In existing markets, laboratory fee
expense increased $1.1 million due to the expansion or relocation of twenty-two
existing Dental Offices, the acquisition of seven dental practices and increased
production at the Dental Offices offset by nine Dental Office closures. As a
percent of Revenue, laboratory fee expense increased to 4.8% from 4.6% for 1999
and 1998, respectively. This increase was due principally to certain acquired
companies having higher laboratory fee expense as a percent of Revenue than the
Company's existing operations.
9
<PAGE> 10
Occupancy. Occupancy expense increased to $10.1 million for 1999 from
$7.3 million for 1998, an increase of $2.8 million, or 38.6%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of occupancy expense
(approximately $2.1 million) in 1999. In existing markets, occupancy expense
increased $780,000 resulting from the expansion or relocation of twenty-two
existing Dental Offices and the acquisition of seven dental practices offset by
a $476,000 (pretax) unusual charge in the fourth quarter of 1998 representing
costs associated with unprofitable Dental Office closures. The Company closed a
total of nine unprofitable Dental Offices in Houston and Austin, Texas,
Arkansas, New Mexico, Pennsylvania and Virginia in 1999. As a percent of
Revenue, occupancy expense decreased to 4.9% from 5.6% for 1999 and 1998,
respectively. This decrease was due principally to the $476,000 (pretax) unusual
charge recorded in the fourth quarter of 1998 and to certain acquired companies
having lower occupancy expense as a percent of Revenue than the Company's
existing operations.
Advertising. Advertising expense increased to $3.1 million for 1999
from $2.4 million for 1998, an increase of $637,000, or 26.1%. This increase
resulted primarily from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of advertising expense
(approximately $539,000) in 1999. Television and print advertising increased
$98,000 in the existing markets in 1999. As a percent of Revenue, advertising
expense decreased to 1.5% from 1.9% for 1999 and 1998, respectively. This
decrease resulted from lower advertising expense for certain acquired companies
as a percent of Revenue than the Company's existing operations and leveraging
advertising expense with greater market penetration in existing markets.
Other operating expenses. Other operating expenses increased to $22.0
million for 1999 from $17.9 million for 1998, an increase of $4.1 million, or
23.4%. This increase resulted primarily from the acquisitions of Valley Forge
and Talbert in September 1998 which provided eight additional months of other
operating expenses (approximately $3.9 million) in 1999. The increase associated
with the acquisitions was net of a $2.9 million credit recorded in the fourth
quarter of 1999 representing the settlement of a dispute with the sellers of an
affiliated dental practice. In existing markets, other operating expenses
increased $253,000 resulting from the expansion or relocation of twenty-two
existing Dental Offices, the acquisition of seven dental practices and the
expansion of the Company's corporate infrastructure to manage growth offset by
nine Dental Office closures and a $2.2 million (pretax) unusual charge recorded
in the fourth quarter of 1998 representing costs associated with establishing
litigation reserves ($1.8 million) and reserves for expenses associated with
certain Dental Office closures ($419,000). Additionally, other operating
expenses included two items recorded in the second quarter of 1999, which in
the aggregate had no impact on the Company's net income. The two items were a
$1.0 million charge related to the settlement of a dispute with the former
shareholders of an acquired company offset by a $1.0 million reduction in
liabilities related to a favorable outcome of a dispute with a former owner of
an acquired dental practice. As a percent of Revenue, other operating expenses
decreased to 10.8% from 13.8% for 1999 and 1998, respectively. This decrease
was due principally to the $2.9 million credit recorded in the fourth quarter
of 1999 and the $2.2 million unusual charge recorded in the fourth quarter of
1998.
Depreciation and amortization. Depreciation and amortization expense
increased to $10.5 million for 1999 from $9.9 million for 1998, an increase of
$686,000, or 7.0%. This increase resulted primarily from the acquisitions of
Valley Forge and Talbert in September 1998 which provided eight additional
months of depreciation and amortization expense (approximately $3.1 million) in
1999. In existing markets, depreciation and amortization expense decreased $2.4
million resulting from the expansion or relocation of twenty-two existing Dental
Offices and the acquisition of seven solo practices offset by nine Dental Office
closures and a $3.3 million (pretax) unusual charge recorded in the fourth
quarter of 1998 for goodwill impairment associated with the closure of certain
Dental Offices in Houston and Austin, Texas and Arkansas.
Operating income. Operating income increased to $17.8 million for 1999
from $2.5 million for 1998, an increase of $15.3 million, or 614.3%. This
increase resulted in part from the acquisitions of Valley Forge and Talbert in
September 1998 which provided eight additional months of operating income
(approximately $8.2 million) in 1999. The increase associated with the
acquisitions includes a $2.9 million credit recorded in the fourth quarter of
1999 representing the settlement of a dispute with the sellers of an affiliated
dental practice. Income from the Company's existing markets increased $8.2
million in 1999, which was offset by increased corporate expenses of $1.1
million due to the development of corporate infrastructure. The increase
associated with the existing markets reflects the effect of the $7.7 million
(pretax) unusual charges recorded in the fourth quarter of 1998, as described
above, representing costs associated with a change in employment status of Dr.
Melamed, goodwill impairment and the
10
<PAGE> 11
establishment of litigation reserves and reserves for the closure of certain
Dental Offices. As a percent of Revenue, operating income increased to 8.7% from
1.9% for 1999 and 1998, respectively. This increase was due principally to the
$2.9 million credit recorded in the fourth quarter of 1999 and the $7.7 million
(pretax) unusual charges recorded in the fourth quarter of 1998.
Interest expense, net. Interest expense, net increased to $7.7 million
for 1999 from $2.9 million for 1998, an increase of $4.8 million, or 167.7%.
This increase is attributable to the higher average outstanding debt balances in
1999 versus 1998. The Company has a Credit Facility (the "Credit Facility") with
a bank syndicate. Average debt outstanding under the Credit Facility totaled
$78.5 million for 1999 compared to average debt outstanding of $29.5 million for
1998.
Minority interest. Minority interest expense increased to $224,000 for
1999 from $12,000 for 1998, an increase of $212,000, or 1,775.0%. This increase
resulted from higher net income at certain acquired companies which owned
between a six-and-one-quarter percent and fifty percent interest in dental group
practices located in Indiana, Texas, New Mexico, Georgia, Pennsylvania and New
Jersey in 1999 compared to 1998.
Income taxes. Income tax expense increased to $3.3 million for 1999
from $31,000 for 1998, an increase of $3.3 million, or 10,545.2%. This increase
was the result of higher net income before taxes, which increased to $9.9
million for 1999 from a net loss before taxes of $393,000 for 1998, an increase
of $10.3 million, or 2,614.2% and the effects of a $588,000 income tax
adjustment relating to goodwill amortization that is not deductible for tax
purposes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Patient revenue, net. Revenue increased to $129.6 million for 1998 from
$68.6 million for 1997, an increase of $61.0 million, or 88.9%. This increase
resulted from the acquisitions of Dental Care One, Managed Dental Care Centers,
Inc. ("MDCC"), Valley Forge Dental Associates, Inc. ("Valley Forge") and Talbert
Medical Management Corporation ("Talbert") in March 1998, June 1998, September
1998 and September 1998, respectively, which contributed combined Revenue of
$30.4 million for the ten months, seven months, four months and four months
ended December 31, 1998, respectively. Dental offices in the eight markets
served at December 31, 1997, namely Dallas-Fort Worth, Houston, Wisconsin,
Arkansas, Indiana, Colorado, San Antonio and Midland-Odessa (the "existing
markets") contributed an additional $30.6 million of the increase in Revenue in
1998 resulting from the opening of seven de novo Dental Offices, the physical
expansion of ten existing Dental Offices, the acquisition of seven solo
practices and the acquisitions of United Dental Care Tom Harris D.D.S. and
Associates ("United"), Dental Centers of Indiana, Inc. ("DCI"), Three Peaks
Dental Health L.P. ("Three Peaks"), Press Family Dental ("Press") and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of Revenue, respectively, in 1998.
Fee-for-service Revenue (i.e., Revenue derived from indemnity dental
plans, preferred provider plans and direct payments by patients not covered by
any third-party payor) increased to $77.5 million for 1998 from $42.5 million
for 1997, an increase of $35.0 million, or 82.2%, due to acquisitions in new
markets and growth in existing markets. New market growth resulted from the
acquisitions of Dental Care One, MDCC, Valley Forge and Talbert which
contributed combined fee-for-service Revenue of $16.9 million for the respective
periods following the dates of acquisition. In existing markets, fee-for-service
Revenue increased to $60.6 million for 1998 from $42.5 million for 1997,
representing an increase of $18.1 million, or 42.6%. Existing market growth
resulted from the opening of seven de novo Dental Offices, the physical
expansion of ten existing Dental Offices, the acquisition of seven solo
practices and the acquisitions of United, DCI, Three Peaks, Press and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of fee-for-service Revenue, respectively, in 1998. Managed dental care
Revenue (i.e., Revenue from capitated managed dental care plans, including
capitation payments and patient co-payments) increased to $52.1 million for 1998
from $26.1 million for 1997, an increase of $26.0 million, or 99.7%. This
increase resulted in part from the acquisitions of Dental Care One, MDCC, Valley
Forge and Talbert which contributed combined managed dental care Revenue of
$13.5 million for the respective periods following the dates of acquisition. In
existing markets, managed dental care Revenue increased to $38.6 million for
1998 from $26.1 million for 1997, an increase of $12.5 million or 47.7%. The
increase in existing markets resulted from the opening of seven de novo Dental
Offices, the physical expansion of ten
11
<PAGE> 12
existing Dental Offices, the acquisition of seven solo practices and the
acquisitions of United, DCI, Three Peaks, Press and Dental America in April
1997, August 1997, November 1997, November 1997 and December 1997, respectively,
which provided three, seven, ten, ten and eleven additional months of managed
dental care Revenue, respectively, in 1998. As a percent of Revenue,
fee-for-service Revenue decreased to 59.8% from 62.0% for 1998 and 1997,
respectively.
Provider salaries and benefits. Provider salaries and benefits expense
increased to $40.3 million for 1998 from $21.2 million for 1997, an increase of
$19.1 million, or 90.2%. The increase was due to the acquisitions of Dental Care
One, MDCC, Valley Forge and Talbert which added combined provider salaries and
benefits expense of $10.3 million for the respective periods following the dates
of acquisition. In existing markets, provider salaries and benefits expense
increased $8.8 million as dentist and hygienist compensation increased as a
result of a higher level of production at the Dental Offices and the
acquisitions of United, DCI, Three Peaks, Press and Dental America in April
1997, August 1997, November 1997, November 1997 and December 1997, respectively,
which provided three, seven, ten, ten and eleven additional months of provider
salaries and benefits expense, respectively, in 1998, and also as a result of
higher compensation levels at certain acquired companies. As a percent of
Revenue, provider salaries and benefits expense increased slightly to 31.1% from
30.9% for 1998 and 1997, respectively, reflecting constant or higher salary
levels for providers across the Company's network of Dental Offices and reduced
revenue levels at certain of the Company's offices in the fourth quarter of
1998.
Clinical and other salaries and benefits. Clinical and other salaries
and benefits expense increased to $36.6 million for 1998 from $18.8 million for
1997, an increase of $17.8 million, or 94.4%. The increase resulted from the
acquisitions of Dental Care One, MDCC, Valley Forge and Talbert which added
combined clinical and other salaries and benefits expense of $8.2 million for
the respective periods following the dates of acquisition. In existing markets,
clinical and other salaries and benefits expense increased $9.6 million due to
the opening of seven de novo Dental Offices, the physical expansion of ten
existing Dental Offices, the acquisition of seven solo practices and the
acquisitions of United, DCI, Three Peaks, Press and Dental America in April
1997, August 1997, November 1997, November 1997 and December 1997, respectively,
which provided three, seven, ten, ten and eleven additional months of clinical
and other salaries and benefits expense, respectively, in 1998. Additionally,
the Company recorded a $1.6 million (pretax) unusual charge in the fourth
quarter of 1998 representing a change in employment status of Dr. Melamed, the
Company's founder, former President and Chief Dental Officer. As a percent of
Revenue, clinical and other salaries and benefits expense increased to 28.2%
from 27.4% for 1998 and 1997, respectively. This increase was due principally to
the $1.6 million (pretax) unusual charge recorded in the fourth quarter of 1998.
Dental supplies. Dental supplies expense increased to $6.9 million for
1998 from $4.3 million for 1997, an increase of $2.6 million, or 61.1%. This
increase resulted from the acquisitions of Dental Care One, MDCC, Valley Forge
and Talbert which added combined dental supplies expense of $1.6 million for the
respective periods following the dates of acquisition. In existing markets,
dental supplies expense increased $1.0 million as a result of increased
production and the acquisitions of United, DCI, Three Peaks, Press and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of dental supplies expense, respectively, for 1998. As a percent of
Revenue, dental supplies expense decreased to 5.3% from 6.2% for 1998 and 1997,
respectively. This decrease was due principally to the leveraging of supply
contracts with expansion in existing markets and to the acquisitions having
lower dental supplies expense as a percent of Revenue than the Company's
existing operations.
Laboratory fees. Laboratory fee expense increased to $6.0 million for
1998 from $2.9 million for 1997, an increase of $3.1 million, or 105.2%. This
increase resulted from the acquisitions of Dental Care One, MDCC, Valley Forge
and Talbert which added combined laboratory fee expense of $1.6 million for the
respective periods following the dates of acquisition. In existing markets,
laboratory fee expense increased $1.5 million as a result of increased
production and the acquisitions of United, DCI, Three Peaks, Press and Dental
America in April 1997, August 1997, November 1997, November 1997 and December
1997, respectively, which provided three, seven, ten, ten and eleven additional
months of laboratory fees expense, respectively, for 1998. As a percent of
Revenue, laboratory fee expense increased to 4.6% from 4.2% for 1998 and 1997,
respectively. This increase was due principally to the acquisitions having
higher laboratory fee expense as a percent of Revenue than the Company's
existing operations.
12
<PAGE> 13
Occupancy. Occupancy expense increased to $7.3 million for 1998 from
$3.7 million for 1997, an increase of $3.6 million, or 95.9%. This increase
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added a combined $1.5 million to occupancy expense for the
respective periods following the dates of acquisition. In existing markets,
occupancy expense increased $2.1 million resulting from the opening of seven de
novo Dental Offices, the physical expansion of ten existing Dental Offices, the
acquisition of seven solo practices and the acquisitions of United, DCI, Three
Peaks, Press and Dental America in April 1997, August 1997, November 1997,
November 1997 and December 1997, respectively, which provided three, seven, ten,
ten and eleven additional months of occupancy expense, respectively, for 1998.
Additionally, the Company recorded a $476,000 (pretax) unusual charge in the
fourth quarter of 1998 representing costs associated with Dental Office closures
in Houston and Austin, Texas and Arkansas. The majority of these closures
occurred in the first quarter of 1999. As a percent of Revenue, occupancy
expense increased slightly to 5.6% from 5.4% for 1998 and 1997, respectively.
This increase was due principally to the $476,000 (pretax) unusual charge
recorded in the fourth quarter of 1998.
Advertising. Advertising expense increased to $2.4 million for 1998
from $1.8 million for 1997, an increase of $655,000, or 36.8%. This increase
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added a combined $335,000 to advertising expense for the
respective periods following the dates of acquisition. There was an increase of
$320,000 in television and print advertising in the existing markets in 1998. As
a percent of Revenue, advertising expense decreased to 1.9% from 2.6% for 1998
and 1997, respectively. This decrease resulted from leveraging advertising
expense with greater market penetration in existing markets.
Other operating expenses. Other operating expenses consist of general
and administrative expenses and bad debt expense (which was reported as a
component of amounts retained by dental group practices for periods prior to
1997). Other operating expenses increased to $17.9 million for 1998 from $7.9
million for 1997, an increase of $10.0 million, or 124.8%. This increase
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added combined other operating expenses of $3.7 million for the
respective periods following the dates of acquisition. Other operating expenses
for existing markets increased $6.3 million resulting from the opening of seven
de novo Dental Offices, the physical expansion of ten existing Dental Offices,
the acquisition of seven solo practices, the acquisitions of United, DCI, Three
Peaks, Press and Dental America in April 1997, August 1997, November 1997,
November 1997 and December 1997, respectively, which provided three, seven, ten,
ten and eleven additional months of other operating expenses, respectively, for
1998 and the expansion of the Company's corporate infrastructure to manage
growth. Additionally, other operating expenses reflect a $2.2 million (pretax)
unusual charge recorded in the fourth quarter of 1998 representing costs
associated with establishing litigation reserves ($1.8 million) and reserves for
expenses associated with certain Dental Office closures ($419,000). As a percent
of Revenue, other operating expenses increased to 13.8% from 11.6% for 1998 and
1997, respectively. This increase was due principally to the $2.2 million
(pretax) unusual charge recorded in the fourth quarter of 1998.
Depreciation and amortization. Depreciation and amortization expense
increased to $9.9 million for 1998 from $2.9 million for 1997, an increase of
$7.0 million, or 235.7%. This increase resulted from the acquisitions of Dental
Care One, MDCC, Valley Forge and Talbert which added combined depreciation and
amortization expense of $1.7 million for the respective periods following the
dates of acquisition. Depreciation and amortization expense for existing markets
increased $5.3 million resulting from the opening of seven de novo Dental
Offices, the physical expansion of ten existing Dental Offices, the acquisition
of seven solo practices and the acquisitions of United, DCI, Three Peaks, Press
and Dental America in April 1997, August 1997, November 1997, November 1997 and
December 1997, respectively, which provided three, seven, ten, ten and eleven
additional months of depreciation and amortization expense, respectively, for
1998. Additionally, the Company recorded a $3.3 million (pretax) unusual charge
in the fourth quarter of 1998 for goodwill impairment associated with the
closure of certain Dental Offices in Houston and Austin, Texas and Arkansas. As
a percent of Revenue, depreciation and amortization expense increased to 7.6%
from 4.3% for 1998 and 1997, respectively. This increase was due principally to
the $3.3 million (pretax) unusual charge recorded in the fourth quarter of 1998
and to the acquired companies having higher depreciation and amortization
expense as a percent of Revenue than the Company's existing operations.
Operating income. Operating income decreased to $2.5 million for 1998
from $5.1 million for 1997, a decrease of $2.6 million, or 51.0%. This decrease
resulted from the acquisitions of Dental Care One, MDCC, Valley Forge and
Talbert which added combined operating income of $1.7 million for the respective
periods following the dates of acquisition and a $5.5 million increase in
operating income in existing markets in 1998 offset by increased corporate
13
<PAGE> 14
expenses of $2.1 million due to the development of corporate infrastructure and
the $7.7 million (pretax) of unusual charges recorded in the fourth quarter of
1998, as described above, representing costs associated with a change in
employment status of Dr. Melamed, goodwill impairment and the establishment of
litigation reserves and reserves for the closure of certain Dental Offices. As a
percent of Revenue, operating income decreased to 1.9% from 7.4% for 1998 and
1997, respectively. This decrease was due principally to the $7.7 million
(pretax) unusual charges recorded in the fourth quarter of 1998.
Interest expense, net. Interest expense, net increased to $2.9 million
for 1998 from $1.5 million for 1997, an increase of $1.4 million, or 85.9%. This
increase is attributable to the higher average outstanding debt balances in 1998
versus 1997. Effective November 1997, the Company entered into a new Credit
Facility (the "Credit Facility") with a bank syndicate. Average debt outstanding
under the Credit Facility totaled $29.5 million for 1998 compared to average
debt outstanding of $14.7 million for 1997.
Minority interest. Minority interest expense decreased to $12,000 for
1998 from $46,000 for 1997, a decrease of $34,000, or 73.9%. This decrease
resulted from lower net income relating to the acquisitions of DCI, which owned
a fifty percent ownership in two partnerships operating four Dental Offices in
Indiana, Dental America, which owned a twenty percent interest in a group dental
practice with two offices located in Midland and Odessa, Texas, and MDCC, which
owned a thirty-five percent interest in a group dental practice with two offices
in Austin, Texas and five offices in New Mexico for the twelve months ended
December 31, 1998 and 1997, respectively.
Income taxes. Income tax expense decreased to $31,000 for 1998 from
$1.4 million for 1997, a decrease of $1.3 million, or 97.7%. This decrease was
the result of lower net income before taxes, which decreased to a net loss
before taxes of $393,000 for 1998 from $3.5 million for 1997, a decrease of $3.9
million, or 111.3%.
Extraordinary loss. The Company incurred an extraordinary loss of
$264,000, net of tax for 1997 as it extinguished its prior credit facility and
wrote off $431,000 in unamortized loan fees, net of a tax benefit of $167,000.
14
<PAGE> 15
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited quarterly consolidated operating
results for each of the Company's last eight quarters ended December 31, 1999.
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.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1999 (1) 1999 1999 1999 1998 (2) 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patient revenue, net ........................ $ 51,949 $ 51,196 $ 51,470 $ 49,455 $ 45,378 $ 34,090 $ 25,853 $ 24,280
Operating expenses:
Provider salaries and benefits ............ 16,920 16,792 17,210 16,167 14,910 10,484 7,671 7,218
Clinical and other salaries and benefits .. 13,451 13,310 13,379 13,055 13,873 9,252 6,965 6,466
Dental supplies ........................... 2,725 2,432 2,580 2,649 2,372 1,624 1,462 1,440
Laboratory fees ........................... 2,564 2,794 2,211 2,319 2,155 1,510 1,231 1,058
Occupancy ................................. 2,419 2,577 2,493 2,576 2,856 1,737 1,343 1,329
Advertising ............................... 641 838 864 730 745 599 578 515
Other operating expenses .................. 3,501 5,769 6,184 6,579 8,000 3,930 2,900 3,024
Depreciation and amortization ............. 2,562 2,769 2,656 2,562 5,816 1,719 1,241 1,087
-------- -------- -------- -------- -------- -------- -------- --------
44,783 47,281 47,577 46,637 50,727 30,855 23,391 22,137
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ..................... 7,166 3,915 3,893 2,818 (5,349) 3,235 2,462 2,143
Interest expense, net ....................... 2,215 1,788 1,905 1,778 1,876 482 231 282
Minority interest in combined subsidiaries .. 6 48 137 34 (37) (15) 15 50
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes ........... 4,945 2,079 1,851 1,006 (7,188) 2,768 2,216 1,811
Income taxes ................................ 1,374 809 725 392 (2,620) 1,080 864 707
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................... $ 3,571 $ 1,270 $ 1,126 $ 614 $ (4,568) $ 1,688 $ 1,352 $ 1,104
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share $ 0.28 $ 0.10 $ 0.09 $ 0.05 $ (0.38) $ 0.16 $ 0.13 $ 0.11
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share-
assuming dilution $ 0.28 $ 0.10 $ 0.09 $ 0.05 $ (0.38) $ 0.16 $ 0.13 $ 0.11
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of common
shares outstanding - basic 12,719 13,181 13,003 12,086 11,936 10,708 10,324 10,235
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding -
diluted 12,732 13,181 13,003 12,086 11,936 10,797 10,466 10,322
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes the effect of an approximately $2.9 million credit, net of
related legal expenses, relating to the settlement of a dispute with the
sellers of an affiliated dental practice offset by a $588,000 income tax
adjustment relating to goodwill amortization that is not deductible for
tax purposes.
(2) Includes the effect of approximately $7.7 million (pre-tax) in charges
relating primarily to costs associated with a change in employment status
of Dr. Melamed, litigation reserves, goodwill impairment and Dental Office
closure costs.
15
<PAGE> 16
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
1999 (1) 1999 1999 1999 1998 (2) 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
PERCENTAGE OF REVENUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patient revenue, net ........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Provider salaries and benefits ............ 32.6 32.8 33.4 32.7 32.9 30.8 29.7 29.7
Clinical and other salaries and benefits .. 25.9 26.0 26.0 26.4 30.7 27.1 26.9 26.6
Dental supplies ........................... 5.2 4.8 5.0 5.4 5.2 4.8 5.7 5.9
Laboratory fees ........................... 4.9 5.5 4.3 4.7 4.7 4.4 4.8 4.4
Occupancy ................................. 4.7 5.0 4.8 5.2 6.3 5.1 5.2 5.5
Advertising ............................... 1.2 1.6 1.7 1.5 1.6 1.8 2.2 2.1
Other operating expenses .................. 6.8 11.3 12.0 13.2 17.6 11.5 11.2 12.5
Depreciation and amortization ............. 4.9 5.4 5.2 5.2 12.8 5.0 4.8 4.5
----- ----- ----- ----- ----- ----- ----- -----
86.2 92.4 92.4 94.3 111.8 90.5 90.5 91.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) ..................... 13.8 7.6 7.6 5.7 (11.8) 9.5 9.5 8.8
Interest expense, net ....................... 4.3 3.4 3.7 3.6 4.1 1.4 0.9 1.1
Minority interest in combined subsidiaries .. -- 0.1 0.3 0.1 (0.1) -- -- 0.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes ........... 9.5 4.1 3.6 2.0 (15.8) 8.1 8.6 7.5
Income taxes ................................ 2.6 1.6 1.4 0.8 (5.7) 3.1 3.4 3.0
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ........................... 6.9% 2.5% 2.2% 1.2% (10.1)% 5.0% 5.2% 4.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) Includes the effect of an approximately $2.9 million credit, net of related
legal expenses, relating to the settlement of a dispute with the sellers of
an affiliated dental practice offset by a $588,000 income tax adjustment
relating to goodwill amortization that is not deductible for tax purposes.
(2) Includes the effect of approximately $7.7 million (pre-tax) in charges
relating primarily to costs associated with a change in employment status
of Dr. Melamed, litigation reserves, goodwill impairment and Dental Office
closure costs.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had an $8.8 million working capital
deficit, representing a decrease of $5.1 million from the working capital
deficit of $13.9 million at December 31, 1998. This working capital deficit
included $32.2 million in current liabilities, consisting of $2.0 million in
accounts payable, $15.9 million in accrued liabilities, $4.8 million in amounts
payable to dental group practices as consideration for accounts receivable
acquired from such group practices and $9.5 million in current maturities of
notes payable and capital lease obligations. These current liabilities were
offset by current assets of $23.4 million, consisting of $3.9 million in cash
and cash equivalents, $17.4 million in accounts receivable, net of allowances,
prepaid expenses of $1.6 million and $427,000 in federal income tax receivable.
The Company's principal sources of liquidity as of December 31, 1999 consisted
of cash and cash equivalents, net accounts receivable and borrowing capacity
under the Credit Facility. There can be no assurance that the Company's working
capital deficit will not continue in the future, particularly if additional
indebtedness requires current amortization of principal.
For the years ended December 31, 1999 and 1998, cash provided by
operations was $5.0 million, net of a non-cash reduction of other liabilities of
$3.4 million due to the settlement of a dispute with the sellers of an
affiliated dental practice, and $3.4 million, respectively.
Cash used in investing activities was $13.9 million for the year ended
December 31, 1999 and $55.5 million for the year ended December 31, 1998. For
the year ended December 31, 1999, $8.8 million was utilized for acquisitions and
$5.1 million was invested in the purchase of additional property and equipment.
For the year ended December 31, 1998, $48.6 million was utilized for
acquisitions and $6.9 million was invested in the purchase of additional
property and equipment.
For the years ended December 31, 1999 and 1998, cash provided by
financing activities was $8.8 million and $53.1 million, respectively. In the
year ended December 31, 1999, the cash provided was primarily comprised of $16.8
million in net borrowings offset by the repayment of $6.2 million in outstanding
debt and $1.6 million in debt issue costs. In the year ended December 31, 1998,
the cash provided was primarily comprised of $55.2 million in net borrowings
offset by the repayment of $1.7 million in outstanding debt.
The Company has a Credit Facility with a bank syndicate, which was
amended in June 1999. Under the Credit Facility, the Company may borrow up to
$85.0 million. At December 31, 1999 the Company had $80.7 million outstanding
under the Credit Facility and remaining availability of $4.3 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 EBITDA, each as defined in the Credit Facility. The Credit Facility prohibits
the Company from incurring indebtedness, incurring liens, disposing of assets,
making investments or making acquisitions without bank approval, 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.
During 1999, the Company amended its loan agreement associated with the
Credit Facility. Changes made in the amendment included, but were not limited
to, modifications of certain defined terms and financial ratios, additions of
newly defined terms, limitations on capital expenditures, modifications to the
definition of Events of Default and the requirement of prior bank approval for
consolidations, mergers, acquisitions, and sales of assets. The methodology by
which the Company's borrowing rates are determined was also adjusted as part of
the amendment. In conjunction with this amendment, the bank syndicate received
contingency compensation in the form of warrants of the Company representing 3%
of the fully diluted outstanding common shares of the Company at the time of
agreement, subject to anti-dilution provisions, for an exercise price of $0.01
per share. The warrants are contingent based upon specific performance of the
Company in conjunction with dates set forth in a vesting schedule. The vesting
dates for the warrants are March 31, April 30, May 31, and June 30, 2000 upon
such dates, an aggregate 3% of the fully diluted outstanding common stock will
vest at a rate of 1/2%, 1/2%, 1/2%, and 1 1/2%, respectively. The Company
believes that it will not meet the specific performance requirements under this
amendment and that all of the warrants will vest by June 30, 2000.
17
<PAGE> 18
As of December 31, 1999, the Company is in compliance with the terms of
the Credit Facility. There can be no assurance that the Company will maintain
the ratios as required by the loan agreement. The failure to maintain these
ratios could adversely affect the Company's operations in future periods.
The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, the Company may not have
sufficient cash from operations to fund interest expense and certain
non-recurring and contingency payments aggregating approximately $3.5 million
during the second quarter of 2000. In addition, the Company does not expect to
generate sufficient cash from operations to repay its obligations under its
short-term note, due June 30, 2000 under the Credit Facility, which the Company
expects will approximate $10.0 million at that time. Failure to make the
required principal payment would constitute a default under the Credit Facility.
The Company is currently discussing with its lenders an extension of this
short-term note and the extension of additional credit to cover the potential
cash shortfall in the second quarter. However, the Company can provide no
assurance that its lenders will extend the maturity of this short-term note or
that additional credit will be available to meet the potential cash shortfall in
the second quarter. Assuming that the Company can obtain additional financing in
the second quarter to meet any cash shortfall, the Company believes that cash
from operations will be sufficient in the third and fourth quarters of 2000 to
meet its obligations.
In order to meet its short-term and long-term liquidity needs, the
Company may issue additional equity and debt securities, subject to market and
other conditions. In addition, the Company is also in the process of contacting
potential acquirors in order to determine if a sale of the Company would be more
beneficial to the Company's stockholders than raising additional capital to meet
its liquidity needs. The Company expects that potential acquirors would commence
due diligence procedures in the second quarter 2000. There can be no assurance
that any such sale will be available on terms acceptable to the Company. In the
event a sale transaction is not consummated, the Company would pursue the
issuance of debt securities and has signed an engagement letter with an
investment bank to pursue the issuance of these securities. Although there can
be no assurance that this financing will be available on terms acceptable to the
Company, the Company believes that additional sources of liquidity are available
at rates that would increase the Company's interest obligations. The failure to
raise the funds necessary to finance its future cash requirements could
adversely affect the Company's operations in future periods.
18
<PAGE> 19
YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Many existing computer programs and databases use two digits to
identify a year in the date field (i.e., 98 would represent 1998). These
programs and databases were not originally designed to operate after December
31, 1999. If left uncorrected, these computer programs and databases were apt to
fail or create erroneous results after December 31, 1999.
The Company is not aware of any significant problems that have arisen
with respect to the Company or any of its suppliers or customers as a result of
year 2000 issues. Prior to the year 2000, the Company completed a comprehensive
review of its key management information systems and operational systems,
including equipment with embedded microprocessors. As part of this review, the
Company completed any required program and database modifications or
replacements. The Company also reviewed the readiness of its major customers,
which consist of third-party payors such as preferred provider plans, and
certain key suppliers.
The Company has spent approximately $90,000 to date related to its
review of year 2000 issues. Based on the lack of any problems related to the
year 2000 issue since December 31, 1999, the Company does not expect that it
will experience any material year 2000 problems in the future or incur
significant additional costs to address year 2000 issues. The Company believes
that the total cost of addressing year 2000 issues will not be material to its
financial condition, liquidity or results of operations.
The preceding "Year 2000 Readiness Disclosure" contains various
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Section 27A Securities Act of 1933. These
forward-looking statements represent the Company's beliefs or expectations
regarding future events. When used in the "Year 2000 Readiness Disclosure", the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to its estimated cost of addressing
all year 2000 issues and the Company's belief that it will not have significant
problems related to the year 2000 in the future. All forward-looking statements
involve a number of risks and uncertainties that could cause the actual results
to differ materially from the projected results. Factors that may cause these
differences include, but are not limited to, the availability of qualified
personnel and other information technology resources and the ability to identify
and remediate all date sensitive lines of computer code or to replace embedded
computer chips in affected systems or equipment.
19
<PAGE> 20
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company has grown substantially in a relatively short period of
time, principally through acquisitions. The Company has completed 30
acquisitions resulting in the addition of 173 Dental Offices since January 1,
1996. The Company has incurred substantial indebtedness to finance these
acquisitions. The Company has experienced setbacks in managing and integrating
certain acquired operations, which has adversely affected the Company's
operating results. Failure of the Company's management to manage and integrate
the Company's existing and acquired operations and to improve the operating
performance of these operations could continue to have a material adverse effect
on the Company's business, financial condition and operating results.
The Company's long-term 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 are untested and there can be no assurance that the Company
will be able to implement such strategy successfully.
The Company's management has historically devoted substantial time and
resources to acquisition-related activities. There can be no assurance that
suitable acquisition candidates will be identified, that acquisitions will be
consummated on terms favorable to the Company, on a timely basis or at all, or
that the Company will have sufficient capital resources to complete additional
acquisitions. In the event the closing of a planned acquisition fails to occur
or is delayed, the Company's financial results may be materially lower than
analysts' expectations, which likely would cause a decline, perhaps substantial,
in the market price of the Company's 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. 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.
RISKS ASSOCIATED WITH EXPANSION WITHIN EXISTING MARKETS
The Company seeks to increase revenue and profitability in existing
markets by physically expanding its existing Dental Offices to add more general
dentists, specialists and hygienists, by establishing Dental Offices on a de
novo basis and by improving the efficiency of the Dental Offices. The Company's
success will be dependent, in part, upon increasing the revenue from existing
Dental Offices and successfully establishing de novo Dental 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.
20
<PAGE> 21
MANAGEMENT OF GROWTH
The Company has experienced a period of rapid growth with a substantial
increase in the number of its Dental Offices, resulting from expansion into 20
new markets since January 1, 1996. The number of Dental Offices owned and
managed by the Company increased from 12 at January 1, 1996 to 190 at December
31, 1999. 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.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock was subject to a major
decline triggered by the Company's failure to meet the expectations of
securities analysts and investors for the fourth quarter and year ended December
31, 1998. The Company cannot provide any assurance that the trading price of the
Company's Common Stock will recover or that it will not experience a further
decline. Moreover, the trading price of the Company's Common Stock could be
subject to additional 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. 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 Company's Common Stock
would likely decline, perhaps substantially.
Effective September 14, 1999 the Company transferred its stock listing
to the NASDAQ SmallCap Market from the NASDAQ National Market system ("NMS").
This move occurred because the trading price of the Company's Common Stock did
not demonstrate compliance with NASDAQ's $5 minimum bid price for trading on the
NMS. Listing on the NASDAQ SmallCap Market may result in the Company's stock
price experiencing greater volatility than it previously experienced.
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 cannot be certain that its cash flow generated from operations and
borrowings available under the Company's existing Credit Facility or any
successor credit facility will be sufficient to meet its capital requirements
over the next few years. The Company anticipates that it will need from time to
time to raise additional capital through equity or debt financings. Additional
debt or non-Common Stock equity financings could be required to the extent that
the Company's Common Stock does not have a market value sufficient to permit 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 prohibits the Company from incurring indebtedness,
incurring liens, disposing of assets, making investments or making acquisitions
without bank approval, and requires the Company to maintain certain financial
ratios on an ongoing basis. The failure to raise the funds necessary to finance
the expansion of the Company's operations or meet 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.
21
<PAGE> 22
PURSUIT OF STRATEGIC ALTERNATIVES
The Company recently announced that it has retained the services of
Bank of America Securities LLC to explore strategic alternatives in order to
expand the Company's growth opportunities and maximize stockholder value. These
alternatives include potential strategic transactions, such as the possible sale
or merger of the Company. There can be no assurance that any actions taken by
the Company will result in the identification of any such transaction. There
also can be no assurance that, if any such transaction is commenced, it will be
completed or as to the value that any such transaction might have for the
Company's stockholders.
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. The Company has historically
experienced difficulty at times in retaining dentists in some of its markets,
which has adversely affected the Company's financial condition and operating
results. There can be no assurance that the Company will not experience further
difficulty in retaining dentists in the future and that the Company's financial
results will not be adversely affected as a result. In addition, the Company's
expansion strategy is dependent on the availability and successful recruitment
of dentists. The Company may not be able to successfully recruit new dentists
for its existing and newly established Dental Offices, which may have a material
adverse effect on the Company's expansion strategy and its business, financial
condition and operating results.
RISKS ASSOCIATED WITH COST CONTAINMENT INITIATIVES
The health care industry, including the dental services market, is
experiencing a trend toward cost containment, as third-party and government
payors seek to impose lower reimbursement rates upon providers. The Company
believes that this trend will continue and will increasingly affect dental
services. This may result in a reduction in per-patient and per-procedure
revenue from historic levels. Significant reductions in payments to dentists or
other changes in reimbursement by third-party payors for dental services may
have a material adverse effect on the Company's business, financial condition
and operating results.
RISKS ASSOCIATED WITH CAPITATED PAYMENT ARRANGEMENTS
Part of the Company's growth strategy involves obtaining capitated
managed dental care contracts. Capitated managed dental care contracts are
between dental benefits organizations, the Company and the dental professional
corporations (the "P.C.s") (except in Wisconsin). The Company negotiates and
administers these contracts on behalf of the P.C.s pursuant to management
agreements with the P.C.s (the "Management Agreements"). Because the Company
assumes responsibility under such Management Agreements for all aspects of the
operation of the dental practices (other than the practice of dentistry) and
thus bears all costs of the P.C.s associated with the provision of dental
services at the Dental Offices (other than compensation and benefits of dentists
and hygienists), the risk of over-utilization of dental services at the Dental
Offices under the capitated managed dental care plans is effectively shifted to
the Company. In contrast, under traditional indemnity insurance arrangements,
the insurance company pays whatever reasonable charges are billed by the dental
group practice for the dental services provided.
There can be no assurance that the Company will be able to negotiate
future capitation arrangements on behalf of itself or the P.C.s, as applicable,
on satisfactory terms or at all, or that the fees offered in current capitation
arrangements will not be reduced to levels unsatisfactory to the Company.
Moreover, to the extent that costs incurred by the Company's affiliated dental
practices in providing services to patients covered by capitated managed dental
care contracts exceed the revenue under such contracts, the Company's business,
financial condition and operating results may be materially and adversely
affected.
22
<PAGE> 23
GEOGRAPHIC CONCENTRATION
The geographic concentration of the Company's operations in markets
such as the Dallas-Fort Worth, Houston, Wisconsin, Arkansas and Utah markets
increases the risk to the Company of adverse economic or regulatory developments
or action within these markets. In addition, the Company's growth strategy is
dependent, in part, upon acquiring larger group practices in selected markets.
The Company's strategy of focused expansion within selected markets increases
the risk to the Company that adverse economic or regulatory developments in one
or more of these markets may have a material adverse effect on the Company's
business, financial condition and operating results.
GOVERNMENT REGULATION
The practice of dentistry is regulated at both the state and federal
levels. There can be no assurance that the regulatory environment in which the
Company or P.C.s operate will not change significantly in the future. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
general, regulation of health care-related companies is increasing. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The ability of the Company to operate
profitably will depend in part upon the ability of the Company and the P.C.s to
operate in compliance with applicable health care regulations.
Although the Company believes its operations as currently conducted are
in material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims,
fee-splitting, insurance, facility licensure or certificate-of-need laws or that
the enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations.
RISKS ARISING FROM HEALTH CARE REFORM
There can be no assurance that the laws and regulations of the states
in which the Company operates will not change or be interpreted in the future
either to restrict or adversely affect the Company's relationships with dentists
or the operation of Dental Offices. Federal and state governments periodically
consider various types of health care initiatives and revisions to the health
care and health insurance system. Such initiatives and revisions 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.
23
<PAGE> 24
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.
COMPETITION
The dental practice management segment of the dental services industry,
currently in its formative stage, is highly competitive and is expected to
become increasingly more competitive. In this regard, the Company expects that
the provision of multi-specialty dental services at convenient locations will
become increasingly more common. The Company is aware of several dental practice
management companies that are currently operating in its existing markets. There
are also a number of companies with dental practice management businesses
similar to that of the Company currently operating in other parts of the country
which may enter the Company's existing markets in the future. Such competitors
may be better capitalized or otherwise enjoy competitive advantages which may
make it difficult for the Company to compete against them or to acquire
additional Dental Offices on terms acceptable to the Company. As the Company
seeks to expand its operations into new markets, it is likely to face
competition from dental practice management companies which already have
established a strong business presence in such locations.
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. To date, the Company has experienced difficulty in
attracting enough qualified management personnel to keep pace with its growth.
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.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
The acquisition of dental practices may result in significant increases
in the Company's intangible assets relating to goodwill. The Company expects the
amount allocable to goodwill on its consolidated balance sheet to increase in
the future if additional acquisitions are made, 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 goodwill may not be recoverable. When factors indicate that the amount
allocable to the Company's goodwill should be evaluated for possible impairment,
the Company may be required to reduce the carrying value of such assets. Based
on such an assessment, the Company was required to write off $3.3 million in
impaired goodwill in the quarter ended December 31, 1998. 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.
24
<PAGE> 25
DEPENDENCE ON MANAGEMENT AGREEMENTS, THE P.C.s AND AFFILIATED DENTISTS
Except with respect to its Wisconsin operations, the Company receives
fees for services provided to the P.C.s under a Management Agreement. The
Company owns all of the operating assets of the Dental Offices, but does not
employ or contract with dentists, employ hygienists or control the provision of
dental care at the Dental Offices, except in Wisconsin. The Company's revenue is
dependent on the revenue generated by the P.C.s at the Dental Offices.
Therefore, effective and continued performance of dentists providing services
for the P.C.s is essential to the Company's long-term success. Under each
Management Agreement, the Company pays substantially all of the operating and
nonoperating expenses associated with the provision of dental services except
for the salaries and benefits of the dentists and hygienists. Any material loss
of revenue by the P.C.s would have a material adverse effect on the Company's
business, financial condition and operating results, and any termination of a
Management Agreement (which is permitted in the event of a bankruptcy or
dissolution or material breach by either the P.C. or the Company, or upon 90
days' notice by the Company) could have such an effect. In the event of a breach
of a Management Agreement by a P.C., there can be no assurance that the legal
remedies available to the Company will be adequate to compensate the Company for
its damages resulting from such breach. The P.C.s are owned by dentists who are
licensed to practice dentistry in the relevant state. The Company has entered
into a succession agreement with the respective stockholders of the P.C.s
whereby upon termination of such stockholder's affiliation with the Company by
the Company or such stockholder for any reason, the stockholder is required to
sell his or her ownership in the P.C. for a nominal amount and the Company is
entitled to designate a successor.
EFFECTIVE CONTROL BY PRINCIPAL STOCKHOLDERS
As of December 31, 1999, Dr. Warren Melamed, along with members of his
family and trusts for the benefit of members of his family, and investors
principally including investment funds associated with TA Associates, Inc.
beneficially owned in the aggregate approximately 18.3% and 13.3%, respectively,
of the Company's 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.
25
<PAGE> 26
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants 1
Consolidated Balance Sheets as of December 31, 1999 and 1998 2
Consolidated Statements of Income for the Years Ended 3
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years 4
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended 5
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 6
</TABLE>
26
<PAGE> 27
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, 1999
and 1998, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 23, 2000
1
<PAGE> 28
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,921,193 $ 3,992,845
Accounts receivable, net of allowances of
approximately $12,678,000 and $9,419,000 in
1999 and 1998, respectively 17,408,886 15,328,575
Prepaid expenses 1,647,897 1,101,649
Income tax receivable 426,970 1,239,590
------------- -------------
Total current assets 23,404,946 21,662,659
Property and equipment, net of accumulated
depreciation of approximately $14,363,000 and
$9,270,000 in 1999 and 1998, respectively 19,071,714 18,725,117
Goodwill, net of accumulated amortization of
approximately $9,938,000 and $4,622,000 in
1999 and 1998, respectively 132,459,266 123,160,844
Deferred income taxes 340,999 2,082,318
Other assets 3,666,642 1,786,899
------------- -------------
Total assets $ 178,943,567 $ 167,417,837
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,028,804 $ 6,073,726
Accrued payroll 4,231,751 5,849,952
Accrued liabilities 10,862,474 9,393,126
Accrued restructuring charges 808,975 4,356,384
Payable to affiliated dental group practices 4,755,666 5,101,925
Current maturities of notes payable and
capital lease obligations 9,539,775 4,789,960
------------- -------------
Total current liabilities 32,227,445 35,565,073
Notes payable 76,728,008 70,515,007
Capital lease obligations 455,240 813,073
Other liabilities 2,849,602 2,933,302
------------- -------------
Total liabilities 112,260,295 109,826,455
Minority interest in consolidated subsidiaries 88,818 128,261
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized; 12,724,886 and 11,982,254 shares issued
and outstanding in 1999 and 1998, respectively 127,249 119,823
Common Stock to be issued, 55,172 shares in 2000 100,000 --
Additional paid-in capital 65,882,409 63,439,123
Retained earnings (deficit) 484,796 (6,095,825)
------------- -------------
Total stockholders' equity 66,594,454 57,463,121
------------- -------------
Total liabilities and stockholders' equity $ 178,943,567 $ 167,417,837
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE> 29
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Patient revenue, net $ 204,069,657 $ 129,600,803 $ 68,619,379
Operating expenses:
Provider salaries and benefits 67,089,126 40,283,317 21,178,925
Clinical and other salaries and benefits 53,195,318 36,556,073 18,802,599
Dental supplies 10,385,867 6,898,237 4,281,608
Laboratory fees 9,888,105 5,953,830 2,902,088
Occupancy 10,065,790 7,264,869 3,709,226
Advertising 3,072,988 2,436,481 1,781,017
Other operating expenses 22,031,181 17,854,560 7,944,179
Depreciation and amortization 10,548,650 9,862,928 2,938,466
------------- ------------- -------------
186,277,025 127,110,295 63,538,108
------------- ------------- -------------
Operating income 17,792,632 2,490,508 5,081,271
Interest expense, net 7,687,174 2,871,689 1,545,340
Minority interest in consolidated subsidiaries 224,474 11,524 45,661
------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item 9,880,984 (392,705) 3,490,270
Income taxes 3,300,363 31,480 1,355,637
------------- ------------- -------------
Income (loss) before extraordinary item 6,580,621 (424,185) 2,134,633
Extraordinary loss on early extinguishment of debt,
net of applicable tax benefit of $166,540 -- -- (263,796)
------------- ------------- -------------
Net income (loss) $ 6,580,621 $ (424,185) $ 1,870,837
============= ============= =============
Net income (loss) per common share:
Income (loss) before extraordinary item $ 0.53 $ (0.04) $ 0.34
Extraordinary item -- -- (0.05)
------------- ------------- -------------
Net income (loss) $ 0.53 $ (0.04) $ 0.29
============= ============= =============
Net income (loss) per common share - assuming dilution:
Income (loss) before extraordinary item $ 0.53 $ (0.04) $ 0.26
Extraordinary item -- -- (0.04)
------------- ------------- -------------
Net income (loss) $ 0.53 $ (0.04) $ 0.22
============= ============= =============
Weighted average number of common shares
outstanding 12,506,588 10,805,338 6,368,982
============= ============= =============
Weighted average number of common and
common equivalent shares outstanding 12,513,506 10,805,338 8,346,289
============= ============= =============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE> 30
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON ADDITIONAL
---------------------------- ---------------------------- STOCK TO PAID-IN
SHARES AMOUNT SHARES AMOUNT BE ISSUED CAPITAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 734,645 $ 7,346 3,133,750 $ 31,338 $ 75,000 $ 1,936,322
Net income -- -- -- -- -- --
Accretion of Redeemable
Common Stock -- -- -- -- -- --
Issuance of Common Stock -- -- 3,850,990 38,509 (75,000) 42,606,147
Issuance of Preferred Stock 969,905 9,699 -- -- -- 1,696,293
Conversion of Preferred Stock (1,704,550) (17,045) 852,275 8,523 -- 8,522
Conversion of Redeemable
Common Stock -- -- 2,400,000 24,000 -- 1,289,315
Repurchase of Common Stock -- -- (8,542) (85) -- (1,725)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 -- -- 10,228,473 102,285 -- 47,534,874
Net loss -- -- -- -- -- --
Issuance of Common Stock -- -- 1,753,781 17,538 -- 15,904,249
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 -- -- 11,982,254 119,823 -- 63,439,123
Net income -- -- -- -- -- --
Issuance of Common Stock -- -- 742,632 7,426 100,000 2,443,286
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 -- $ -- 12,724,886 $ 127,249 $ 100,000 $ 65,882,409
============ ============ ============ ============ ============ ============
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(DEFICIT) EQUITY
------------ ------------
<S> <C> <C>
Balance, December 31, 1996 $ (7,458,331) $ (5,408,325)
Net income 1,870,837 1,870,837
Accretion of Redeemable
Common Stock (84,146) (84,146)
Issuance of Common Stock -- 42,569,656
Issuance of Preferred Stock -- 1,705,992
Conversion of Preferred Stock -- --
Conversion of Redeemable
Common Stock -- 1,313,315
Repurchase of Common Stock -- (1,810)
------------ ------------
Balance, December 31, 1997 (5,671,640) 41,965,519
Net loss (424,185) (424,185)
Issuance of Common Stock -- 15,921,787
------------ ------------
Balance, December 31, 1998 (6,095,825) 57,463,121
Net income 6,580,621 6,580,621
Issuance of Common Stock -- 2,550,712
------------ ------------
Balance, December 31, 1999 $ 484,796 $ 66,594,454
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 31
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,580,621 $ (424,185) $ 1,870,837
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 10,548,650 9,862,928 2,938,466
Extraordinary loss, net -- -- 263,796
Minority interest in consolidated subsidiaries 224,474 11,524 45,661
Changes in assets and liabilities, net of effects
from acquisitions -
Accounts receivable, net (2,677,201) (5,230,288) (1,273,681)
Prepaid expenses (529,610) (482,891) (58,635)
Income tax receivable 812,620 (1,239,590) --
Other noncurrent assets (272,128) 433,227 (183,056)
Accounts payable and accrued expenses (4,666,972) (743,114) (334,778)
Accrued restructuring charges (3,547,409) 4,356,384 --
Other liabilities (3,231,253) (1,057,116) 400,410
Deferred income taxes 1,741,319 (2,097,701) 650,844
------------ ------------ ------------
Net cash provided by operating activities 4,983,111 3,389,178 4,319,864
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (5,100,907) (6,889,830) (3,330,102)
Cash paid for dental group practices, including
related costs, net of cash acquired (8,801,908) (48,601,828) (16,508,796)
------------ ------------ ------------
Net cash used in investing activities (13,902,815) (55,491,658) (19,838,898)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of issuance costs 16,750,000 55,150,000 15,235,000
Payments for debt issue costs (1,607,615) (254,139) (241,638)
Payments on notes payable and capital lease obligations (6,175,017) (1,736,018) (28,133,626)
Distributions to stockholders/partners (432,797) (189,097) (30,000)
Repurchase of Common Stock -- -- (1,810)
Redemption of Convertible Participating Preferred Stock -- -- (8,000,000)
Issuance of Common Stock 313,481 149,437 38,606,913
------------ ------------ ------------
Net cash provided by financing activities 8,848,052 53,120,183 17,434,839
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (71,652) 1,017,703 1,915,805
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,992,845 2,975,142 1,059,337
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,921,193 $ 3,992,845 $ 2,975,142
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 8,212,850 $ 1,217,422 $ 1,260,285
============ ============ ============
Cash paid for taxes $ 788,010 $ 3,624,600 $ 640,000
============ ============ ============
Equipment acquired under capital leases $ -- $ 855,038 $ 961,225
============ ============ ============
Debt assumed through acquisitions $ 150,000 $ 10,886,539 $ 1,275,000
============ ============ ============
Non-cash issuance of Common Stock $ 2,237,231 $ 15,772,350 $ 3,962,743
============ ============ ============
Non-cash reduction of other liabilities $ 3,368,000 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE> 32
MONARCH DENTAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND CURRENT OPERATING ENVIRONMENT:
Monarch Dental Corporation ("Monarch"), a Delaware corporation, and
subsidiaries (collectively, the "Company"), manages dental group practices in
selected markets. At December 31, 1999, the Company managed 190 dental group
practices in Texas, Wisconsin, Pennsylvania, Virginia, Ohio, Arkansas, Utah,
Colorado, Georgia, New Jersey, Florida, Indiana, Arizona and New Mexico (each a
"Dental Office" and collectively, the "Dental Offices.") The Company has grown
substantially in a relatively short period of time, principally through
acquisitions. Since January 1, 1997, the Company has completed 26 acquisitions
resulting in the addition of 135 Dental Offices.
During 1999, as a result of its focus on internal operations and the
uncertain availability of additional capital, the pace of acquisitions was
significantly reduced. The Company continues to review acquisitions in selected
existing markets on an opportunistic basis when and as opportunities arise and
to the extent the Company has available capital. Further expansion through
acquisitions is likely to require additional borrowings unless a substantial
increase in the current market price of the Company's common stock permits the
raising of additional capital in the equity markets, there can be no assurance
that such capital will be available. The Company may decide to refinance all or
a portion of existing indebtedness with longer term indebtedness having lower
amortization requirements but higher interest payments, which would result in
higher levels of interest expense in the future.
2. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation / Basis of Consolidation
The accompanying consolidated financial statements have been prepared
on the accrual basis of accounting. All intercompany accounts and transactions
have been eliminated in the consolidation.
In thirteen states, the Company accounts for its management activities
with the dental group practices under long-term management agreements (the
"Management Agreements"). The Management Agreements represent the Company's
right to manage the Dental Offices during the 40-year term of the agreement. The
Management Agreements cannot be terminated by the related professional
corporation without cause, consisting primarily of bankruptcy or material
default. Under the Management Agreements, the Company assumes responsibility for
the management of all aspects of the dental group practices' business (including
all operating expenses consisting of the expenses incurred by the Company in
connection with managing the Dental Offices, including salaries and benefits for
personnel other than dentists and hygienists, dental supplies, dental laboratory
fees, occupancy costs, equipment leases, management information systems and
other expenses related to the dental practice operations) other than the
provision of dental services and retains a 100% residual interest in the net
income of the dental group practices. The Company receives a management fee
equal to the Company's costs plus the lower of (i) 30% of the P.C.'s net
revenues or (ii) the P.C.'s net pre-tax income. If net pre-tax income exceeds
30% of the P.C.'s net revenues, the P.C. would retain the amount of pre-tax
income over 30% of the P.C.'s net revenues. The Company's net revenue and
operating results are significantly dependent upon the revenue of the dental
group practices. The Company has no material commitments or guarantees to the
dental group practices under the Management Agreements. In one state, currently
Wisconsin, the Company directly employs the dentists and hygienists.
Under the Management Agreements, the Company establishes a "controlling
financial interest" as defined by EITF 97-2, "Application of FASB No. 94 and APB
No. 16 to Physician Practice Management Entities and Certain Other Entities
under Contractual Management Arrangement" ("EITF 97-2"). In addition, the
Company has nominee shareholder arrangements with certain of the dental group
practices as defined by EITF 97-2. For these reasons, the Company consolidates
the financial statements of the dental group practices. The Company's 1997
consolidated financial statements have been restated to conform with the
provisions of EITF 97-2. The restatement affected the display of previously
reported revenue and amounts retained by the dental group practices only and did
not affect the Company's 1997 financial position, results of operations or cash
flows.
6
<PAGE> 33
Patient Revenue, Net
Patient 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 in accordance with the Management Agreements. Warren
F. Melamed, D.D.S. ("Dr. Melamed") is chairman of the Board of the Company and
sole shareholder of Modern Dental Professional, P.C. ("Modern Dental"), the
professional corporation in Texas which employs the dentists and other licensed
personnel. Patient revenue, net generated by Modern Dental approximated 35%, 46%
and 58% of total patient revenue, net in 1999, 1998 and 1997, respectively. No
other dental group practices provided more than 10% of patient revenue, net.
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 1999, 1998 and 1997, the Company estimates that approximately
42%, 40% and 38%, respectively, of patient revenue, net was received under
capitated managed dental care plan agreements with payors. The remainder of
patient revenue, net for these periods was earned under fee-for-service
arrangements. Approximately 20%, 20% and 26% of the Company's patient revenue,
net during 1999, 1998 and 1997 respectively, was derived from contracts with
Prudential Dental Maintenance Organization, Inc. and Compcare Health Services
Insurance Corporation. 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, adversely affecting the Company's patient revenue,
net. Since the Company is required to provide only basic dental services under
these contracts, there are no significant future losses anticipated under these
contracts. There were no other contracts with payors comprising more than 10% of
patient revenues, net during 1999, 1998 or 1997.
Advertising
The costs of advertising, promotion and marketing are expensed in the
year incurred.
Cash and Cash Equivalents
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. 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 under the terms of the
Management Agreements. Amounts collected on behalf of and payable to the Dental
Offices are reflected as payable to affiliated dental group practices in the
accompanying consolidated balance sheets. These amounts are unsecured and
consist primarily of salary and benefits expense of the dental group practices.
Management continually monitors and periodically adjusts its allowances
associated with these receivables based on estimated collection and payment
rates. Any adjustments to these estimates are made in the period that they
become known and quantifiable.
7
<PAGE> 34
Property and Equipment
Property and equipment are stated at cost or fair market value at dates
of acquisition, net of accumulated depreciation. 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................................ 5-7
Computer equipment and software................. 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.
Goodwill
The Company's acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
dental group practices. As part of the purchase price allocation, the Company
allocates the purchase price to the tangible assets acquired and liabilities
assumed, based on estimated fair market values. Costs of acquisition in excess
of the net estimated fair value of tangible assets acquired and liabilities
assumed are allocated first to identifiable intangibles and the remainder to
goodwill. The Company amortizes goodwill over twenty-five years using the
straight-line method.
The Company reviews the recorded amount of goodwill 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 continually evaluates 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. During the fourth quarter
of 1998, the Company recorded impairment charges totaling approximately $3.3
million (pretax) relating to Dental Offices that the Company closed in the first
and second quarters of 1999. Such charges are included in depreciation and
amortization expense in the accompanying 1998 consolidated statements of income.
There were no such charges in 1999 or 1997.
Accrued Restructuring Charges
Accrued restructuring charges include Dental Office closure costs,
accrued compensation costs for a former officer (see Note 9), litigation
reserves, accrued interest and property taxes. During the fourth quarter of
1998, in connection with the Dental Office closings discussed above, the Company
recorded charges of approximately $765,000 related primarily to estimated lease
abandonment liabilities and severance costs. The Company expects to expend the
remaining accrued restructuring amounts recorded as of December 31, 1999 during
2000 and 2001.
Other Liabilities
Other liabilities consist primarily of estimated liabilities related to
acquisitions accounted for as purchases and deferred rent for the Company's
facilities.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
8
<PAGE> 35
Income Taxes
The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Net Income (Loss) Per Common Share
The net income (loss) per common share is based on the weighted average
number of common shares outstanding during the period. Diluted net income (loss)
per share has been calculated using the treasury stock method for stock options
and other diluted securities. Such shares totaled 6,918 and 1,977,307 in 1999
and 1997, respectively. Because the Company reported a loss in 1998, no
additional shares related to stock options have been included since the effect
would be antidilutive. If stock options had been included in the computation of
diluted earnings per share, the number of shares would have increased by
347,819.
Other
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
3. ACQUISITIONS:
The Company made the following acquisitions in 1996, 1997, 1998 and
1999. All of these transactions were accounted for under the purchase method.
1996 Acquisitions -
The Company acquired certain assets and assumed certain liabilities of
MacGregor Dental Centers, Inc. and Shears Management, Inc. (collectively
referred to as "MacGregor") for $15.9 million in cash and 700,000 shares of
Common Stock.
Effective September 1, 1996, the Company acquired all of the
outstanding stock of Midwest Dental Care - Sheboygan, SC ("Sheboygan"), and
Midwest Dental Care - Mondovi, SC ("Mondovi") in a stock purchase transaction
and acquired certain assets and assumed certain liabilities of Advance Dental
Management, a related entity to Sheboygan and Mondovi, in an asset purchase
transaction. All three entities (collectively referred to as "Midwest") were
acquired for $5.3 million in cash and 350,000 shares of Common Stock.
Additionally, the seller has the right to receive additional purchase
consideration of up to 80,000 stock options upon meeting specified financial
performance goals. As of December 31, 1999, none of these stock options have
been issued to the seller.
Effective October 1, 1996, the Company acquired certain assets and
assumed certain liabilities of John H. Davis, DDS for $172,000 in cash and 5,000
shares of Common Stock in an asset purchase transaction.
Effective November 7, 1996, the Company acquired all of the outstanding
stock of Convenient Dental Care, Inc. ("Convenient") in Arkansas for a $500,000
promissory note, paid in January 1997, and 30,000 shares of Common Stock in a
stock purchase transaction. Additionally, the seller was given the right to
receive additional purchase consideration of up to $200,000 contingent upon
meeting specified financial performance goals. The full amount of the additional
consideration was earned by the seller during 1998.
1997 Acquisitions -
Effective January 1, 1997, the Company acquired all of the outstanding
stock of Arkansas Dental Health Associates, Inc. in Arkansas, for $1.6 million
in cash and 57,500 shares of Common Stock in a stock purchase transaction.
Additionally, the seller was given the right to receive additional purchase
consideration of up to $500,000 contingent upon meeting specified financial
performance goals. As of December 31, 1999, the seller has earned approximately
$423,000 of this amount with no future contingent amounts payable.
9
<PAGE> 36
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.
Effective August 1, 1997, the Company acquired all of the outstanding
stock of Dental Centers of Indiana, Inc. in Indiana, for $1.8 million in cash
and 139,944 shares of Common Stock in a stock purchase transaction.
Additionally, the seller was given the right to receive additional purchase
consideration contingent upon meeting specified financial performance goals. As
of December 31, 1999, this additional consideration was earned by the seller
with no future contingent amounts payable.
Effective November 3, 1997, the Company acquired certain assets and
assumed certain liabilities of Press Family Dental in San Antonio, Texas for
$6.6 million in cash and 179,736 shares of Common Stock in an asset purchase
transaction.
Effective December 1, 1997, the Company acquired an 80% interest in
certain assets and assumed certain liabilities of Dental America in Midland,
Texas for $650,000 in cash and 8,785 shares of Common Stock in an asset purchase
transaction. Additionally, the seller was given the right to receive additional
purchase consideration contingent upon meeting specified financial performance
goals. As of December 31, 1999, this additional consideration was earned by the
seller with no future contingent amounts payable.
During 1997, the Company acquired certain assets and assumed certain
liabilities of four dental groups in Dallas and Conroe, Texas, Fayetteville,
Arkansas and Colorado Springs, Colorado for $3.4 million in cash and 28,774
shares of Common Stock in asset purchase transactions. Additionally, the sellers
were given the right to receive additional purchase consideration contingent
upon meeting specified financial performance goals. As of December 31, 1999,
this additional consideration was earned by the sellers with no future
contingent amounts payable.
1998 Acquisitions -
Effective March 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Dental Care One in Dayton, Ohio for $2.3 million
in cash and 34,781 shares of Common Stock in an asset purchase transaction.
Effective June 1, 1998, the Company acquired 65% of the outstanding
stock of Managed Dental Care Centers, Inc. in Dallas, Texas for $2.0 million in
cash and 27,686 shares of Common Stock in a stock purchase transaction. The
Company increased its ownership to 82.5% during 1999.
Effective September 1, 1998, the Company acquired all of the
outstanding stock of Valley Forge Dental Associates, Inc. ("Valley Forge") in
King of Prussia, Pennsylvania for 1,559,111 shares of Common Stock and the
issuance of approximately $42.0 million in debt in a stock purchase transaction.
As of December 31, 1998, Valley Forge had contingent purchase obligations in
cash, notes and stock totaling approximately $8.3 million in cash and notes and
approximately 41,122 shares of stock. These obligations were assumed by the
Company. In 1999, the Company issued an additional 400,000 shares of Common
Stock to the former shareholders of Valley Forge as consideration for the
settlement of a dispute. The settlement is reflected in the financial statements
as a $1.0 million charge to other operating expenses. Subsequent to December 31,
1999, all contingent purchase obligations have been settled.
Effective September 1, 1998, the Company acquired certain assets and
assumed certain liabilities of Talbert Medical Management Corporation, which
operated dental offices in Utah and Arizona, for $7.0 million in cash in an
asset purchase transaction.
During 1998, the Company acquired certain assets and assumed certain
liabilities of five dental groups in Indianapolis, Indiana, San Antonio and
Abilene, Texas and Manitowoc, Wisconsin for $946,000 in cash and 12,702 shares
of Common Stock in asset purchase transactions.
10
<PAGE> 37
1999 Acquisitions -
During 1999, the Company acquired certain assets and assumed certain
liabilities of seven dental groups in Duncanville, Texas, Eau Claire and New
Richmond, Wisconsin, Tucker, Georgia and Spring Valley, Minnesota for an
aggregate purchase consideration of $4.9 million, consisting of $3.8 million in
cash, 163,312 shares of Common Stock and the assumption of $150,000 in debt in
asset purchase transactions.
Obligations related to undeterminable contingent purchase
considerations for certain acquisitions have not been earned at December 31,
1999, 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.
The Company's liabilities for future obligations to sellers of
affiliated dental practices were reduced by $2.9 million as a result of a
settlement of a dispute. This amount is reflected in the financial statements as
a credit to other operating expenses.
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. Some of these estimates are
preliminary and subject to further adjustment. The estimated fair values of
assets acquired and liabilities assumed during 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash and cash equivalents ................... $ -- $ 649,000
Accounts receivable, net .................... (596,890) 4,380,082
Other assets ................................ 16,638 5,611,052
Property and equipment, net ................. 411,865 6,780,225
Liabilities assumed ......................... (4,354,014) (33,669,377)
Intangible assets ........................... 14,585,587 79,416,395
Less - Fair value of Common Stock issued .... (1,261,278) (14,701,698)
------------ ------------
Cash purchase price (including earnouts) .... $ 8,801,908 $ 48,465,679
============ ============
Total earnouts paid ......................... $ 5,006,601 $ 2,016,627
============ ============
</TABLE>
The following unaudited pro forma information reflects the effects of
acquisitions on the consolidated results of operations of the Company had the
acquisitions occurred at January 1, 1998. Pro forma results for 1999 are not
materially different from historical amounts reported.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,1998
----------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Patient revenue, net .................................. $ 187,927
=========
Net income ............................................ $ 1,875
=========
Net income per common share - assuming dilution ....... $ 0.15
=========
</TABLE>
11
<PAGE> 38
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Leasehold improvements ............. $ 8,309,290 $ 6,957,563
Furniture and fixtures ............. 4,125,909 3,629,209
Dental equipment ................... 17,208,224 14,501,512
Computer equipment and software .... 3,791,067 2,906,560
------------ ------------
33,434,490 27,994,844
Less - Accumulated depreciation .... (14,362,776) (9,269,727)
------------ ------------
Property and equipment, net ........ $ 19,071,714 $ 18,725,117
============ ============
</TABLE>
Depreciation expense was $5,232,650, $3,601,043, and $1,813,241 for
1999, 1998 and 1997, respectively.
5. NOTES PAYABLE:
Notes payable consists of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Borrowings under credit facility, due June 30, 2000 ........................ $ 5,650,000 $ --
Borrowings under credit facility, due June 30, 2001 ........................ 75,000,000 65,400,000
Other notes payable, due April 2002, with an interest rate of prime
plus 0.5%, secured by certain receivables and property .................. 19,719 102,417
Notes payable assumed through acquisitions, with interest rates ranging
between 6.00% and 12.21%, with due dates between March 2000 and
March 2004, secured by certain receivables and property ................. 5,262,930 8,987,550
------------ ------------
85,932,649 74,489,967
Less - Current maturities .................................................. (9,204,641) (3,974,960)
------------ ------------
Notes payable, net ......................................................... $ 76,728,008 $ 70,515,007
============ ============
</TABLE>
The maturities of notes payable at December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000 .......... $ 9,204,641
2001 .......... 76,342,781
2002 .......... 300,984
2003 .......... 54,243
2004 .......... 30,000
-----------
$85,932,649
===========
</TABLE>
The Company has a Credit Facility with a bank syndicate, which was
amended in June 1999. Under the Credit Facility, the Company may borrow up to
$85.0 million. At December 31, 1999 the Company had $80.7 million outstanding
under the Credit Facility and remaining availability of $4.3 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 EBITDA, each as defined in the Credit Facility. The Credit Facility prohibits
the Company from incurring indebtedness, incurring liens, disposing of assets,
making investments or making acquisitions without bank approval, 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.
12
<PAGE> 39
During 1999, the Company amended its loan agreement associated with the
Credit Facility. Changes made in the amendment included, but were not limited
to, modifications of certain defined terms and financial ratios, additions of
newly defined terms, limitations on capital expenditures, modifications to the
definition of Events of Default and the requirement of prior bank approval for
consolidations, mergers, acquisitions, and sales of assets. The methodology by
which the Company's borrowing rates are determined was also adjusted as part of
the amendment. In conjunction with this amendment, the bank syndicate received
contingency compensation in the form of warrants of the Company representing 3%
of the fully diluted outstanding common shares of the Company at the time of
agreement, subject to anti-dilution provisions, for an exercise price of $0.01
per share. The warrants are contingent based upon specific performance of the
Company in conjunction with dates set forth in a vesting schedule. The vesting
dates for the warrants are March 31, April 30, May 31, and June 30, 2000 upon
such dates, an aggregate 3% of the fully diluted outstanding common stock will
vest at a rate of 1/2%, 1/2%, 1/2%, and 1 1/2%, respectively. The Company
believes that it will not meet the specific performance requirements under this
amendment and that all of the warrants will vest by June 30, 2000.
As of December 31, 1999, the Company is in compliance with the terms of
the Credit Facility. There can be no assurance that the Company will maintain
the ratios as required by the loan agreement. The failure to maintain these
ratios could adversely affect the Company's operations in future periods.
The Company believes that cash generated from operations will be
sufficient to fund its core operations. However, the Company may not have
sufficient cash from operations to fund interest expense and certain
non-recurring and contingency payments aggregating approximately $3.5 million
during the second quarter of 2000. In addition, the Company does not expect to
generate sufficient cash from operations to repay its obligations under its
short-term note, due June 30, 2000 under the Credit Facility, which the Company
expects will approximate $10.0 million at that time. Failure to make the
required principal payment would constitute a default under the Credit Facility.
The Company is currently discussing with its lenders an extension of this
short-term note and the extension of additional credit to cover the potential
cash shortfall in the second quarter. However, the Company can provide no
assurance as to the probability that its lenders will extend the maturity of
this short-term note or that additional credit will be available to meet the
potential cash shortfall in the second quarter. Assuming that the Company can
obtain additional financing in the second quarter to meet any cash shortfall,
the Company believes that cash from operations will be sufficient in the third
and fourth quarters of 2000 to meet its obligations.
In order to meet its short-term and long-term liquidity needs, the
Company may issue additional equity and debt securities, subject to market and
other conditions. In addition, the Company is also in the process of contacting
potential acquirors in order to determine if a sale of the Company would be more
beneficial to the Company's stockholders than raising additional capital to meet
its liquidity needs. The Company expects that potential acquirors would commence
due diligence procedures in the second quarter 2000. There can be no assurance
that any such sale will be available on terms acceptable to the Company. In the
event a sale transaction is not consummated, the Company would pursue the
issuance of debt securities and, as a contingency plan, has signed an engagement
letter with an investment bank to pursue the issuance of these securities.
Although there can be no assurance that this financing will be available on
terms acceptable to the Company, the Company believes that additional sources of
liquidity are available at rates that would increase the Company's interest
obligations. The failure to raise the funds necessary to finance its future cash
requirements could adversely affect the Company's operations in future periods.
The Company enters into interest rate swap agreements to manage its
interest rate exposure. Interest rate swaps are agreements to exchange interest
rate payment streams based on a notional principle amount. Company policy
requires settlement accounting principles for interest rate swaps in which net
interest rate differentials to be paid or received are recorded currently as
adjustments to interest expense. Transactions involving such agreements did not
have a material effect to the 1999 financial statements.
The Company incurred an extraordinary loss of $264,000, net of tax, in
1997 as it extinguished its previous credit facility and wrote off $431,000 in
unamortized loan fees, net of a tax benefit of $167,000.
13
<PAGE> 40
6. STOCKHOLDERS' EQUITY:
At December 31, 1999, the Company has authorized 52,000,000 shares of
stock, of which (a) 50,000,000 shares, par value $0.01 per share, are designated
Common Stock, and (b) 2,000,000 shares, par value $0.01 per share, are
designated Preferred Stock.
In July 1997, the Company completed its initial public offering of
3,162,500 shares of Common Stock at $13.00 per share, resulting in net proceeds
of approximately $37.2 million.
Preferred Stock
During 1996, the Company issued 734,645 shares of Series A Convertible
Junior Preferred Stock to the holders of previously issued Convertible
Participating Preferred Stock. During 1997, an additional 969,905 shares were
issued, resulting in a total of 1,704,550 shares outstanding. These shares were
converted into Common Stock on a 1-for-2 basis upon the completion of the
initial public offering.
14
<PAGE> 41
Stock-Based Compensation
During 1999, the Company's Board of Directors approved the 1999 Stock
Option and Grant Plan (the "1999 Plan") under which 1,000,000 options to
purchase shares of the Company's Common Stock may be granted to employees,
advisors, consultants and other key persons of the Company and its subsidiaries,
including affiliated professional corporations. Options granted under the 1999
Plan are non-qualified stock options ("NQSO"). The Company also administers the
1996 Stock Option and Incentive Plan (the "1996 Plan") under which 1,376,250
options to purchase shares of the Company's Common Stock may be granted to
officers and other employees, directors, advisors, consultants and other key
persons of the Company and its subsidiaries. Options granted under the 1996 Plan
may be either incentive stock options ("ISO") or NQSO. The option price per
share may not be less than 100% of the fair market value at the grant date for
ISO and may not be less than 85% of the fair market value at the grant date for
NQSO. Generally, options vest over a 4-year period and are exercisable over a
ten-year life. As of December 31, 1999, 1998, and 1997, 1,418,477, 1,066,875 and
556,750 shares, respectively, were outstanding under the 1999 Plan and the 1996
Plan.
The following table summarizes the activity during 1999, 1998 and 1997
under the 1999 Plan and 1996 Plan.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Outstanding at beginning of year ........ 1,066,875 556,750 25,000
Granted ................................. 418,501 530,750 531,750
Exercised ............................... -- (625) --
Canceled ................................ (66,899) (20,000) --
---------- ----------- ------------
Outstanding at end of year .............. 1,418,477 1,066,875 556,750
=========== =========== ============
Exercisable at end of year .............. 479,557 146,685 6,250
Price range ............................. $2.44-18.38 $3.00-17.31 $3.00-13.00
</TABLE>
The following summarizes information about options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -------------------
Weighted Weighted Weighted
Exercise Average Average Average
Price Remaining Exercise Exercise
Range Number Term Price Number Price
- --------------- --------- --------- -------- ------- --------
<C> <C> <C> <C> <C> <C>
$ 1.69- 4.13 448,501 9.5 years $ 2.57 124,250 $ 3.55
$ 7.70-11.38 375,000 8.7 years 11.13 100,000 10.92
$ 11.88-15.38 523,250 7.7 years 13.35 231,000 13.19
$ 17.00-18.38 71,726 8.0 years 17.90 24,307 18.24
--------- -------
1,418,477 479,557
========= =======
</TABLE>
The shares exercisable at December 31, 1998 and 1997 had a weighted average
exercise price of $9.29 and $3.00 per share, respectively.
The Company accounts for its stock-based compensation arrangements under the
provisions of APB No. 25, "Accounting for Stock Issued to Employees." In 1995,
SFAS No. 123, "Accounting for Stock-Based Compensation" was issued, whereby
companies may elect to account for stock-based compensation using a fair value
based method or continue measuring compensation expense using the intrinsic
value method prescribed in APB No. 25. SFAS No. 123 requires that companies
electing to continue to use the intrinsic value method make pro forma
disclosures of net income and net income per share as if the fair value based
method of accounting had been applied.
15
<PAGE> 42
The Company used the Black-Scholes option-pricing model to estimate the fair
value of options. The effects of applying SFAS No. 123 for 1999, 1998 and 1997
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported $ 6,581 $ (424) $ 1,871
Pro forma 5,710 (1,054) 1,604
Net income (loss) per common share - assuming dilution:
As reported $ 0.53 $ (0.04) $ 0.22
Pro forma 0.46 (0.10) 0.19
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Operating and Capital Lease Obligations
The Company leases all of its facilities, including the Dental Offices
and corporate office, under non-cancelable operating leases, extending through
2011. Rent expense totaled approximately $8.6 million, $6.3 million and $3.1
million for 1999, 1998 and 1997, respectively.
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, 1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- -----------
<S> <C> <C>
2000 ............................................. $ 7,507,302 $ 453,642
2001 ............................................. 6,424,104 223,721
2002 ............................................. 5,001,278 79,786
2003 ............................................. 3,539,908 51,723
2004 ............................................. 2,588,413 41,675
Thereafter ....................................... 4,148,669 211,846
----------- -----------
Total minimum lease obligation ................ $29,209,674 1,062,393
===========
Less - Amounts representing interest (272,019)
-----------
Present value of minimum lease obligations 790,374
Less - Current maturities (335,134)
-----------
Capital lease obligations, net ................ $ 455,240
===========
</TABLE>
Litigation, Claims, and Assessments
On or about April 26, 1999, the Company was served with a putative
class action complaint against the Company and certain of its officers and
directors, captioned Robert O. Neibert, et al. v. Monarch Dental Corp., Warren
F. Melamed, Gary W. Cage and Roger B. Kafker, Civil No. 3-99-CV-0762-X. The
class action complaint, which was filed in the United States District Court for
the Northern District of Texas (the "District Court"), alleges that the Company
and certain of its officers and directors violated the federal securities laws
by making material misrepresentations and omissions in certain public
disclosures during the period between February 24, 1998 and December 22, 1998.
The public disclosures relate to, among other things, acquired dental practices,
the Company's internal growth and growth prospects, and the Company's past and
future financial performance. Following the announcement of the filing of this
class action lawsuit, the Company was served with two similar putative class
actions in the District Court, which encompass the same class period and cover
almost identical allegations. On May 24, 1999, the District Court consolidated
these three class action complaints into a single action. The Company was
subsequently served on September 10, 1999 with a consolidated amended class
action complaint which contained substantially the same allegations as were
encompassed in the prior separate class action complaints. The Company and all
of the defendants named in the amended class action complaint filed motions to
dismiss all of the claims set forth in this complaint in October 1999.
16
<PAGE> 43
After the motions to dismiss were filed but before the District Court
decided on them, the parties reached agreement on the terms of a potential
settlement of the action. Accordingly, the parties entered into a Memorandum of
Understanding dated January 31, 2000, which sets forth the principal bases of a
settlement of the action, subject to approval by the District Court. The
Memorandum of Understanding and the proposed settlement will be contingent upon
(i) the parties' execution of an appropriate Stipulation of Settlement
("Stipulation"); (ii) conditional certification of the Class for purposes of the
Settlement; (iii) Court approval of the Settlement; and (iv) dismissal of the
Action with prejudice.
In the Stipulation, the parties will request that the District Court
certify, for purposes of settlement, a class of all persons (exclusive of
Defendants and their affiliates) who purchased or otherwise acquired shares of
the Company during the period between February 24, 1998 and December 22, 1998,
and their successors in interest and transferees, immediate and remote (the
"Class"); that the District Court approve the settlement, including the release
of all claims by Class members against the Defendants; and that the Court enter
final judgment dismissing with prejudice all claims of the plaintiffs and the
Class against the Defendants. As part of the settlement, the Company will pay
$3.5 million into a settlement fund which will, among other things, be used to
pay authorized members of the Class. The entire settlement amount will be funded
by Monarch's directors & officers liability insurance carrier. No cash
contribution is required of Monarch or any of the other defendants. The parties
are currently negotiating the Stipulation and related settlement documentation.
The Company also settled a dispute with the sellers of an affiliated
dental practice regarding the original purchase price and future obligations to
the sellers based on earnings of the practice.
In accordance with generally accepted accounting principles, the
difference between the obligations terminated and the total consideration was
reflected in the Company's fourth quarter 1999 financial statements as a special
income item of $2.9 million, net of related legal expenses, or approximately
$0.23 per share.
In addition to the matters discussed above, 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.
8. INCOME TAXES:
The income tax provision (benefit) consisted of the following for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal .... $ 1,392 $ 2,035 $ 754
State ...... 500 350 184
------- ------- -------
1,892 2,385 938
Deferred ...... 1,408 (2,353) 418
------- ------- -------
Total ......... $ 3,300 $ 32 $ 1,356
======= ======= =======
</TABLE>
The Company's effective tax rate of 33.4% in 1999 is lower than the
federal rate of 34.0% due to a $2.9 million credit recorded in the fourth
quarter related to the settlement of a dispute with the sellers of an affiliated
dental practice that is not considered taxable income, offset by the impact of
state income taxes. Due to the 1998 pre-tax loss, the 1998 effective tax rate is
significantly impacted by state income taxes. The Company's effective tax rate
of 38.8% in 1997 is greater than the federal rate of 34.0% due to the impact of
state income taxes.
17
<PAGE> 44
Deferred income taxes are recorded for temporary differences between
the basis of assets and liabilities for financial reporting purposes and income
tax purposes. Temporary differences comprising the deferred tax assets and
liabilities in the consolidated balance sheets as of December 31, 1999 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax asset:
Cash to accrual and other .......................... $3,350 $3,828
Net operating loss carryforwards ................... 354 --
Legal accruals ..................................... 211 633
Accrued compensation ............................... 132 510
------ ------
$4,047 $4,971
Deferred tax liability:
Deferred tax liabilities of acquired companies ..... 2,244 2,177
Intangible asset amortization ...................... 1,318 307
Accelerated depreciation ........................... 144 405
------ ------
3,706 2,889
------ ------
Net deferred tax asset (liability) ................. $ 341 $2,082
====== ======
</TABLE>
The deferred income tax provision (benefit) of approximately
$1,408,000, $(2,353,000), and $418,000 in 1999, 1998 and 1997, respectively,
consists primarily of nondeductible accruals, the excess of the tax over book
amortization of intangible assets, the excess of the tax over book depreciation
of fixed assets and cash to accrual adjustments.
9. RELATED-PARTY TRANSACTIONS:
The Company leases several of its facilities from affiliated entities.
Total rent expense paid to related parties for 1999, 1998 and 1997, was
approximately $1.1 million, $1.1 million and $715,000, respectively. The leases
have average remaining lives of approximately 3.5 years at December 31, 1999.
The Management Agreement activity between the Company and the Dental
Offices is reflected as a liability in the consolidated balance sheets. Such
amounts are generally payable within a 30-day period following month-end and are
unsecured.
Included in accrued restructuring charges in 1999 and 1998 is
approximately $535,000 and $1.6 million, respectively, in compensation expense
related to a change in employment status of Dr. Melamed. This amount was
recorded in the fourth quarter of 1998. Of the total amount accrued,
approximately $1.1 million was paid in 1999 with the remaining amount payable in
equal monthly installments through July 2001.
10. BENEFIT PLANS:
401(k) Plans
Prior to 1999, the Company maintained three defined contribution plans
that conformed to IRS provisions for 401(k) plans. One plan covered the
employees of the Company located in the Dallas-Fort Worth, Houston, San Antonio,
Indiana, Arkansas and Wisconsin markets. The second plan covered employees
formerly of Valley Forge and a third plan covered employees located in the
Dayton, Ohio market. During 1999, these three plans were consolidated into one
plan. The plan, referred to as the "Monarch 401(k) Plan," covers all employees
of the Company. Under this plan, employees are eligible to participate in the
plan provided they have attained the age of 18 and have completed the 90-day
initial employment period. The Company makes discretionary matching
contributions up to a maximum dollar amount. Total contributions by the Company
for the plan were approximately $544,000, $214,000, and $118,000 for 1999, 1998,
and 1997, respectively.
18
<PAGE> 45
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "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. Offerings under the Purchase Plan commence on each January 1 and
July 1 and 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.
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. 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. The Company issued an aggregate of 129,313 and
45,339 shares of Common Stock under the Purchase Plan in 1999 and 1998,
respectively.
11. 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 and capital lease
obligations are based on similar issues or on current rates available to the
Company and approximate their carrying values at December 31, 1999 and 1998.
12. SEGMENT REPORTING:
The Company organizes its business into five reportable segments. The
Company's reportable segments are strategic business units, and are comprised of
the following:
Region One - Includes Dallas/Fort Worth, Houston, San Antonio, West
Texas, New Mexico and Austin Dental Offices. The Company
exited the Austin market in the first quarter of 1999.
Region Two - Includes Pittsburgh, Northern Virginia, Southern Virginia,
Atlanta and Florida Dental Offices.
Region Three - Includes Indiana, Arkansas, Dayton and Cleveland Dental
Offices.
Region Four - Includes Wisconsin, Utah, Arizona and Colorado Dental
Offices.
Region Five - Includes Philadelphia and Northern New Jersey Dental
Offices.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies except that the Company does
not allocate income taxes to any of the regions. They are managed separately
because each region operates under different contractual arrangements, providing
service to a diverse mix of patients and payors.
19
<PAGE> 46
FOR THE YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Region 1 Region 2 Region 3 Region 4 Region 5 Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Patient revenue, net $ 74,883 $ 36,440 $ 28,958 $ 46,133 $ 17,656 $204,070
Total operating expenses 61,517 29,838 24,313 39,075 14,513 169,256 (a)
-------- -------- -------- -------- -------- --------
Segment contribution 13,366 6,602 4,645 7,058 3,143 34,814
Contribution margin 18% 18% 16% 15% 18% 17%
Depreciation and
amortization expense 3,654 2,053 1,483 1,716 1,522 10,428
Interest expense, net 35 140 (45) 19 129 278
Segment profit 9,677 4,409 3,207 5,323 1,492 24,108
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Region 1 Region 2 Region 3 Region 4 Region 5 Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Patient revenue, net $ 61,473 $ 11,046 $ 22,307 $ 29,122 $ 5,653 $129,601
Total operating expenses 52,434 8,740 19,114 24,084 4,264 108,636
-------- -------- -------- -------- -------- --------
Segment contribution 9,039 2,306 3,193 5,038 1,389 20,965
Contribution margin 15% 21% 14% 17% 25% 16%
Depreciation and
amortization expense 6,193 581 1,522 992 380 9,668 (b)
Interest expense, net 64 38 12 45 10 169
Segment profit 2,782 1,687 1,659 4,001 999 11,128
</TABLE>
Reconciliation of Profit (in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Segment profit $ 24,108 $ 11,128
Unallocated amounts:
Corporate operating expenses 6,473 8,611
Corporate depreciation and amortization expense 121 195
Corporate interest expense, net 7,409 2,703
Minority interest in consolidated subsidiaries 224 12
-------- --------
Income (loss) before income taxes $ 9,881 $ (393)
======== ========
</TABLE>
(a) Includes a $1.0 million charge related to the settlement of a dispute with
the former shareholders of an acquired company and a credit of
approximately $2.9 million related to the settlement of a dispute with the
sellers of an affiliated dental practice (see Note 3). Also includes $1.0
million credit related to the settlement of a dispute with a former owner
of an acquired dental practice.
(b) Includes impairment charges of approximately $3.3 million related to Dental
Office closures (see Note 2).
20
<PAGE> 1
EXHIBIT 21.1
MONARCH DENTAL CORPORATION AND AFFILIATES
Monarch Dental Corporation
Partners Dental Corporation
Monarch Dental Associates, L.P.
Monarch Dental Associates (Houston), 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.
Monarch Dental Associates (Arkansas), Inc.
Modern Dental Professionals - Girlinghouse, P.A.
Modern Dental Professionals - St. Raymond (a Professional Dental Corporation)
Monarch Dental Associates (Indiana), Inc.
Drs. Johnson, Terry and Associates, L.P.
Modern Dental Professionals - Indiana, P.C.
Dental Alliance, Inc.
Dental Providers Alliance, Inc.
DCI / Wood Joint Venture
Three Peaks Dental Management, Inc.
Modern Dental Professionals - Colorado, P.C.
Monarch Dental (Press) Associates, L.P.
Monarch Dental Associates (Midland/Odessa), L.P.
Managed Dental Care Centers, Inc.
Dental Care One (Monarch), Inc.
Monarch Dental Associates (Abilene), L.P.
Monarch Dental Associates (Utah), Inc.
Monarch Dental Associates (Arizona), L.L.C.
Modern Dental Professionals - Utah, P.C.
Modern Dental Professionals - New Mexico, P.C.
Modern Dental Professionals - Arizona, P.C.
Modern Dental Professionals - Sternberg, Inc.
Valley Forge Dental Associates, Inc.
VFD of Pennsylvania, Inc.
Monarch Dental Associates (Cleveland), Inc.
Precise Dental Lab, Inc.
VFD of Georgia, Inc.
VFD of Pittsburgh, Inc.
Pro Dent, Inc.
VFD Realty, Inc.
Valley Forge Dental of Florida, P.A.
Western Dental Associates, P.C.
Nancy J. Magone, D.M.D., P.C.
Witkin Dentistry, P.C.
Horizon Dental Group International, Inc. - Mark B. Sternberg, D.D.S.
John E. Tiano, D.D.S., P.C.
Kenneth Tralongo, D.D.S. and Associates, P.C.
Dworkin and Clemens, D.D.S.
George E. Frattali, D.D.S. & Associates, Ltd.
George E. Frattali, D.D.S. & Associates, P.A.
Village at Newtown Dentists, P.C.
Modern Dental Professionals - New Jersey, P.A.
Modern Dental Professionals - Minnesota, P.C.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 23, 2000. It should be
noted that we have not audited any financial statements of the Company
subsequent to December 31, 1999 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,921,193
<SECURITIES> 0
<RECEIVABLES> 30,086,886
<ALLOWANCES> 12,678,000
<INVENTORY> 0
<CURRENT-ASSETS> 23,404,946
<PP&E> 33,434,714
<DEPRECIATION> 14,363,000
<TOTAL-ASSETS> 178,943,567
<CURRENT-LIABILITIES> 32,227,445
<BONDS> 0
0
0
<COMMON> 127,249
<OTHER-SE> 66,467,205
<TOTAL-LIABILITY-AND-EQUITY> 178,943,567
<SALES> 0
<TOTAL-REVENUES> 204,069,657
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 186,277,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,687,174
<INCOME-PRETAX> 9,880,984
<INCOME-TAX> 3,300,363
<INCOME-CONTINUING> 6,580,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,580,621
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.53
</TABLE>
