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 FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] 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: 0-22985
CASTLE DENTAL CENTERS, INC.
DELAWARE
(State or other jurisdiction of incorporation or organization)
76-0486898
(I.R.S. Employer Identification No.)
1360 POST OAK BOULEVARD, SUITE 1300
HOUSTON, TEXAS
(Address of principal executive offices)
77056
(Zip Code)
(713) 479-8000
(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, $.001 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 the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (ss.229.405 under the Securities Exchange Act of
1934) is not contained herein, and will not be contained, to the best of
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. [ ]
As of March 26, 1998, there were 6,237,581 shares of Castle Dental
Centers, Inc. Common Stock, $.001 par value, issued and outstanding 3,252,338
of which, having an aggregate market value of approximately $34.1 million were
held by non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant's 1997 annual
meeting of stockholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 1997, are incorporated by reference into Part III
of this Form 10-K.
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TABLE OF CONTENTS
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PAGE
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Item 1. Business....................................................................... 1
The Company.................................................................... 1
The Dental Industry............................................................ 2
Business Strategy.............................................................. 3
Dental Network Development..................................................... 4
Services....................................................................... 6
Operations..................................................................... 6
Sales & Marketing.............................................................. 8
Competition.................................................................... 8
Management Information Systems................................................. 8
Regulation..................................................................... 9
Employees...................................................................... 11
Corporate Liability and Insurance.............................................. 11
Item 2. Properties..................................................................... 11
Item 3. Legal Proceedings.............................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............................ 12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 13
Item 6. Selected Financial Data........................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 15
Introduction................................................................... 15
Results of Operations.......................................................... 16
Liquidity and Capital Resources................................................ 21
Recently Issued Pronouncements................................................. 23
Item 8. Financial Statements and Supplementary Data.................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 24
Item 10. Directors and Executive Officers of the Registrant............................. 25
Item 11. Executive Compensation......................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 25
Item 13. Certain Relationships and Related Transactions................................. 25
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 27
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NOTE ON FORWARD-LOOKING STATEMENTS
This Form 10-K contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K are forward-looking
statements. When used in this document, the words, "anticipate," "believe,"
"estimate" and "expect" and similar expressions are intended to identify such
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and are subject to certain uncertainties and
assumptions. Important factors that could cause actual results to differ
materially from expectations ("Cautionary Statements") are disclosed in this
Form 10-K, including without limitation in conjunction with the forward-looking
statements included in this Form 10-K. Should one or more of these uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from expectations. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
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ITEM 1. BUSINESS
THE COMPANY
The Company develops, manages and operates integrated dental networks
through contractual affiliations with general, orthodontic and multi-specialty
dental practices in the United States. The Company currently conducts operations
in the states of Texas, Florida and Tennessee. In January 1998, the Company
signed a definitive agreement to acquire 80% of a dental practice management
company in Los Angeles, California. The Company does not engage in the practice
of dentistry but rather establishes integrated dental networks by entering into
management services agreements with affiliated dental practices to provide on an
exclusive basis management and administrative services to affiliated dental
practices. The Company's strategy is to provide high-quality care in selected
markets with a view to achieving broad geographic coverage within those markets.
The Company seeks to achieve operating efficiencies by consolidating and
integrating affiliated practices into regional networks, realizing economies of
scale in such areas as marketing, administration and purchasing and enhancing
the revenues of its affiliated dental practices by increasing both patient
visits and the range of specialty services offered. As of December 31, 1997, the
Company provided management services to 42 dental centers with 125 affiliated
dentists, orthodontists and other dental specialists.
The Company's objective is to make each of its dental networks the
leading group dental care provider in each market it serves. Since its
formation, the Company has applied traditional retail principles of business and
marketing techniques to the practice of dentistry, including locating practices
in high-profile locations, offering more affordable fees and payment plans,
expanding the range of services offered, increasing market share through
targeted advertising and offering extended office hours. By using the Castle
Dental Centers' approach to managing affiliated dental practices, the Company
believes it will enable affiliated dentists, orthodontists and other dental
specialists to focus on delivering quality patient care and to realize
significantly greater productivity than traditional individual and small-group
dental practices.
The Company believes that the provision of a full range of dental
services through an integrated network is attractive to managed care payors and
intends to continue to pursue managed care contracts. The Company's affiliated
dental practices currently maintain an aggregate of 20 capitated managed care
contracts covering approximately 55,000 members. The Company believes that the
continued development of its networks will assist it in negotiating national and
regional capitated arrangements with managed care payors on behalf of the
affiliated practices.
The Company intends to utilize the practice management principles
employed in its Houston operations to establish a consistent national identity
for its business. Moreover, the Company believes that its experience and
expertise in managing multi-specialty dental group practices, as well as the
development of name recognition associated with the name "Castle Dental
Centers," will provide its affiliated dental practices with a competitive
advantage in attracting and retaining patients and realizing practice
efficiencies.
The Company was formed in 1981 by Jack H. Castle, D.D.S. and Jack H.
Castle, Jr., as a single location, multi-specialty dental practice in Houston,
Texas. From 1982 through 1996, the Company expanded to a total of 10 locations
with 39 dentists in the Houston metropolitan area. During this period the
Company developed, implemented and refined the integrated dental network
approach that it intends to utilize as a basis for its national expansion.
There presently are 13 Castle Dental Centers operating in the Houston,
Texas area and 3 additional centers in Houston in various stages of development.
In May 1996, the Company acquired the assets of and entered into long-term
management services agreements with 1st Dental Care, a dental practice with 11
locations in the Tampa/Clearwater, Florida area, and Mid-South Dental Centers, a
dental practice with six dental centers in various locations in Tennessee. In
August 1996, the Company increased its dental practices under management in
Texas by acquiring the assets of Horizon Dental Centers, a dental practice with
four dental centers in Fort Worth, Texas and four dental centers in Austin,
Texas. In September 1997, the Company acquired SW Dental Associates, LC, a
dental practice with four dental centers in the Austin,
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Texas metropolitan area. In December 1997, the Company acquired substantially
all the assets of two individual practices in Ft. Worth, Texas and Nashville,
Tennessee. (All of the acquisitions are collectively referred to as the
"Completed Acquisitions.")
THE DENTAL INDUSTRY
Dental care services in the United States are generally delivered
through a fragmented system of local providers, primarily sole practitioners, or
small groups of dentists, orthodontists or other dental specialists, practicing
at a single location with a limited number of professional assistants and
business office personnel. According to the American Dental Association 1995
Survey of Dental Practice ("ADA Survey"), there were approximately 150,800
actively practicing dental professionals in the U.S., of which approximately
8,900 were practicing orthodontists. Nearly 81% of the nation's private
practitioners work either as sole practitioners or in a practice with one other
dentist. The balance of these dentists practice in about 4,700 groups of three
or more dentists. However, dental, orthodontic and other specialty practices
have followed the trend of the health care industry generally and are
increasingly forming larger group practices.
The annual aggregate domestic market for dental services was estimated
by the Health Care Financing Administration, Health Care Financing Review (1995)
to be approximately $42.9 billion for 1995, representing approximately 4.3% of
total health care expenditures in the United States, and is projected to reach
$79.1 billion by 2005. Within the total market for dental services in the United
States, there are, in addition to general dentistry, a number of specialties,
including orthodontics (the straightening of teeth and remedy of occlusion),
periodontics (gum care), endodontics (root canal therapy), oral surgery (tooth
extraction) and pedodontics (care of children's teeth). The dental services
market has grown at a compound annual growth rate of approximately 8.1% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.3% through the year 2005. In contrast to other health care
expenditures, dental services are primarily paid for by the patient. According
to the U.S. Department of Health and Human Services, in 1995, consumer
out-of-pocket expenditures accounted for 53% of the payment for dental services,
compared to 19% for other medical services.
The Company believes that the growth in the dental industry has largely
been driven by four factors: (i) an increase in the availability and types of
dental insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic; and (iv) an increased focus on preventive and cosmetic dentistry.
Concerns over the accelerating cost of health care have resulted in the
increasing importance of managed care in the dental industry. Managed care
typically involves a third party (frequently the payor) assuming responsibility
for ensuring that health care is provided in a high-quality, cost-effective
manner. According to industry sources, approximately 18.6% of the estimated
118.5 million people covered by dental benefits in 1995 were enrolled in managed
care programs. It is estimated that managed care's penetration of this group
will increase to 35% of the 131 million people expected to be covered by dental
benefits in the year 2000. Enrollment in managed dental care plans, according to
the National Association of Dental Plans, is estimated to have grown from 7.8
million patients in 1990 to 22.8 million patients in 1995.
The Company believes that the provision of dental, orthodontic and other
specialty care will follow the pattern set by other segments of the health care
industry, moving away from the sole practitioner model to a group practice
environment in which a separate professional management team handles personnel,
management, billing, marketing and other business functions. The trends which
are leading dentists to affiliate with dental practice management companies
include: (i) the increasingly capital intensive nature of acquiring and
maintaining state-of-the-art dental equipment, laboratory and clinical
facilities; (ii) the growing need to develop and maintain specialized management
information
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and billing systems to meet the increasing demands of payors; and (iii) the
increasingly more complicated, competitive and regulated business environment
for dentists.
BUSINESS STRATEGY
The Company's strategy is to develop integrated networks for the
provision of a broad range of dental services through practice affiliations that
provide high-quality, cost-effective dental care in target markets. Key elements
of this strategy are to:
PROVIDE HIGH-QUALITY, COMPREHENSIVE, ONE-STOP FAMILY DENTAL HEALTH CARE.
The prototypical Castle Dental Center provides general dentistry as well
as a full range of dental specialties (including orthodontics,
pedodontics, periodontics, endodontics, oral surgery and implantology),
thereby allowing the majority of specialty referrals to remain in-house
within the Company's network of facilities. By bringing together
multi-specialty dental services within a single practice, the Company is
able to realize operating efficiencies and economies of scale and to
promote increased productivity, higher utilization of professionals and
facilities, and the sharing of dental specialists among multiple
locations. The Company's practice model also incorporates quality
assurance and quality control programs, including peer review and
continuing education and technique enhancement. The Company believes
that its multi-specialty strategy significantly differentiates it from
both individual and multi-center practices that typically offer only
general dentistry, orthodontics or other single specialty dental
services.
DEVELOP COMPREHENSIVE DENTAL NETWORKS IN TARGET MARKETS. The Company
intends to build its networks through acquisition of existing practices
and DE NOVO development of additional practices within target markets.
The Company seeks to consolidate and integrate its affiliated practices
to establish regional dental care networks. The Company believes this
network system will enable it to reduce the operating costs of its
affiliated practices by centralizing certain functions such as
telemarketing and advertising, billing and collections, payroll and
accounting and by negotiating regional and national contracts for
supplies, equipment, services and insurance. Once practice affiliations
are established in a market, the Company seeks to assist the affiliated
practices in expanding their range of services to make available
specialty dental services not previously offered.
APPLY TRADITIONAL RETAIL PRINCIPLES OF BUSINESS TO DENTAL CARE. The
Company believes it can enhance revenues and profitability by applying
traditional retail principles of business to the provision of dental
services in its target markets. These principles include professionally
produced broadcast and print advertisements targeting specific
audiences, and extended hours of operation which are convenient for
patients, including weekend and evening hours. As part of its retail-
oriented strategy, the Company will seek to establish or, where
appropriate, relocate each Castle Dental Center in a convenient location
in or near a high-profile neighborhood retail area and utilize
innovative sales and marketing programs designed to achieve strong name
recognition and increase patient visits. In addition, the Company
stresses the breadth and affordability of its services and works closely
with patients to establish treatment schedules and affordable payment
plans tailored to the patients' needs.
MARKET ITS NETWORKS TO MANAGED CARE ENTITIES. The Company believes that
managed care will play an increasing role in the provision of dental
services and therefore intends to market the services of its dental
practice networks to the managed care community. The Company believes
that contracting with managed care entities will facilitate entry into
new markets and the expansion of existing networks, as well as improve
the utilization of existing facilities by providing a source of patients
to dentists with whom the Company is affiliated. In addition, such
contracts, including capitated contracts, enable the Company to leverage
its infrastructure and marketing efforts by increasing patient visits.
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DENTAL NETWORK DEVELOPMENT
The Company seeks to build its dental networks through the acquisition
of existing dental practices and the DE NOVO development of dental practices in
retail environments.
ACQUISITION CRITERIA
The Company's acquisition strategy is to identify successful group
dental practices in its target markets, acquire certain assets of the identified
practices, enter into long-term management services agreements, and utilize
these core practices as a base from which to expand within the target markets.
Prior to entering any market, the Company considers such factors as population,
demographics, market potential, competitive environment, supply of available
dentists, dental regulatory environment, patient-provider ratios, advertising
costs and the economic condition of the local market. Core acquisition
candidates are successful group dental practices that the Company believes are
leaders in their regional markets. Subsequent acquisitions target practices that
strategically complement the core practices within a market. In considering
acquisitions, the Company evaluates qualitative issues such as the dental
professionals' qualifications, experience and reputation in the local
marketplace and their operating histories, as well as the ability to demonstrate
potential for revenue growth and continued profitability.
COMPLETED ACQUISITIONS
The following table describes acquisitions completed as of December 31, 1997:
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NUMBER NUMBER OF
OF AFFILIATED
AFFILIATED DENTAL PRACTICE PRINCIPAL LOCATIONS CENTERS DENTISTS*
-------------------------- ------------------- ------- ---------
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1st Dental Care Clearwater/Tampa, Florida 11 16
Mid-South Dental Centers Nashville and Chattanooga, Tennessee 6 21
Horizon Dental Centers Austin and Fort Worth, Texas 8 23
SW Dental Associates, LC Austin, Texas 4 17
Steve W. Lebo, D.D.S. Fort Worth, Texas 1 2
Frederec B. Cothren, II,
D.D.S., M.S., P.C. Nashville, Tennessee - 1
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* Includes full-time and part-time dentists.
The contractual arrangements pursuant to which the Completed
Acquisitions were made include representations and warranties from the sellers
regarding the assets being acquired, and employment agreements with the
affiliated practices containing noncompetition provisions with the former owners
of such practices. Additionally, the Company typically enters into an option
agreement with the owner of the affiliated dental practice which entitles the
Company to select successor owners of the affiliated dental practice.
AFFILIATION AND INTEGRATION OF DENTAL CENTERS
In affiliating with dental practices, the Company typically: (i)
acquires certain assets of the practice, and, in certain situations, laboratory
or other ancillary facilities that are either owned by or affiliated with such
practice as allowable by federal and state law; (ii) enters into a long-term
management services agreement with such dental practice pursuant to which the
Company provides comprehensive management services to the affiliated practice;
(iii) requires that the affiliated dentists enter into employment agreements
with the affiliated practices containing non-compete and liquidated damages
provisions; and (iv) assumes the principal administrative, financial, marketing
and general management functions of the affiliated practice, including
employment of most administrative personnel. As soon as practicable following
the acquisition of an affiliated dental practice, when market conditions
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permit, the Company initiates the process of converting the affiliated practice
into a Castle Dental Center. Management will retain the name of an affiliated
practice in situations where brand recognition has been established. This
conversion process, the implementation and timing of which will vary from market
to market, typically includes the addition of specialty dental services not
previously offered by the center, implementation of retail business concepts
applied by the Company in its Houston operations, and, where appropriate, the
relocation of the center to a more desirable location.
In certain markets, the Company intends to grow through DE NOVO
development to expand in market areas that are either under-served or are
otherwise attractive market opportunities and in which there is no suitable
acquisition candidate. The Company will use its experience in building and
staffing DE NOVO dental centers in Houston, Texas for the implementation of this
expansion strategy.
MANAGEMENT SERVICES AGREEMENT
The Company has entered into a management services agreement with each
of its affiliated dental practices pursuant to which the Company becomes the
exclusive manager and administrator of all non-dental services relating to the
operation of the practice. The Company anticipates that it will enter into a
similar management services agreement with each new affiliated dental practice.
The amount of the management fee charged by the Company to an affiliated dental
practice is intended to reflect and is based on the fair value of the management
services rendered by the Company to the affiliated dental practice. Subject to
applicable law, the Company is paid a monthly management fee comprised of three
components: (i) the costs incurred by it on behalf of the affiliated practice;
(ii) a base management fee in an amount ranging from 12.5% to 15.0% of adjusted
gross revenues; and (iii) a performance fee equal to the patient revenues of the
affiliated dental practice less (a) the expenses of the affiliated dental
practice and (b) the sum of (i) and (ii), as described in each agreement. The
amount of the management fee is reviewed by the Company and the affiliated
dental practice not less frequently than annually in order to determine whether
such fee should be adjusted, up or down, to continue to reflect the fair value
of the management services rendered by the Company.
The obligations of the Company under the typical management services
agreement include assuming financial and other responsibility, either on its own
or with the input and participation of the policy board of the affiliated
practice, for the following (subject to limitations imposed by applicable state
law): facilities, equipment and supplies; advertising, marketing and sales;
training and development; operations management; provision of support services;
risk management and utilization review; application and maintenance of
applicable local licenses and permits; negotiation of contracts between the
affiliated dental practice and third parties, including third-party payors,
alternative delivery systems and purchasers of group health care services;
establishing and maintaining billing and collection policies and procedures;
fiscal matters, such as annual budgeting, maintaining financial and accounting
records, and arranging for the preparation of tax returns; and maintaining
insurance. The Company does not assume any authority, responsibility,
supervision or control over the provision of dental services to patients or for
diagnosis, treatment, procedure or other health care services, or the
administration of any drugs used in connection with any dental practice.
The typical management services agreement is for an initial term of 25
to 40 years, and is automatically renewed for successive five-year terms unless
terminated at least 90 days before the end of the initial term or any renewal
term. Additionally, the typical management services agreement may be terminated
by the Company or the affiliated dental practice in the event of the bankruptcy
or default in the performance of the material duties of the nonterminating
party.
DENTIST EMPLOYMENT AGREEMENTS
As a part of the process of converting an affiliated dental practice
into a Castle Dental Center, each affiliated dental practice has entered into
employment agreements with substantially all of its full-time dentists,
orthodontists and other dental specialists. The Company anticipates that this
practice will continue when market conditions permit. Although the form of
contract varies somewhat among
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practices and among dentists with different specialties, the typical contract
for a full-time dentist provides for a defined compensation arrangement,
including performance-based compensation and, where market conditions permit and
to the extent deemed enforceable under applicable law, a covenant not to
compete. Each full-time dentist, whether or not a party to a dentist employment
agreement, is required to maintain professional liability insurance, and
mandated coverage limits are generally at least $1.0 million per claim and $3.0
million in the aggregate. In addition, many affiliated dental practices employ
part-time dentists. Not all part-time dentists have employment agreements, but
all part-time dentists are required to carry professional liability insurance in
specified amounts. Certain part-time dentists retained by the affiliated dental
practices are independent contractors and have entered into independent
contractor agreements.
SERVICES
The Company provides management expertise, marketing, information
systems, capital resources and acquisition services to its affiliated dental
practices. As a result, the Company is involved in the financial and
administrative management of the affiliated dental practices, including legal,
financial reporting, cash management, human resources and insurance assistance.
The Company's goals in providing such services are (i) to allow the dentists
associated with affiliated dental practices to dedicate their time and efforts
more fully to patient care and professional practice activities; (ii) to improve
the performance of affiliated dental practices in these administrative and sales
activities; and (iii) to enhance the financial return to the Company.
Aside from the centralization of functions mentioned above, the
affiliated dental practices are encouraged to administer their practices in
accordance with the needs of their specific patient populations. The practice of
dentistry at each affiliated dental practice is under the exclusive control of
the dentists who practice at such location.
The majority of the practices whose non-dental assets are available to
the Company for acquisition are general dentistry practices. General dentistry
includes diagnostics, treatment planning, preventive care, removal of infection,
fillings, crowns, bridges, partials, dentures, and extractions, all of which are
currently being provided by the affiliated dental practices. Within its network,
the Company provides a wide range of specialty services. The Company seeks to
expand the services offered by affiliated practices beyond general dentistry to
include other dental specialty services and to improve efficiency by improving
appointment availability, increasing practice visibility and assisting the
practices in adding complementary services. These complementary services include
orthodontics, periodontics (the diagnosis, treatment and prevention of infection
of the gums and supporting bone around the teeth), endodontics (the diagnosis,
treatment and prevention of infection of the oral tissues), oral surgery and
implantology (the placement of abutments (implants) in the jaw bones to support
tooth replacement). By adding these complementary services to the practice, the
affiliated dental practices will retain the majority of specialty service
referrals in-house, thereby increasing patient revenues.
OPERATIONS
CENTER DESIGN AND LOCATION
The affiliated dental practices are generally located in retail
environments. Many of the affiliated practices include semi-private general
dentistry treatment rooms, private treatment rooms and orthodontic bays.
Currently, affiliated dental practices include from four to 22 treatment rooms
and range in size from approximately 2,000 square feet to approximately 6,000
square feet.
Where an acquired practice is not able, due to limitations of floor
space, zoning or other reasons, to accommodate new services or specialists, the
Company may seek to relocate such affiliated practice to a more desirable retail
location as soon as practicable. Since its formation, the Company has adapted
its locations in Houston, Texas to accommodate the full range of dental
specialties. The Company believes
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the application of its method of designing and locating dental centers will
facilitate the expansion of services offered by the acquired practices.
STAFFING AND SCHEDULING
The Company believes that making its facilities available at times which
are convenient to its patients is an important element of its strategy. As a
result, the affiliated dental practices maintain extended hours of operation,
with many affiliated practices opening as early as 7:00 a.m. and closing as late
as 9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The affiliated practices
are staffed with dentists and dental assistants every day they are open, with
orthodontists and other specialists rotating among several centers in order to
utilize their time optimally. Each patient typically is assigned to and sees the
same dentist or specialist on all visits to the center. Each affiliated dental
practice is also regularly staffed with an office manager, front office staff,
dental assistants and other support staff.
The Company's dental centers are staffed with patient care coordinators
who are responsible for the non-clinical aspects of the patient's experience
with the practice. The patient care coordinator's function is (i) to act as a
liaison between the dentist and patient; (ii) to work with the patient to
develop a treatment schedule with payments tailored to the patient's needs
within the Company's established credit policies; and (iii) to optimize the
dentist's time spent with patients.
FEES AND PAYMENT PLANS
The Company believes that fees charged by its affiliated practices are
typically lower than usual and customary fees within their respective markets.
The affiliated practices generally provide a wide range of payment options,
including cash, checks, credit cards, third party insurance and various forms of
credit. In general, most general dentistry and specialty services, other than
orthodontics, are paid for by the patient, or billed to the patient's insurance
carrier, on the date the service is rendered. In some instances, the Company
will extend credit in accordance with its established credit policies. The
Company believes that its lower fees and ability to assist patients in obtaining
financing provides it with a competitive advantage compared to sole
practitioners and small group practices.
The Company's typical orthodontic payment plan consists of no initial
down payment and equal monthly payments during the term of treatment ranging
from $89 to $98 per month. After consultation with the patient care coordinator
at the initial visit, the patient signs a contract outlining the terms of the
treatment, including the anticipated length of treatment and the total fees. The
number of required monthly payments is fixed at the beginning of the case and
corresponds to the anticipated number of monthly treatments. Patients are billed
in advance by the Company on a monthly basis.
QUALITY ASSURANCE
Affiliated dental practices are solely responsible for all aspects of
the practice of dentistry. The Company has responsibility for the business and
administrative aspects of the practices and exercises no control over the
provision of dental services. The Company's management structure is designed to
bring to its affiliated dental practices improvements in their recruiting and
professional training. The Company expects that the increased visibility of the
Company, the ability to offer career paths previously unavailable to dentists
and the ability to recruit for multiple markets will give it an advantage in
recruiting and retaining dentists. In addition, the Company believes that the
ability to offer dentists in private practice the chance to practice in an
environment where they do not assume capital risks and administrative burdens
normally associated with private practice will make joining the Company an
attractive choice for private practitioners.
Most affiliated dental practices have policy boards comprised of
representatives of both the Company and the affiliated dental practice. The
policy boards are responsible for developing and implementing management and
administrative policies for the overall operation of the affiliated dental
practice. Specifically, the policy board has the authority to review and approve
capital improvements and expansion, marketing and advertising, collection
policies, provider and payor relationships, strategic
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planning and capital expenditures. However, in recognition of the laws and
regulations applicable to the licensure and practice of dentistry, the policy
board does not make clinical decisions, recommendations or other decisions that
are required to be made by a licensed dentist.
SALES AND MARKETING
The Company intends to implement the practice management principles
employed in its Houston operations to establish a consistent national identity
for its business and to utilize the "Castle Dental Centers" name and logo. When
acquired practices already have high existing name recognition within their
local markets, the Company may seek to capitalize on that name recognition and
implement the Castle model while maintaining the existing practice name. The
Company applies traditional retail principles of business to the provision of
dental care. These principles include network development, extended hours of
operation, location optimization, signage, customized treatment schedules,
affordable fees and payment plans. The Company has used both print advertising
and professionally produced broadcast advertising to market its dental services
to potential patients in Houston, Texas and the Company intends to use the same
marketing techniques in its regional markets.
The Company has also established a regional telemarketing system in
Houston and Austin, Texas to field calls generated by advertising, to confirm
upcoming scheduled patient visits and to encourage patients to return for
follow-up visits and regularly scheduled six-month periodic exams. Where
feasible, the Company intends to establish additional telemarketing systems in
other regional markets. The telemarketers can enter all relevant information
into the Company's management information system for patients making
appointments for an initial visit, including pre-screening patients for
insurance and other credit information.
COMPETITION
The dental care industry is highly fragmented, comprised principally of
sole practitioners and group practices of dental and orthodontic services. The
dental practice management industry is subject to continuing changes in the
provision of services and the selection and compensation of providers. The
Company is aware of several dental practice management companies, both
publicly-traded and privately owned, that are acquiring and managing dental
practices. Publicly-Traded dental practice management companies that compete
with the Company include Monarch Dental Corporation, Gentle Dental Service Corp.
and Coast Dental Services, Inc., as well as others. Certain of the Company's
competitors are larger and better capitalized, may provide a wider variety of
services, may have greater experience in providing dental care management
services and may have longer established relationships with buyers of such
services. The existence of other dental practice management companies may also
increase competition for acquisition candidates, thereby increasing amounts
that must be paid for acquired practice management businesses.
In certain markets, the demand for dental care professional personnel
presently exceeds the supply of qualified personnel. As a result, the Company
experiences competitive pressures for the recruitment and retention of qualified
dentists to deliver their services. The Company's future success depends in part
on its ability to continue to recruit and retain qualified dentists to serve as
employees or independent contractors of the affiliated dental practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of competent dentists to continue to expand its operations.
MANAGEMENT INFORMATION SYSTEMS
The Company and its affiliated dental practices presently utilize two
dental practice management software systems to monitor and control patient
treatment, scheduling, invoicing of patients and insurance companies,
productivity of clinical staffs and other practice related activities. The
Company has identified the practice management software system that it currently
employs in its Houston operations as its preferred system and intends, where
appropriate, to use the Houston system as a common practice management system
for use by its affiliated practices. The Company is presently implementing a
client-server based management information system designed to enable the Company
to compare financial performance of affiliated dental practices, to track and
control costs, and to facilitate the accounting and financial reporting process
between the affiliated dental practices and corporate
8
<PAGE>
headquarters. The Company intends to use its financial information system in
conjunction with existing practice management systems at the affiliated dental
practices.
REGULATION
GENERAL
The practice of dentistry is highly regulated, and there can be no
assurance that the regulatory environment in which the affiliated dental
practices and the Company operate will not change significantly in the future.
In general, regulation of health care related companies also is increasing.
Every state imposes licensing and other requirements on individual
dentists and dental facilities and services. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
for which dentists may be providers. In connection with its operations in
existing markets and expansion into new markets, the Company may become subject
to compliance with additional laws, regulations and interpretations or
enforcements thereof. The ability of the Company to operate profitably will
depend in part upon the Company and its affiliated dental practices obtaining
and maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable health care regulations.
Dental practices must meet federal, state and local regulatory standards
in the areas of safety and health. Historically, those standards have not had
any material adverse effect on the operations of the dental practices managed by
the Company. Based on its familiarity with the operations of the dental
practices managed by the Company, management believes that it, and the practices
it manages, are in compliance in all material respects with all applicable
federal, state and local laws and regulations relating to safety and health.
MEDICARE AND MEDICAID FRAUD AND ABUSE
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service, in each
case, reimbursable under Medicare or Medicaid. Because dental services are
covered under various government programs, including Medicare, Medicaid or other
federal and state programs, the law applies to dentists and the provision of
dental services. Pursuant to this anti-kickback law, the federal government
announced a 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. Many states have similar
anti-kickback laws, and in many cases these laws apply to all types of patients,
not just Medicare and Medicaid beneficiaries. The applicability of these federal
and state laws to many business transactions in the health care industry,
including the Company's operations, has not yet been subject to judicial
interpretation.
Significant prohibitions against physician self-referrals, including
those by dentists, 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 referral prohibitions
apply. Effective January 1, 1995 and subject to certain exceptions, Stark II
prohibits a physician or dentist or a member of his immediate family from
referring Medicare or Medicaid patients to any entity providing "designated
health services" in which the physician or dentist has an ownership or
investment interest, or with which the physician or dentist has entered into a
compensation arrangement, including the physician's or dentist's own group
practice unless such practice satisfies the "group practice" exception. The
designated health services include the provision of clinical laboratory
services, radiology and other diagnostic services (including ultrasound
services), radiation
9
<PAGE>
therapy services, physical and occupational therapy services, durable medical
equipment, parenteral and enteral nutrients, certain equipment and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services and
inpatient and outpatient hospital services. A number of states also have laws
that prohibit referrals for certain services such as x-rays by dentists if the
dentist has certain enumerated financial relationships with the entity receiving
the referral, unless an exception applies.
Noncompliance with, or violation of, the federal anti-kickback
legislation or Stark II can result in exclusion from Medicare and Medicaid as
well as civil and criminal penalties. Similar penalties are provided for
violation of state anti-kickback and self-referral laws. To the extent that the
Company or any affiliated dental practice is deemed to be subject to these
federal or similar state laws, the Company believes its intended activities will
comply in all material respects with such statutes and regulations.
STATE LEGISLATION
In addition to the anti-kickback laws and anti-referral laws noted
above, the laws of many states prohibit dentists from splitting fees with
non-dentists and prohibit non-dental entities such as the Company from engaging
in the practice of dentistry and from employing dentists to practice dentistry.
The specific restrictions against the corporate practice of dentistry, as well
as the interpretation of those restrictions by state regulatory authorities,
vary from state to state. However, the restrictions are generally designed to
prohibit a non-dental entity from controlling the professional assets of a
dental practice (such as patient records and payor contracts), employing
dentists to practice dentistry (or, in certain states, employing dental
hygienists or dental assistants), controlling the content of a dentist's
advertising or professional practice or sharing professional fees. The laws of
many states also prohibit dental practitioners from paying any portion of fees
received for dental services in consideration for the referral of a patient. In
addition, many states impose limits on the tasks that may be delegated by
dentists to dental assistants.
State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; licensed
dentists have control over the manner in which dental care is provided and all
decisions affecting the provision of dental care. State laws generally require
that the amount of a management fee be reflective of the fair market value of
the services provided by the management company and certain states require that
any management fee be a flat fee or cost-plus fee based on the cost of services
performed by the Company. In general, the state dental practice acts do not
address or provide any restrictions concerning the manner in which companies
account for revenues from a dental practice subject to the above-noted
restrictions relating to control over the professional activities of the dental
practice, ownership of the professional assets of a dental practice and payments
for management services.
The Company does not control the practice of dentistry or employ
dentists to practice dentistry. Moreover, in states in which it is prohibited
the Company does not employ dental hygienists or dental assistants. The Company
provides management services to its affiliated practices, and the management
fees the Company charges for those services are consistent with the laws and
regulations of the jurisdictions in which it operates.
In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is subject to interpretation by regulators with broad discretion. As the
Company or its affiliated practices contract with third-party payors, including
self-insured plans, for certain non-fee-for-service basis arrangements, the
Company or the affiliated dental practices may become subject to state insurance
laws. In the event that the Company or the affiliated practices are determined
to
10
<PAGE>
be engaged in the business of insurance, these parties could be required
either to seek licensure as an insurance company or to change the form of their
relationships with third-party payors, and may become subject to regulatory
enforcement actions. In such events, the Company's revenues may be adversely
affected.
REGULATORY COMPLIANCE
The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations or marketing from time to time in response to changes in the
business, statutory and regulatory environments. The Company plans to structure
all of its agreements, operations and marketing in compliance with applicable
law, although there can be no assurance that its arrangements will not be
successfully challenged or that required changes may not have a material adverse
effect on operations or profitability.
EMPLOYEES
As of December 31, 1997, the Company and its affiliated dental practices
employed approximately 625 administrative and dental office personnel on a
full-time or part-time basis, and the affiliated dental practices employed
approximately 100 general dentists and 25 specialists on a full-time or
part-time basis. As a component of its acquisition strategy, the Company
frequently enters into employment or consulting agreements for ongoing
management and administrative services with the dentists from whom it acquires
affiliated practices. The Company believes that its relations with its employees
are good. The Company believes that it may need to hire additional personnel to
accommodate the demands prompted by the provision of services to each of the
affiliated practices under the management services agreements, as well as to
pursue its growth strategies.
CORPORATE LIABILITY AND INSURANCE
The provision of dental services entails an inherent risk of
professional malpractice and other similar claims. Although the Company does not
influence or control the practice of dentistry by dentists or have
responsibility for compliance with certain regulatory and other requirements
directly applicable to dentists and dental groups, the contractual relationship
between the Company and the affiliated dental practices may subject the Company
to some medical malpractice actions under various theories, including successor
liability. There can be no assurance that claims, suits or complaints relating
to services and products provided by managed practices will not be asserted
against the Company in the future. The availability and cost of professional
liability insurance has been affected by various factors, many of which are
beyond the control of the Company. The cost of such insurance to the Company and
its affiliated dental practices may have an adverse effect on the Company's
operations.
The Company requires each affiliated dental practice to maintain
comprehensive general liability and professional liability coverage covering the
practice and each dentist retained or employed by the affiliated dental
practice, which normally provide for comprehensive general liability coverage of
$1.0 million for each occurrence and $3.0 million annual aggregate, and
professional liability coverage of not less than $1.0 million for each
occurrence and $3.0 million annual aggregate.
The Company maintains other insurance coverages including general
liability, property, business interruption and workers' compensation, which
management considers to be adequate for the size of the Company and the nature
of its business.
ITEM 2. PROPERTIES
The Company leases approximately 12,000 square feet of space for
executive, administrative, sales and marketing and operations offices in
Houston, Texas. The Company's initial lease term expires May 2000, which may be
extended at the Company's option for an additional 60 months.
11
<PAGE>
All of the Company's existing centers are leased. Two of the centers are
owned by affiliates of the companies from whom the Company acquired affiliated
dental practices. All such facilities leased by the Company are leased on a
basis not less favorable to the Company than fair market value basis.
The Company intends to lease centers or enter into build-to-suit
arrangements with third parties for dental centers to be leased by the Company.
Certain leases provide for fixed minimum rentals and provide for additional
rental payments for common area maintenance, insurance and taxes. The leases
carry varying terms expiring between 1998 and 2006 excluding options to renew.
The majority of the centers are located in retail locations. The Company
believes that its leased facilities are well maintained, in good condition and
adequate for its current needs. Furthermore, the Company believes that suitable
additional or replacement space will be available when required.
ITEM 3. LEGAL PROCEEDINGS
In July and August 1997, a dentist from whom the Company acquired
Horizon Dental Centers in August 1996 contacted the Company asserting that the
Company misrepresented the value of the Common Stock issued to him as a part of
the consideration for the acquisition and demanded the issuance of approximately
200,000 shares of Common Stock as additional consideration for the transaction.
The Company believes that these asserted claims are without merit and has denied
the demand for the issuance of additional shares of Common Stock. In the event,
that litigation is initiated against the Company, the Company intends to defend
itself vigorously.
The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company.
The Company carries insurance with coverages and coverage limits that it
believes to be customary in the dental industry. Although there can be no
assurance that such insurance will be sufficient to protect the Company against
all contingencies, management believes that its insurance protection is
reasonable in view of the nature and scope of the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
quoted on the Nasdaq National Market under the symbol "CASL." The following
table presents the quarterly high and low sale prices as reported by the Nasdaq
National Market since the shares became publicly traded on September 12, 1997.
These quotations reflect the inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
1997: HIGH LOW
----- ---- ---
Third Quarter (beginning September 12, 1997) ............ 14.438 13.00
Fourth Quarter .......................................... 14.125 7.50
As of March 26, 1998, there were 6,237,581 shares of the Company's
Common Stock outstanding held by approximately 150 stockholders of record. The
Company believes there are approximately 1,650 beneficial owners of the
Common Stock.
The Company has never paid a cash dividend on its Common Stock. The
Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. In addition, the Company's credit
facility (the "Credit Facility") permits the payment of dividends only to the
extent the Company maintains a specified minimum net worth. The Company's net
worth as of December 31, 1997 was approximately $31.1 million. Any future change
in the Company's dividend policy will be made at the discretion of the Company's
Board of Directors in light of the financial condition, capital requirements,
earnings and prospects of the Company and any restrictions under credit
agreements, as well as other factors the Board of Directors may deem relevant.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices (1) ....................... 15,053 17,083 18,257 $ 29,601 $ 46,225
Amounts retained by affiliated dental
practices (1) ....................... -- -- -- 9,981 14,813
-------- -------- -------- -------- --------
Net revenues (1) ...................... 15,053 17,083 18,257 19,620 31,412
Expenses:
Dentists' salaries (1) ............. 2,684 2,853 3,345 -- --
Clinical salaries .................. 1,529 1,811 1,879 4,233 6,760
Dental supplies and laboratory fees 1,565 1,907 2,185 3,120 4,335
Rental and lease expense ........... 504 681 836 1,592 2,590
Advertising and marketing .......... 729 1,062 959 1,522 2,033
Depreciation and amortization ...... 245 309 336 1,088 2,132
Other operating expenses ........... 1,871 2,205 2,260 2,913 4,314
General and administrative (2) ..... 4,947 5,319 9,109 4,292 5,929
-------- -------- -------- -------- --------
Total expenses ................... 14,074 16,147 20,909 18,760 28,093
-------- -------- -------- -------- --------
Operating income (loss) ............... 979 936 (2,652) 860 3,319
Interest expense ...................... 130 112 87 2,596 2,792
Other income (3) ...................... -- -- -- (89) (84)
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary loss ................. 849 824 (2,739) (1,647) 611
Provision (benefit) for income taxes(4) 40 43 (325) (561) 200
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss 809 781 (2,414) (1,086) 411
Extraordinary loss .................... -- -- -- -- (3,195)
-------- -------- -------- -------- --------
Net income (loss) (4) ................. 809 781 (2,414) (1,086) (2,784)
Preferred stock dividends (5) ......... -- -- -- -- (1,930)
-------- -------- -------- -------- --------
Net income (loss) attributable to
common stock ........................ $ 809 $ 781 $ (2,414) $ (1,086) $ (4,714)
======== ======== ======== ======== ========
Income (loss) per common share:
Basic and diluted:
Income (loss) before extraordinary
loss ........................... $ (0.34) $ 0.10
Extraordinary loss ............... (0.78)
-------- --------
Net loss.......................... $ (0.34) $ (0.68)
======== ========
Weighted average number of common and common
equivalent shares outstanding
Basic ............................ 3,191 4,100
======== ========
Diluted .......................... 3,191 4,132
======== ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 34 $ 22 $ 6,439 $ 119 $ 2,908
Working capital .................... 773 1,212 6,208 (3,244) 3,917
Total assets ....................... 4,130 4,711 12,677 29,098 44,513
Long-term liabilities, less current
portion .......................... 496 162 9,462 20,529 3,659
Redeemable preferred stock ......... -- -- 2,928 2,928 1,550
Total stockholders' equity (deficit) 1,796 2,577 (5,743) (3,509) 31,113
</TABLE>
(1) In periods prior to 1996, the Company operated as a dental service
company and reported all of its revenues as patient revenues. Effective
December 31, 1995, as part of a reorganization and recapitalization plan
(the "Reorganization"), the Company provides practice management
services to the affiliated dental practices, and, as a result, its net
revenues beginning January 1, 1996 consist of amounts earned by the
Company under the terms of its management services agreements with
affiliated dental practices, which equal patient revenues less amounts
retained by affiliated dental practices. Amounts retained by affiliated
dental practices consist primarily of compensation paid to dental
professionals, which were classified as expenses of the Company prior to
the Reorganization.
(2) In 1995, the Company expensed $2.6 million of deferred compensation in
connection with the Reorganization.
(3) Represents primarily gain or loss on sale of assets and interest income.
(4) Prior to the Reorganization, significant operations of the Company were
conducted through a subchapter S corporation and accordingly were not
subject to federal and state income taxes. If all of the Company's
operations had been subject to income taxes, net income (loss) would
have been $546,000, $515,000 and ($1.7 million) for the years ended
December 31, 1993, 1994 and 1995, respectively. Subsequent to December
31, 1995, the Company's operations are subject to income taxes and such
taxes have been reflected in the historical consolidated statement of
operations data for the year ended December 31, 1996 and 1997.
(5) The Company recorded a $1,930,000 non-cash dividend to accrete the
Series A Convertible Preferred Stock and the Series C Convertible
Preferred Stock to their estimated fair value.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company develops, manages and operates integrated dental networks
through contractual affiliations with general, orthodontic and multi-specialty
dental practices in Texas, Florida and Tennessee. In January 1998, the Company
signed a definitive agreement to acquire 80% of a dental practice management
company in Los Angeles, California. The Company does not engage in the practice
of dentistry but rather establishes integrated dental networks through
affiliations with dental practices providing quality care in selected markets
with a view to establishing broad geographic coverage within those markets. The
Company seeks to achieve operating efficiencies by consolidating and integrating
affiliated practices into regional networks, realizing economies of scale in
such areas as marketing, administration and purchasing and enhancing the
revenues of its affiliated dental practices by increasing both patient visits
and the range of specialty services offered. At December 31, 1997, the Company
managed 42 dental centers with 125 affiliated dentists, orthodontists and
specialists.
The Company's objective is to make each of its dental networks the
leading group dental care provider in each market it serves. The Company applies
traditional retail principles of business to the
15
<PAGE>
practice of dentistry, including situating practices in high-profile locations,
offering affordable fees and payment plans, expanding the range of services
offered, increasing market share through targeted advertising and offering
extended office hours. By using the Castle Dental Centers' approach to managing
affiliated dental practices, the Company believes it will enable affiliated
dentists, orthodontists and other dental specialists to focus on delivering
quality patient care and to realize greater productivity than traditional retail
and small group dental practices.
Certain of the affiliated dental practices derive a significant portion
of their revenues from managed care contracts, preferred provider arrangements
and other negotiated price agreements. While the laws of some states permit the
Company to participate in the negotiations by affiliated dental practices of
managed care contracts, preferred provider arrangements and other negotiated
price agreements, the affiliated dental practices are the contracting parties
for all such relationships, and the Company is dependent on its affiliated
dental practices for the success of such relationships.
COMPONENTS OF REVENUES AND EXPENSES
Patient revenues from affiliated dental practices represent amounts
billed by the affiliated dental practices to patients and third-party payors for
dental services rendered. Such amounts also include monthly capitation payments
received from third-party payors pursuant to managed care contracts. Amounts
retained by group dental practices include compensation paid to dentists,
hygienists and other dental care personnel employed by the affiliated dental
practices, as well as other costs directly incurred by the affiliated practices
such as employment taxes, personnel benefits and insurance costs. Net revenues
represent amounts earned by the Company under the terms of its management
services agreements with the affiliated dental practices, which generally equal
patient revenues less amounts retained by the affiliated practices. The
Company's net revenues, therefore, are dependent upon patient revenues realized
by the affiliated practices as well as compensation and other expenses of the
affiliated practices.
Under the terms of the typical management services agreement with an
affiliated dental practice, the Company becomes the exclusive manager and
administrator of all non-dental services relating to the operation of the
practice. The obligations of the Company include assuming responsibility for the
operating expenses incurred in connection with managing the dental centers.
These expenses include salaries, wages and related costs of non-dental
personnel, dental supplies and laboratory fees, rental and lease expenses,
advertising and marketing costs, management information systems, and other
operating expenses incurred at the dental centers. In addition to these
expenses, the Company incurs general and administrative expenses related to the
billing and collection of accounts receivable, financial management and control
of the dental operations, insurance, training and development, and other general
corporate expenditures. As compensation for its services under the typical
management services agreement and subject to applicable law, the Company is paid
a management fee comprised of three components: (i) the costs incurred by it on
behalf of the affiliated practice; (ii) a base management fee in an amount
ranging from 12.5% to 15.0% of adjusted gross revenues; and (iii) a performance
fee equal to the patient revenues of the affiliated dental practice less (a) the
expenses of the affiliated dental practice and (b) the sum of (i) and (ii).
RESULTS OF OPERATIONS
The following table sets forth the percentages of patient revenues represented
by certain items reflected in the Company's Statements of Operations. The
information that follows represents historical results of the Company and does
not include pre-acquisition results of the dental practices that the Company has
acquired. The Company acquired 1st Dental Care of Clearwater, Florida in May
1996, Mid-South Dental of Nashville, Tennessee in May 1996, Horizon Dental
Centers of Ft. Worth and Austin, Texas in August 1996 and Southwest Dental
Associates of Austin, Texas in September 1997, and two individual practices
located in Ft.Worth, Texas and Nashville, Tennessee in December 1997.
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Patient revenues of affiliated dental practices ........ 100.0 % 100.0% 100.0 %
Amounts retained by affiliated dental practices ........ -- 33.7 32.0
------ ------ ------
Net revenues ........................................... 100.0 66.3 68.0
Expenses:
Dentists' salaries .................................. 18.3 -- --
Clinical salaries ................................... 10.3 14.3 14.6
Dental supplies and laboratory fees ................. 12.0 10.5 9.4
Rental and lease expense ............................ 4.6 5.4 5.6
Advertising and marketing ........................... 5.3 5.1 4.4
Depreciation and amortization ....................... 1.8 3.7 4.6
Other operating expenses ............................ 12.4 9.8 9.3
General and administrative .......................... 49.9 14.6 12.8
------ ------ ------
Total expenses .................................... 114.6 63.4 60.7
------ ------ ------
Operating income (loss) ................................ (14.6) 2.9 7.3
Interest expense ....................................... 0.5 8.8 6.0
Other income ........................................... -- (0.3) (0.2)
------ ------ ------
Income (loss) before income taxes and extraordinary item (15.1) (5.6) 1.5
Provision (benefit) for income taxes ................... (1.8) (1.9) 0.4
------ ------ ------
Income (loss) before extraordinary item ................ (13.3) (3.7) 1.1
Extraordinary item ..................................... -- -- (6.9)
------ ------ ------
Net loss......... ...................................... (13.3) (3.7) (5.8)
Preferred stock dividends .............................. -- -- (4.2)
------ ------ ------
Net loss attributable to common stock .................. (13.3)% (3.7)% (10.0)%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES - Patient revenues of
affiliated dental practices increased from $29.6 million for the year ended
December 31, 1996 to $46.2 million for the year ended December 31, 1997, an
increase of $16.6 million or 56%. Approximately $12.6 million of the increase
was attributable to the acquisitions of 1st Dental Care in Clearwater, Florida,
Mid-South Dental Centers in Nashville, Tennessee, and Horizon Dental Centers in
Ft. Worth and Austin, Texas, completed during 1996, and SW Dental Associates in
Austin, Texas, completed in September 1997. Patient revenues in Houston
increased from $18.6 million in 1996 to $20.5 million in 1997, primarily the
result of the opening of three new dental centers in Houston during 1997.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES - Amounts retained by
affiliated dental practices primarily consist of compensation paid to dentists,
orthodontists, hygienists and other dental care personnel employed by the
affiliated dental practice. For the year ended December 31, 1997, amounts
retained by affiliated dental practices were $14.8 million, an increase of $4.8
million, or 48.4% from the prior year, primarily resulting from the Completed
Acquisitions. Expressed as a percentage of patient revenues, amounts retained by
dental practices decreased from 33.7% in 1996 to 32.0% in 1997, primarily
resulting from improved productivity of the Company's dentists and dental
staffs.
17
<PAGE>
NET REVENUES - For the year ended December 31, 1997, net revenues were
$31.4 million, an increase of $11.8 million or 60.1%. The Completed Acquisitions
accounted for $8.2 million of the increase in net revenues. Expressed as a
percentage of patient revenues, net revenues increased from 66.3% in 1996 to
68.0% in 1997, primarily as a result of the percentage reduction in amounts
retained by dental practices.
CLINICAL SALARIES - Clinical salaries increased from $4.2 million for
the year ended December 31, 1996 to $6.8 million for the year ended December 31,
1997, an increase of $2.6 million or 59.7%. The Completed Acquisitions accounted
for the increase in clinic employee salaries. Expressed as a percentage of
patient revenues, clinical salaries increased from 14.3% to 14.6% for the years
ended December 31, 1996 and 1997, respectively.
DENTAL SUPPLIES AND LABORATORY FEES - Dental supplies and laboratory
fees increased from $3.1 million for the year ended December 31, 1996 to $4.3
million for the year ended December 31, 1997, an increase of $1.2 million or
39.0%. This increase resulted primarily from the Completed Acquisitions, which
incurred $1.2 million in dental supplies and laboratory expenses. Expressed as a
percentage of patient revenues, dental supplies and laboratory fees decreased
from 10.5% in 1996 to 9.4% in 1997, primarily resulting from the centralization
of the Company's purchasing function and the institution of national supply
agreements with certain vendors of dental supplies and laboratory work.
RENT AND LEASE EXPENSE - Rent and lease expense increased from $1.6
million for the year ended December 31, 1996 to $2.6 million for the year ended
December 31, 1997, an increase of $1.0 million or 62.7%. Rental expense from the
acquisitions in Florida, Tennessee and Texas accounted for $765,000 of the
increase with the balance resulting from the opening of four new dental centers
in Houston in 1996 and 1997. Expressed as a percentage of patient revenues,
rental and lease expense increased from 5.4% in 1996 to 5.6% in 1997.
ADVERTISING AND MARKETING - Advertising and marketing expense increased
from $1.5 million for the year ended December 31, 1996 to $2.0 million for the
year ended December 31, 1997, an increase of 33.6%. The Completed Acquisitions
accounted for all of the increase. Expressed as a percentage of patient
revenues, however, advertising and marketing costs decreased from 5.1% in 1996
to 4.4% in 1997 as the Completed Acquisitions generally had lower advertising
and marketing costs than the Company's operations in Houston. The Company plans
to increase advertising and marketing costs in the acquired markets on a
selective basis.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased
from $1.1 million for the year ended December 31, 1996 to $2.1 million for the
year ended December 31, 1997, an increase of $1.0 million or 96.0%, primarily
resulting from higher depreciation and amortization of goodwill related to the
Completed Acquisitions. As a percentage of patient revenues, depreciation and
amortization increased from 3.7% to 4.6% for the years ended December 31, 1996
and 1997, respectively.
OTHER OPERATING EXPENSES - Other operating expenses increased from $2.9
million for the year ended December 31, 1996 to $4.3 million for the year ended
December 31, 1997, an increase of approximately $1.4 million or 48.1%. Other
operating expenses include certain expenses related to the operation of the
Company's dental centers and bad debt expense incurred in the financing of
patient receivables at the affiliated dental practices. The increase from 1996
to 1997 resulted from the Completed Acquisitions and the new dental centers
opened in Houston during 1997. Expressed as a percentage of revenues, however,
other operating expenses decreased from 9.8% to 9.3%, for the years ended
December 31, 1996 and 1997, respectively.
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GENERAL & ADMINISTRATIVE EXPENSE - General and administrative expenses
increased from $4.3 million for the year ended December 31, 1996 to $5.9 million
for the year ended December 31, 1997, an increase of $1.6 million or 38.2%. The
increase resulted from the addition of general and administrative expenses of
the Completed Acquisitions and increased personnel and general corporate
expenses at the Company's headquarters in Houston. Expressed as a percentage of
patient revenues, general and administrative expense, however, decreased from
14.6% to 12.8% for years ended December 31, 1996 and 1997, respectively, due to
relatively higher percentage increase in the Company's patient revenues.
INTEREST EXPENSE - Interest expense increased from $2.6 million for the
year ended December 31, 1996 to $2.8 million for the year ended December 31,
1997, as a result of higher average borrowing levels and increased interest
rates in 1997. In September and October 1997, the Company repaid approximately
$23.9 million of its outstanding debt with the net proceeds of the initial
public offering of the Company's common stock.
INCOME TAXES - For the year ended December 31, 1997, the Company
recorded a provision for income taxes of $200,000 resulting from income before
income taxes and extraordinary loss of $611,000. For the year ended December 31,
1996, the Company recorded a benefit for income taxes of $561,000 resulting from
the loss before income taxes of $1.6 million. The Company's average tax rate for
1997 was 30.3% as it realized some benefit from its net operating loss
carryforwards. At December 31, 1997, the Company had net operating loss
carryforwards available to reduce future taxable income of approximately $6.0
million expiring in 2017.
EXTRAORDINARY LOSS - During 1997, the Company recorded an extraordinary
loss of $3.2 million, net of income tax benefit of $490,000, to record the write
off of deferred loan costs and unamortized discounts associated with early
retirement of the Company's 12% Senior Subordinated Notes in the aggregate
amount of $10.4 million, including accrued interest. The Senior Subordinated
Notes had been issued in December 1995 and in June 1997 in original principal
amounts of $7.5 million and $2.0 million, respectively, and were retired
utilizing a portion of the proceeds of the Company's initial public offering.
PREFERRED STOCK DIVIDENDS - Coincident with the completion of the
initial public offering in September 1997, the holders of the Company's Series A
and Series C Preferred Stock converted such shares into an aggregate of 948,243
shares of Company Common Stock. As a result, the Company recorded $1.9 million
in non-cash dividends in the third quarter 1997, representing the accretion of
the difference between the recorded value of the Preferred Stock and its
redemption value.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $18.3 million for the year ended
December 31, 1995 to $29.6 million for the year ended December 31, 1996, an
increase of $11.3 million or 62.1%. Approximately $11.0 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $18.3 million in 1995 to $18.6 million in 1996, primarily the
result of the opening of the Company's ninth dental center in Houston in April
1996.
AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES -- For the year ended
December 31, 1996, amounts retained by affiliated dental practices were $10.0
million, or 33.7% of patient revenues. For the year ended December 31, 1995,
compensation paid to dental professionals was classified as dentist salaries and
clinical salaries. The Company estimates that amounts retained by the affiliated
dental practice in 1995, calculated on a basis comparable to 1996, was $5.2
million, or 28.6% of patient revenues. The percentage increase from 1995 to 1996
resulted from the relatively higher percentage of dentist and clinical salaries
from the Completed Acquisitions.
NET REVENUES -- Net revenues of $19.6 million for the year ended
December 31, 1996 represent management fees earned by the Company in accordance
with management services agreements with the affiliated practices. In periods
prior to 1996, the Company's predecessor companies, Family Dental and
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Jack H. Castle D.D.S., Inc, operated as a combined entity, and did not
distinguish between patient revenues and net revenues.
DENTISTS' SALARIES -- Compensation paid to dentists for the year ended
December 31, 1995 was $3.3 million, or 18.3% of patient revenues. Dentist
salaries in 1996, which are included in amounts retained by affiliated dental
practices, were $5.9 million, or 20% of patient revenues. Dentist salaries from
the 25 dental centers of the Completed Acquisitions accounted for $2.4 million
of the increase. The addition of one DE NOVO dental center and higher
compensation paid to dentists in Houston accounted for the balance of the
increase.
CLINICAL SALARIES -- Clinical salaries increased from $1.9 million for
the year ended December 31, 1995 to $4.2 million for the year ended December 31,
1996, an increase of $2.4 million or 125.3%. The Completed Acquisitions
accounted for the increase in clinic employee salaries. Expressed as a
percentage of patient revenues, clinical salaries increased from 10.3% to 14.3%
for the years ended December 31, 1995 and 1996, respectively, as the Completed
Acquisitions had relatively higher percentage clinical salaries costs than the
Houston operations.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory
fees increased from $2.2 million for the year ended December 31, 1995 to $3.1
million for the year ended December 31, 1996, an increase of $935,000 or 42.8%.
This increase resulted primarily from the Completed Acquisitions, which incurred
$1.1 million in dental supplies and laboratory expenses. Expressed as a
percentage of patient revenues, dental supplies and laboratory fees decreased
from 12.0% in 1995 to 10.5% in 1996.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$836,000 for the year ended December 31, 1995 to $1.6 million for the year ended
December 31, 1996, an increase of 90.4%. Rental expense from the Completed
Acquisitions accounted for nearly all of the increase. Expressed as a percentage
of patient revenues, rental and lease expense increased from 4.6% in 1995 to
5.4% in 1996, as the Completed Acquisitions had relatively higher percentage
rental and lease expense than the Houston operation.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $1.0 million for the year ended December 31, 1995 to $1.5 million for the
year ended December 31, 1996, an increase of 58.7%. The Completed Acquisitions
accounted for $420,000 of the increase. Higher expenditures for television
advertising and direct mail campaigns conducted in conjunction with the opening
of two new dental centers in Houston resulted in increased advertising and
marketing costs of approximately $150,000 in Houston. Expressed as a percentage
of patient revenues, however, advertising and marketing costs decreased from
5.3% in 1995 to 5.1% in 1996.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $336,000 for the year ended December 31, 1995 to $1.1 million for the year
ended December 31, 1996, an increase of approximately $752,000, primarily
resulting from the Completed Acquisitions and amortization of deferred loan
costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles incurred in the period following the completion of
the acquisitions was $231,000 in 1996. As a percentage of patient revenues,
depreciation and amortization increased from 1.8% to 3.7% for the years ended
December 31, 1995 and 1996, respectively.
OTHER OPERATING EXPENSES -- Other operating expenses increased from $2.3
million for the year ended December 31, 1995 to $2.9 million for the year ended
December 31, 1996, an increase of $653,000 or 28.9%. Other operating expenses
include certain expenses related to the operation of the Company's dental
centers and bad debt expense incurred in the financing of patient receivables at
the affiliated dental practices. The Completed Acquisitions accounted for all of
the increase in other operating expenses from 1995 to 1996. Expressed as a
percentage of patient revenues, other operating expenses decreased from 12.4% to
9.8% for the years ended December 31, 1995 and 1996, respectively,
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primarily due to the lower percentage of bad debt expense of the Completed
Acquisitions as compared to the Houston dental centers.
GENERAL AND ADMINISTRATIVE -- General and administrative expense
decreased from $9.1 million for the year ended December 31, 1995 to $4.3 million
for the year ended December 31, 1996, a decrease of $4.8 million or 52.9%.
Compensation paid to the Company's owners was $5.3 million in 1995 including
$2.6 million in accrued deferred compensation payable to a shareholder.
Compensation to stockholders declined to $592,000 in 1996. This reduction was
partially offset by general and administrative expense of $1.2 million from the
Completed Acquisitions. In addition, the Company incurred approximately $400,000
in 1996 related to potential acquisitions that were not completed and
approximately $200,000 in personnel severance costs. Expressed as a percentage
of patient revenues, general and administrative expense decreased from 49.9% to
14.4% for years ended December 31, 1995 and 1996, respectively.
INTEREST EXPENSE -- Interest expense increased from $87,000 for the year
ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. In
the period from December 1995 through August 1996, the Company borrowed
approximately $25.0 million in order to fund the Reorganization and the
acquisition of affiliated dental practices in Florida, Tennessee and Texas,
resulting in $2.1 million in higher interest costs in 1996. In addition, the
amortization of the discount on the Senior Subordinated Notes was $522,000 for
the year ended December 31, 1996.
INCOME TAXES -- Prior to 1996, the Company did not accrue significant
corporate income taxes because a major portion of the Company's operations were
conducted through a Subchapter S corporation. Subsequent to the Reorganization
in December 1995, all of the Company's operations became subject to corporate
income taxes. For the year ended December 31, 1996 the Company recorded a
benefit for income taxes of $561,000, related to the loss before taxes of $1.6
million for the year. At December 31, 1996, the Company had net tax loss
carryforwards of $2.1 million, which may be used in future periods to offset
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Since 1996, the Company has relied on cash flow from operations and
third party borrowings to finance its operations, and on a combination of third
party borrowings, the issuance of Company common stock and seller notes payable,
and the assumption of certain debt and lease obligations to finance its
acquisitions.
At December 31, 1997, the Company had net working capital of $3.9
million, representing an increase of $7.2 million from the net working capital
deficit of $3.2 million at December 31, 1996. Current assets consisted of cash
of $2.9 million, billed and unbilled accounts receivable of $8.4 million and
other current assets of $838,000. These were partially offset by current
liabilities of $8.2 million at December 31, 1997, consisting primarily of $2.6
million in current maturities of long-term debt, $4.9 million in accounts
payable and accrued liabilities, $658,000 in accrued deferred compensation
payments.
For the year ended December 31, 1997, net cash used in operating
activities was approximately $502,000. Cash used in investing activities in 1997
totaled approximately $6.5 million. Cash provided by financing activities
amounted to approximately $9.8 million. Significant components of cash used in
operations included net income before extraordinary item and other non-cash
adjustments of $5.3 million offset by increased patient and unbilled patient
receivables of $4.7 million and decreased liabilities of $385,000. These changes
resulted primarily from the addition of new dental centers, increased
orthodontic revenues and a reduction in accounts payable. Significant components
of cash used in investing activities included $5.0 million to complete the
acquisition of SW Dental Associates located in Austin, Texas and $1.5 million in
capital expenditures used primarily to develop three de novo dental centers in
Houston, Texas and to upgrade the Company's practice management software.
Significant
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components of cash provided by financing activities included net proceeds of
$33.7 million from the initial public offering of the Company's common stock in
September 1997 and $2.0 million in additional subordinated debt partially offset
by debt reductions totaling $24.4 million. Significant debt reductions included
$10.4 million in Senior Subordinated Debt, $9.1 million due under the Company's
bank credit facility and $4.4 million in subordinated seller notes. In
connection with the repayment of $10.4 million of 12% Senior Subordinated Notes,
the Company recognized a $3.2 million extraordinary loss, net of income tax
benefit, associated with the early retirement of such debt.
For the year ended December 31, 1996 cash provided by operations was
$446,000. Cash used in investing activities in 1996 was $11.6 million,
consisting primarily of $10.3 million to acquire three group dental practices in
Florida, Tennessee and Texas, and of capital expenditures of $730,000 to develop
two de novo dental centers in Houston. Cash provided by financing activities was
$4.8 million for the year ended December 31, 1996 and consisted of bank
borrowings of $7.3 million, offset by debt repayments of $1.5 million and
prepaid offering and debt issuance costs of $908,000.
During 1996, the Company financed its acquisitions, capital expenditures
and working capital requirements through a combination of borrowings under its
bank credit facility, the sale of senior subordinated notes, the issuance of
common stock and subordinated seller notes, and the assumption of certain debt
and lease obligations of the acquired dental practices. In the aggregate, the
total consideration for acquisitions made in 1996 consisted of $9.3 million in
cash, $894,000 of assumed debt and capital lease obligations, $4.5 million in
subordinated seller notes and 331,996 shares of Company common stock. During
1997, the Company acquired two dental practices in Texas and one in Tennessee
for total consideration of $10.2 million, consisting of $5.5 million in cash,
$138,000 of assumed debt and capital lease obligations, 119,231 shares of Series
B Convertible Preferred Stock, $1.4 million in seller notes, and 165,000 shares
of Company common stock. The Company paid the $1.5 million seller note on
January 5, 1998, utilizing proceeds from borrowings under its bank credit
facility.
On September 17, 1997, the Company received approximately $30.3 million
in net proceeds from the initial public offering of 2,500,000 shares of Company
Common Stock at $13.00 per share. In October 1997, the underwriter's exercised
the overallotment option and the Company received an additional $3.4 million in
net proceeds from the issuance of 284,000 shares of Company Common Stock at
$13.00 per share.
The Company's principal sources of liquidity as of December 31, 1997
consisted of cash and cash equivalents, net accounts receivable and borrowing
availability under the Company's bank credit facility. In November 1997, the
Company entered into a new Credit Agreement with its existing bank and
refinanced the outstanding balance due under the previous bank credit facility.
The Credit Agreement initially provided for borrowings up to $25.0 million and
matures November 2002. The principal balance of $3.0 million under the bank
credit facility at November 7, 1997 is payable in 16 quarterly payments
beginning in March 1998. Future advances under the bank credit facility require
quarterly interest payments through November 1999 when principal becomes payable
based on a five-year amortization and a final payment at maturity. Borrowings
under the bank credit facility may at no time exceed a specified borrowing base,
which is calculated as a multiple of the Company's earnings before taxes,
depreciation and amortization ("EBITDA"), as adjusted. The bank credit facility
bears interest at variable rates, which are based upon either the bank's base
rate or LIBOR, plus, in either case, a margin which varies according to the
ratio of the Company's funded debt to the EBITDA, each as defined in the bank
credit facility. A commitment fee is payable quarterly at rates ranging from
0.125 percent to 0.5 percent of the unused amounts for such quarter. The bank
credit facility contains affirmative and negative covenants that require that
Company to maintain certain financial ratios, limit the amount of additional
indebtedness, limit the creation or existence of liens, set certain restrictions
on acquisitions, mergers and sales of assets and restrict the payment of
dividends. At December 31, 1997, $3.0 million was outstanding under the bank
credit facility. In January 1998, the Company borrowed $1.5 million under the
bank credit facility that was used to repay certain short-term notes payable. In
February 1998,
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the Company and the Bank amended the bank credit facility and increased the
available borrowing to $42.5 million.
In March 1998, the Company entered into definitive agreements to acquire
two dental practice management companies located in Houston, Texas and Los
Angeles, California. The acquisitions consist of a combination of cash, notes,
common stock and assumed indebtedness, totaling approximately $22.5 million. The
Company currently expects to acquire additional dental practice management
companies and dental practices in 1998. The Company anticipates that the
consideration for future acquisitions will consist of a combination of cash,
borrowings under the Company's bank credit facility, the issuance of Company
common stock and the assumption of existing indebtedness of the acquired
business. The Company anticipates making ongoing capital expenditures of
approximately $3.0 million in 1998, primarily to develop new dental centers in
its existing markets.
Management believes that cash flow from operations and borrowings
available under the bank credit facility should be sufficient to meet its
anticipated capital expenditures and other operating requirements and to fund
anticipated acquisitions for the next 12 months. However, because future cash
flows and the availability of financing are subject to a number of variables,
such as the number and size of acquisitions made by the Company, the Company's
financial performance and other factors, there can be no assurance that the
Company's capital resources will be sufficient to maintain currently planned
levels of capital expenditures or to fund future acquisitions. Additional debt
and equity financing may be required in connection with future acquisitions. The
availability of these capital sources will depend on prevailing market
conditions and interest rates and the then-existing financial condition of the
Company.
YEAR 2000
The year 2000 issue is the result of computer programs using two digits
to define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system which is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.
As part of the Company's continuing program to update its information
systems in anticipation of future growth, the Company has recently completed the
purchase and installation of year 2000 compliant software for its operations.
The Company is also currently evaluating software systems for its operations and
expects to have year 2000 compliant software in place by the end of 1998.
Accordingly, the Company does not expect the year 2000 issue to have a material
effect on its financial position, results of operations or cash flows.
INFLATION
Inflation has not had a significant impact on the results of operations
of the Company during the last three years.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("SFAS
131"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 131 establishes standards for the way that public
enterprises report segment information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. These statements are both
effective for fiscal years beginning after December 15, 1997. The Company does
not believe implementation of SFAS 130 and 131 will have a material effect on
its financial position, results of operation or cash flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are incorporated
under Item 14 in Part IV of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "-Election of Directors - Directors and Nominees
for Director," "-Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement which involves
the election of directors and is to be filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), within 120 days of the end of the Company's
fiscal year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors - Director
Compensation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Voting Securities and Principal
Stockholders" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1997, Mr. G. Daniel Siewert, the Company's President and
Chief Operating Officer, received a $130,000 loan from the Company in connection
with his employment agreement. The loan does not bear interest.
Mr. Kahle, a director of the Company, is a Managing Director of The
GulfStar Group, Inc., which has provided investment banking and advisory
services to the Company. In 1995, the Company paid $540,000 in investment
banking fees to The GulfStar Group, and issued the GulfStar Warrant for 56,579
shares of Common Stock to GulfStar Investments, Ltd. The Company has paid The
GulfStar Group, Inc. for investment banking and financial advisory services
provided to the Company in an amount equal to one percent of the total
consideration for each of the Company's acquisitions which has been consummated.
The GulfStar Group received approximately $195,000 in investment banking and
financial advisory fees from the Company in 1996. The directors of the Company
other than Mr. Kahle approve the payments made to The GulfStar Group, Inc. by
the Company.
Mr. Cresci, a director of the Company, is a Managing Director of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
held in the aggregate 1,244,737 shares of Series A Convertible Preferred Stock
and 485,382 shares of Series C Convertible Preferred Stock and the Senior
Subordinated Notes. Upon completion of the Company's initial public offering in
September 1997, the Series A and Series C Convertible Preferred Stock was
converted into 948,243 shares of Common Stock. Pursuant to the provisions of the
Securities Purchase Agreement, for so long as certain ownership thresholds with
respect to the Common Stock are maintained, these investors have the contractual
right to nominate one member of the Company's Board of Directors. See
"Management -- Directors and Executive Officers."
In December 1995, the Company acquired all of the stock of Jack H.
Castle, D.D.S., Inc., a professional corporation of which Dr. Castle, a director
of the Company, was the sole owner. In connection with that transaction, the
Company paid Dr. Castle $6.0 million in cash and entered into a Deferred
Compensation Agreement with Dr. Castle pursuant to which the Company has agreed
to pay
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Dr. Castle $2.6 million in 20 quarterly installments beginning March 1996. In
connection with the purchase of the stock of Jack H. Castle, D.D.S., Inc., the
Company also entered into a management services agreement with Jack H. Castle,
D.D.S., P.C., a professional corporation of which Dr. Castle is the sole owner.
Pursuant to the management services agreement, Dr. Castle receives an annual
payment of $100,000 for services performed in connection therewith.
The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.
Pursuant to a Registration Rights Agreement dated as of December 18,
1995, as amended, the Pecks Investors, GulfStar Investments, Ltd. and the
members of the Castle Family have been granted certain registration rights by
the Company with respect to the shares of Common Stock owned by them or acquired
on conversion of Series A Convertible Preferred Stock and Series C Convertible
Preferred Stock and exercise of the GulfStar Warrant.
Pursuant to the Securityholders Agreement, the Pecks Investors are
entitled to certain rights with respect to their shares of capital stock.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1 FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated:
PAGE
Report of Independent Accountants ......................................... F-2
Balance Sheets as of December 31, 1996 and 1997 ........................... F-3
Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 ........................................ F-4
Statements of Changes in Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995, 1996 and 1997 .................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997 ........................................................... F-6
Notes to Financial Statements ............................................. F-7
(a) 2 FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:
PAGE
Report of Independent Accountants on Financial Statement Schedule ......... S-1
Financial Statement Schedule
II - Valuation and Qualifying Accounts .................................. S-2
All other schedules are omitted because the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(a) 3 EXHIBITS
The exhibits to this report have been included only with the copies of
this report filed with the Commission. Copies of individual exhibits will be
furnished to stockholders upon written request to the Company and payment of a
reasonable fee.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Houston, State of Texas on March 31, 1998.
CASTLE DENTAL CENTERS, INC.
By: /s/ JACK H. CASTLE, JR.
--------------------------
Jack H. Castle, Jr.
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned, directors and officers of Castle Dental Centers,
Inc. (the "Company"), do hereby severally constitute and appoint Jack H. Castle,
Jr. and John M. Slack and each or any of them, our true and lawful attorneys and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, and to file the same with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys and agents, and each or any of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys and agents, and
each of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JACK H. CASTLE, JR. Chairman of the Board, Chief March 31, 1998
Jack H. Castle, Jr Executive Officer (Principal
Executive Officer)
/s/ G. DANIEL SIEWERT President, Chief Operating March 31, 1998
G. Daniel Siewert Officer
/s/ JOHN M. SLACK Vice President - Chief March 31, 1998
John M. Slack Financial Officer (Principal
Financial and Accounting Officer)
/s/ JACK H. CASTLE, D.D.S. Director March 31, 1998
Jack H. Castle, D.D.S.
/s/ G. KENT KAHLE Director March 31, 1998
G. Kent Kahle
28
<PAGE>
/s/ ROBERT J. CRESCI Director March 31, 1998
Robert J. Cresci
/s/ ELIZABETH A. TILNEY Director March 31, 1998
Elizabeth A. Tilney
/s/ EMMETT E. MOORE Director March 31, 1998
Emmett E. Moore
/s/ LOUIS A. WATERS Director March 31, 1998
Louis A. Waters
29
<PAGE>
CASTLE DENTAL CENTERS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants. F-2
Balance Sheets as of December 31, 1996 and 1997 F-3
Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 F-4
Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997 F-5
Statements of Cash Flows for the years ended December
31, 1995, 1996 and 1997 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:
We have audited the accompanying balance sheets of Castle Dental Centers, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the two
years in the period ended December 31, 1997 and the related statement of
operations, changes in stockholders' equity (deficit) and cash flows of its
combined predecessor companies for the year ended December 31, 1995. 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 Castle Dental Centers, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the two years in the period ended December 31, 1997 and the results of
operations and cash flows of its combined predecessor companies for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 26, 1998
F-2
<PAGE>
CASTLE DENTAL CENTERS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 119 $ 2,908
Patient receivables, net of allowance for uncollectible
accounts of $2,425 and $3,879 in 1996 and 1997, respectively 3,649 5,841
Unbilled patient receivables, net of allowance for
uncollectible accounts of $361 and $568 in 1996 and 1997,
respectively 1,637 2,521
Prepaid expenses and other current assets 366 838
Deferred income taxes 135 -
------------- -------------
Total current assets 5,906 12,108
------------- -------------
Property and equipment, net 3,882 5,189
Intangibles, net 16,432 25,565
Deferred income taxes 600 1,125
Other assets 2,278 526
------------- -------------
Total assets $ 29,098 $ 44,513
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit $ 1,200 $ -
Current portion of long-term debt 2,371 2,598
Accounts payable and accrued liabilities 4,790 4,935
Deferred compensation payable, related party 789 658
------------- -------------
Total current liabilities 9,150 8,191
------------- -------------
Long-term debt, net of current portion 13,616 2,607
Long-term debt, related party 5,335 -
Other long-term liabilities, related party 1,578 1,052
Commitments and contingencies
Preferred stock, $.001 par value, 5,000,000 shares authorized;
1,244,737 shares Series A and 485,382 shares Series C issued
and outstanding at December 31, 1996 and 119,231 shares
Series B issued and outstanding at December 31, 1997 2,928 1,550
Stockholders' equity (deficit):
Common stock, $.001 par value, 30,000,000 shares authorized,
2,331,996 and 6,229,239 shares issued and outstanding in
1996 and 1997, respectively 2 6
Additional paid-in capital 3,416 40,818
Accumulated deficit (6,927) (9,711)
------------- -------------
Total stockholders' equity (deficit) (3,509) 31,113
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 29,098 $ 44,513
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-3
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR
COMPANIES CONSOLIDATED
------------- ---------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
Patient revenues of affiliated dental practices $ 18,257 $ 29,601 $ 46,225
Amounts retained by affiliated dental practices - 9,981 14,813
------------- ------------- ------------
Net revenues 18,257 19,620 31,412
------------- ------------- ------------
Expenses:
Dentist salaries 3,345 - -
Clinical salaries 1,879 4,233 6,760
Dental supplies and laboratory fees 2,185 3,120 4,335
Rental and lease expense 836 1,592 2,590
Advertising and marketing 959 1,522 2,033
Depreciation and amortization 336 1,088 2,132
Other operating expenses 2,260 2,913 4,314
General and administrative 3,825 3,700 5,575
Compensation to stockholders 5,284 592 354
------------- ------------- ------------
Total expenses 20,909 18,760 28,093
------------- ------------- ------------
Operating income (loss) (2,652) 860 3,319
Interest expense 57 1,174 1,314
Interest expense, related party 30 1,422 1,478
Other income - (89) (84)
------------- ------------- ------------
Income (loss) before income taxes and extraordinary
loss (2,739) (1,647) 611
Provision (benefit) for income taxes (325) (561) 200
------------- ------------- ------------
Income (loss) before extraordinary loss (2,414) (1,086) 411
Extraordinary loss, net of tax benefit of $490 - - (3,195)
------------- ------------- ------------
Net loss (2,414) (1,086) (2,784)
Preferred stock accretion - - (1,930)
------------- ------------- ------------
Loss attributable to common stock $ (2,414) $ (1,086) $ (4,714)
============= ============= ============
Income (loss) per common share:
Basic and diluted:
Income (loss) before extraordinary loss $ (0.34) $ 0.10
Extraordinary loss - (0.78)
------------- ------------
Net loss $ (0.34) $ (0.68)
============= ============
Weighted average number of common and common
equivalent shares outstanding
Basic 3,191 4,100
============= ============
Diluted 3,191 4,132
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
F-4
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED EQUITY
---------------------
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 2,000,000 $ 2 $ 3 $ 2,572 $ 2,577
Issuance of common stock and
distribution in connection with
the Reorganization 500 - 1 (6,000) (5,999)
Cancellation of common stock in
connection with the Reorganization (500) - (1) 1 -
Issuance of warrant - - 93 - 93
Net loss - - - (2,414) (2,414)
---------- --------- --------- ----------- ----------
Balance, December 31, 1995 2,000,000 2 96 (5,841) (5,743)
Issuance of common stock 331,996 - 3,320 - 3,320
Net loss - - - (1,086) (1,086)
---------- --------- --------- ----------- ----------
Balance, December 31, 1996 2,331,996 2 3,416 (6,927) (3,509)
Issuance of common stock
Initial Public Offering 2,784,000 3 31,743 31,746
Conversion of Series A Preferred
Stock 705,552 1 3,228 3,229
Conversion of Series C Preferred
Stock 242,691 - 2,670 2,670
In connection with an acquisition 165,000 - 1,691 1,691
Accretion of discount on
preferred stock - - (1,930) (1,930)
Net loss - - (2,784) (2,784)
---------- --------- --------- ----------- ----------
Balance, December 31, 1997 6,229,239 $ 6 $ 40,818 $ (9,711) $ 31,113
========== ========= ========= =========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR
COMPANIES CONSOLIDATED
-------------- ----------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------
1995 1996 1997
-------------- ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,414) $ (1,086) $ (2,784)
Adjustments:
Provisions for bad debts 1,399 1,227 1,897
Depreciation and amortization 336 1,088 2,132
Gain on sale of property and equipment - (16) -
Amortization of debt discount - 522 712
Deferred income taxes (benefit) (325) (561) 100
Issuance of deferred compensation agreement 2,630 - -
Extraordinary loss - - 3,195
Changes in operating assets and liabilities:
Patient receivables (1,285) (1,514) (3,654)
Unbilled patient receivables (578) (748) (1,046)
Prepaid expenses and other current assets - (246) (651)
Other assets (13) (283) (18)
Accounts payable and accrued liabilities 748 2,326 272
Deferred compensation payments to
shareholder - (263) (657)
-------------- ------------ --------------
Net cash provided by (used in) operating
activities 498 446 (502)
-------------- ------------ --------------
Cash flows used in investing activities:
Capital expenditures (441) (1,337) (1,515)
Proceeds from sale of property, plant and
equipment - 607 -
Acquisition of affiliated dental practices,
net of cash acquired - (10,335) (5,015)
Escrow deposit - (500) -
-------------- ------------ --------------
Net cash used in investing activities (441) (11,565) (6,530)
-------------- ------------ --------------
Cash flows from financing activities:
Proceeds from issuance of common stock - - 33,659
Proceeds from debt 10,362 7,250 2,074
Repayment of debt (328) (1,543) (24,376)
Issuance of redeemable preferred stock 3,138 - -
Distribution to shareholder (6,000) - -
Offering costs - (650) (1,263)
Debt and preferred stock issuance costs (812) (258) (273)
-------------- ------------ --------------
Net cash provided by financing activities 6,360 4,799 9,821
-------------- ------------ --------------
Net change in cash and cash equivalents 6,417 (6,320) 2,789
Cash and cash equivalents, beginning of period 22 6,439 119
-------------- ------------ --------------
Cash and cash equivalents, end of period $ 6,439 $ 119 $ 2,908
============== ============ ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CORPORATE ORGANIZATION AND BASIS OF PRESENTATION
Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management services, non-healthcare personnel, facilities and
equipment to certain professional corporations in Texas, Florida and Tennessee
under long-term management services agreements. These professional corporations
are collectively referred to as the affiliated dental practices.
The Company has entered into a long-term management services agreement with each
of the affiliated dental practices, under which the Company provides equipment,
facilities, administrative personnel and management services, in exchange for a
contracted management fee based on a formula. Each of these agreements is for an
initial term of 25 to 40 years with successive automatic five year renewal
terms, unless terminated at least 90 days before the end of the initial term or
any renewal term.
Through the management services agreement, the Company generally assumes full
responsibility for the operating expenses, has the right to purchase and has
responsibility for collection of all accounts receivable, and receives a
management fee for providing non-dental services. The Company generally has
perpetual, unilateral control over the assets and operations of the affiliated
dental practices (except with respect to those relating to the practice of
dentistry and other matters requiring licensure).
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
CORPORATE ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED
The Company was formed in December 1995 and merged with Family Dental Services
of Texas, Inc. ("FDS"), a company wholly owned by members of the family of and
entities controlled by Jack H. Castle, D.D.S. (the "Castle Family"). The
Company's operations began on January 1, 1996. Simultaneously with this
transaction, the Company paid $6,000,000 to acquire all of the outstanding stock
of Jack H. Castle, D.D.S., Inc. ("JCD"), a professional corporation of which Dr.
Jack H. Castle was the sole owner. JCD provided dental care to patients from
1949 through December 31, 1995. FDS had been established in 1981 to carry out
administrative functions for the professional corporation and had no business
other than providing administrative services to JCD. All of FDS's revenues
consisted of reimbursement of its costs incurred on behalf of JCD. Effective
with the acquisition, JCD ceased to operate as a separate entity, and a new
professional corporation, Jack H. Castle, D.D.S., P.C. ("PC") was established to
continue the dental practice previously operated by JCD. Therefore, at December
31, 1995, the Company's financial statements included both the operations and
assets of FDS, the administrative and management services company, and JCD, the
professional corporation (together the "predecessor companies"). The combined
statements of operations, changes in stockholders' deficit and cash flows for
the year ended December 31, 1995 reflect the combined operations of predecessor
companies because these entities' activities were assumed by the Company and the
PC and they were under common control. All of the services provided by FDS to
JCD have been eliminated in combination of the predecessor companies' financial
statements.
In 1997, the Emerging Issues Task Force released Issue No. 97-2 "Application of
FASB statement No. 94, Consolidation of all Majority-Owned Subsidiaries, and APB
Opinion No. 16, Business Combinations, to Physician Practice Management Entities
And Certain Other Entities With Contractual Management Arrangements ("Issue No.
97-2).
Issue 97-2 allows consolidation by the physician practice management company
(the "PPM") with the affiliated physician practice when the PPM has controlling
financial interest through a contractual management arrangement. The Company's
management services agreement meet the criteria of Issue 97-2. The Company has
adopted the provisions of Issue 97-2 and retroactivity restated prior periods
based on the terms of the agreements that were in effect during the prior
periods.
At December 31, 1996 and 1997, and for the years ended December 31, 1996 and
1997, the consolidated financial statements include Castle Dental Centers, Inc.
and its wholly-owned management company subsidiaries and the affiliated
professional corporations.
All intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications of prior years have been made to
conform to current period classifications.
REVENUE RECOGNITION
Patient revenues from affiliated dental practices ("Patient Revenues") represent
the estimated realizable amounts to be received from patients, third-party
payors and others for services rendered by affiliated dentists. Patient Revenues
from general dentistry are recognized as the services are performed. Patient
Revenues from orthodontic services are recognized in accordance with the
proportional performance method. Under this method, revenue is recognized as
services are performed under the terms of contractual agreements with each
patient. Approximately 25% of the services are performed in the first month with
the remaining services recognized ratably over the remainder of the contract.
Billings under each contract, which average approximately 24 months, are made
equally throughout the term of the contract, with final payment at the
completion of the treatment.
F-8
<PAGE>
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
REVENUE RECOGNITION, CONTINUED
Amounts retained by affiliated dental practices consist primarily of
compensation paid to dental professionals, including dentists, orthodontists,
hygienists, and other medical personnel.
Net revenues represent management fees earned by the Company in accordance with
management services agreements with the affiliated dental practices and are
generally equal to Patient Revenues less amounts retained by affiliated dental
practices.
The management services fee charged to affiliated dental practices is comprised
of three components: (1) the reimbursable expenses of the Company, (2) a base
management fee ranging from 12.5% to 15.0% of net patient revenues of the
affiliated dental practices and (3) a performance fee equal to the patient
revenues of the affiliated dental practice less (a) the expenses of the
professional corporation and (b) the reimbursable expenses and base management
fees comprised of (1) and (2) above, if any.
Accounts receivable consist primarily of receivables from patients, insurers,
government programs and contracts between the affiliated dental practices and
third-party payors for dental services provided by dentists. The Company does
not believe that change in the reimbursement arrangements for its affiliated
dental practice contracts with third-party payors would have a material impact
on management fee revenues. An allowance for doubtful accounts is recorded by
the Company based on historical experience.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents. The carrying amounts approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the various classes of
depreciable assets, ranging from five to ten years. Fully depreciated assets are
retained in property and equipment until they are removed from service. Fully
depreciated assets in use as of December 31, 1996 and 1997 were approximately
$950,000 and $1,062,000, respectively. Maintenance and repairs are charged to
expense whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations.
F-9
<PAGE>
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INTANGIBLE ASSETS
The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 1997, are 25 years.
In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
management services agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional
dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and noncompete agreements with the dentist, or directly contract
with payors, the intangible asset created in the purchase allocation process is
associated solely with the management services agreement with the affiliated
dental practice.
The Company reviews intangible assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. If this review indicates that the carrying amount of the asset may
not be recoverable, as determined based on the undiscounted cash flows of the
related operations over the remaining amortization period, the carrying value of
the asset is reduced to estimated fair value. Among the factors that the Company
will continually evaluate are unfavorable changes in each affiliated dental
practice's relative market share and local market competitive environment,
current period and forecasted operating results and cash flows of the affiliated
dental practice and its impact on the management fee earned by the Company, and
legal factors governing the practice of dentistry.
OTHER ASSETS
Other assets consist primarily of debt issuance costs and other receivables. The
costs related to the issuance of debt are capitalized and amortized using the
effective interest method over the lives of the related debt. The Company
provided a non-interest bearing loan for $130,000 to an officer which is
outstanding at December 31, 1997.
F-10
<PAGE>
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
INCOME TAXES
Prior to January 1, 1996, JCD was a subchapter S entity and, accordingly, all
federal tax liabilities were the responsibility of the shareholder. The
subchapter S election of JCD was automatically terminated when the entity became
a wholly-owned subsidiary of the Company and, therefore, became a C-Corporation
for federal income tax purposes. If all of the Company's operations had been
subject to income taxes, net loss for the year ended December 31, 1995, would
have been $1.7 million.
The Company accounts for income taxes under the liability method. Under this
method, deferred taxes are determined based on the differences between the
financial reporting and tax basis of assets and liabilities and are measured
using the enacted marginal tax rates currently in effect. All federal deferred
taxes of JCD were recognized upon becoming a C-Corporation.
EARNINGS PER SHARE
In June 1997, the Company's Board of Directors declared and the stockholders
approved a 1-for-2 reverse split of the Company's common stock. All share and
per share information in the accompanying financial statements has been
retroactively restated to reflect the effects of the reverse stock split. The
Company adopted the provisions of SFAS No. 128 "Earnings per Share," effective
January 1, 1997. All prior periods presented have been restated to conform to
the new requirements.
ADVERTISING
Costs incurred for advertising are expensed when incurred.
PREOPENING COST
Costs incurred prior to opening a dental center, primarily salaries and lease
expense, are expensed when incurred.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 net revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
F-11
<PAGE>
1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED:
RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"). SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 131 establishes standards for the way that
public enterprises report segment information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial statements to shareholders. These statements are
both effective for fiscal years beginning after December 15, 1997. The Company
does not believe implementation of SFAS 130 and 131 will have a material effect
on its financial position, results of operation or cash flows.
2. REORGANIZATION AND RELATED TRANSACTIONS:
In December 1995, the Company completed a reorganization (the "Reorganization")
by (i) entering into a credit agreement that included a $3,000,000 revolving
line of credit and a $6,000,000 bank term loan (the "Bank Credit Facility"),
(ii) issuing $7,500,000 face amount of senior subordinated notes (the "Senior
Subordinated Notes") together with 1,244,737 shares of Series A Convertible
Preferred Stock (the "Series A Stock") and (iii) issuing 2,000,000 shares of
common stock to the former owner of JCD and certain related parties. A portion
of the proceeds from the Reorganization was used to acquire JCD, which
acquisition was recorded as a capital distribution to JCD's shareholder because
the Company and JCD were under common control. The Company applied these common
shares to a stock split.
In connection with the purchase of the stock of JCD, the Company entered into a
deferred compensation agreement (the "Deferred Compensation Agreement") with the
sole shareholder of JCD, who is a director of the Company, pursuant to which the
Company agreed to pay the shareholder $2,630,000 in 20 quarterly installments
beginning March 1996. The Company accrued the entire liability under the
agreement in December 1995 through a charge to compensation to shareholders.
Amounts not paid when scheduled under the original Deferred Compensation
Agreement bear interest at the rate of ten percent per year. As of December 31,
1997, there was $1,710,000 payable to the sole shareholder of JCD.
A warrant to purchase 56,579 shares of common stock at an exercise price of
$11.00 per share was issued to an investment advisor in connection with the
Reorganization. The warrant is exercisable at any time prior to its expiration
date of December 18, 2000.
F-12
<PAGE>
2. REORGANIZATION AND RELATED TRANSACTIONS, CONTINUED:
In September and October 1997, the Company completed an initial public offering,
including the underwriters' overallotment, of 2,784,000 shares of its common
stock at $13.00 per share. Proceeds of $31.7 million, net of underwriting
commission and offering expenses of $1,913,000, were used primarily to retire
debt and complete the SW Dental Associates, LC ("SW Dental") acquisition.
Coincident with the completion of the initial public offering, the holders of
1,244,737 shares of Series A and 485,382 shares of Series C Preferred Stock
converted such shares into an aggregate of 948,243 shares of Company common
stock. During the year ended December 31, 1997, the Company recorded
approximately $1.9 million in non-cash dividends which represents the accretion
of the difference between the recorded value of the Preferred Stock and the
redemption value. As of December 31, 1997, there were no shares of the Series A
Stock and Series C Convertible Preferred Stock (the "Series C Stock")
outstanding.
3. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts were as follows:
DECEMBER 31,
-------------------
1996 1997
------- --------
Property and equipment:
Equipment .............................................. $3,841 $5,249
Leasehold improvements ................................. 1,825 2,820
Furniture and fixtures ................................. 610 653
Vehicles ............................................... 75 75
------ ------
Total property and equipment ....................... 6,351 8,797
Less accumulated depreciation and amortization ......... 2,469 3,608
------ ------
Property and equipment, net ........................ $3,882 $5,189
====== ======
F-13
<PAGE>
3. SELECTED BALANCE SHEET INFORMATION, CONTINUED:
Depreciation expense was approximately $336,000, $678,000 and $1,178,000 for the
years ended December 31, 1995, 1996 and 1997, respectively (in thousands).
DECEMBER 31,
-------------------
1996 1997
------- --------
Intangible assets:
Management services agreements ..................... $16,513 $26,447
Other .............................................. 150 150
------- -------
Total intangible assets ........................ 16,663 26,597
Less accumulated amortization ...................... 231 1,032
------- -------
Intangible assets, net ......................... $16,432 $25,565
======= =======
Accounts payable and accrued liabilities:
Trade .............................................. $ 2,791 $ 2,937
Salaries, wages and payroll taxes .................. 1,204 1,577
Other .............................................. 795 421
------- -------
$ 4,790 $ 4,935
======= =======
4. ACQUISITIONS:
In May 1996, the Company acquired substantially all of the assets and assumed
certain liabilities of 1st Dental Care and Mid-South Dental Centers, group
dental practices headquartered in Clearwater, Florida, and Nashville, Tennessee,
respectively. In August 1996, the Company acquired substantially all of the
assets and assumed certain liabilities of five dental practices and acquired the
stock of three dental practices operated by Horizon Dental Centers, a group
dental practice with offices in Austin and Ft. Worth, Texas.
The aggregate purchase price, including the payment of certain assumed debt and
related acquisition expenses, of $18.2 million consisted of $10.3 million in
cash, $4.6 million in seller notes payable (Note 5) and 332,000 shares of
Company common stock with a fair market value of $3.3 million. In connection
with these acquisitions, the Company entered into employment agreements with
certain employees and former owners of the businesses acquired and into
long-term management services agreements with each of the affiliated dental
practices.
F-14
<PAGE>
4. ACQUISITIONS, CONTINUED:
In June 1997, the Company entered into a management services agreement and
option agreement to acquire all of the membership interest in SW Dental, a group
dental practice located in Austin, Texas. In September 1997, the Company
completed the acquisition. In December 1997, the Company acquired substantially
all the assets of two individual practices in Ft. Worth, Texas and Nashville,
Tennessee and entered into employment agreements with the dentists. The
aggregate purchase price, including related acquisition expenses, of
approximately $10.2 million consisted of $5.5 million in cash, $1.5 million in
Series B Preferred Stock (Note 6), $1.4 million in sellers notes payable (Note
5) and 165,000 shares of the Company common stock with a fair market value of
approximately $1.7 million. The cash portion included $1.5 million in previously
paid non-refundable deposits of which $500,000 was in escrow at December 31,
1996.
The assets and liabilities have been recorded at their estimated fair values at
the date of acquisition. The aggregate purchase price and related expenses
exceeded the fair market value of net assets, which has been assigned to
management services agreements, included in intangible assets. Patient Revenues,
management fees and related costs are included in the consolidated financial
statements from their acquisition dates.
The estimated fair value of assets acquired and liabilities assumed are
summarized as follows:
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
Patient receivables, net ............................... $ 562 $ 236
Unbilled patient receivables, net ...................... 66 37
Prepaid expenses and other current assets .............. 99 31
Property and equipment, net ............................ 2,104 554
Other assets ........................................... 10 3
Management services agreements ......................... 16,663 9,934
Accounts payable and accrued liabilities ............... (603) (452)
Long-term debt, assumed ................................ (535) (138)
Other liabilities ...................................... (80) --
-------- --------
18,286 10,205
Less: fair value of common stock issued and to be
issued ............................................... 3,320 3,241
Less: issuance of notes payable ....................... 4,631 1,449
-------- --------
Cash purchase price, net of cash acquired .......... $ 10,335 $ 5,515
======== ========
F-15
<PAGE>
4. ACQUISITIONS, CONTINUED:
Unaudited pro forma combined results of operations, assuming all of the
acquisitions occurred at January 1, 1996, are as follows:
YEAR ENDED
DECEMBER 31,
-------------------
1996 1997
------- --------
(in thousands, except per
share data)
Net revenues ................................. $ 30,718 $ 34,116
Net loss ..................................... (988) (2,558)
Basic and diluted net loss per share ......... (0.29) (0.62)
The unaudited pro forma summary is not necessarily indicative either of results
of operations, that would have occurred had the acquisitions been made at the
beginning of the periods presented, or of future results of operations of the
combined companies.
5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
Term loan ........................................ $10,847 $3,000
Senior subordinated notes ........................ 7,950 --
Seller notes ..................................... 4,444 1,499
Other various notes payable ...................... 696 706
------- ------
Total debt ................................... 23,937 5,205
Less discount on senior subordinated notes ....... 2,615 --
------- ------
Long-term debt, net of discount .................. 21,322 5,205
Less current portion ............................. 2,371 2,598
------- ------
Long-term debt ............................... $18,951 $2,607
======= ======
Long-term debt, net of current portion ........... $13,616 $2,607
Long-term debt, related party .................... 5,335 --
------- ------
$18,951 $2,607
======= ======
F-16
<PAGE>
5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT,
CONTINUED:
In November 1997, the Company entered into a new credit agreement with its
existing bank (the "Credit Agreement") and refinanced the outstanding balance
of $3.0 million due under the previous Bank Credit Facility. The Credit
Agreement provides for borrowings up to $25 million and matures November 2002.
The principal balance of $3.0 million due under the Credit Agreement at November
7, 1997 is payable in sixteen quarterly payments beginning March 1998. Future
advances under the Credit Agreement require quarterly interest payments through
November 1999 when principal becomes payable based on a five-year amortization
and a final payment at maturity. The Credit Agreement bears interest at variable
rates, which are based upon (a) either (i) the bank's base rate or (ii) LIBOR
plus (b) a margin which varies according to the ratio of the Company's funded
debt to EBITDA, each as defined in the Credit Agreement. The bank's base rate at
December 31, 1997 was 8.5%. A commitment fee is payable quarterly at rates
ranging from 0.125 percent to 0.5 percent of the unused amounts for such
quarter. The Credit Agreement is collateralized by substantially all of the
Company's assets and contains affirmative and negative covenants that require
the Company to maintain certain financial ratios, limit the creation or
existence of liens and set certain restrictions on acquisitions, mergers, sale
of assets and restrict the payment of dividends.
The Company retired approximately $23.9 million of long-term debt in 1997 with
proceeds of the initial public offering. The retirement of debt consisted of
$10.4 million of senior subordinated notes, $9.1 million of Bank Credit Facility
debt and $4.4 million of promissory notes in connection with certain
acquisitions. In connection with the repayment of $9.5 million in 12% Senior
Subordinated Debt in September 1997, the Company recognized a $3.2 million
extraordinary loss associated with the early retirement of such debt.
At December 31, 1997, approximately $268,000 (net of accumulated amortization of
$9,000) of debt issuance costs, had been capitalized in connection with the
issuance of the new Credit Agreement. All costs associated with the Bank Credit
Facility and the Senior Subordinated Notes were included with the extraordinary
loss.
The Company has issued various subordinated promissory notes payable in
connection with certain acquisitions ("Seller Notes") (Note 4). Through
September 1997, interest on the Seller Notes ranged from 6.36 percent to 10.0
percent. As of December 31, 1997, one noninterest bearing Seller Note issued in
December 1997 remained outstanding, which was paid in January 1998 from proceeds
borrowed under the Credit Agreement.
The aggregate maturities of long-term debt for each of the next five years
subsequent to December 31, 1997 were as follows (in thousands):
1998 $ 2,598
1999 911
2000 851
2001 839
2002 6
------------
$ 5,205
============
F-17
<PAGE>
6. PREFERRED STOCK:
The Company issued 119,231 shares of Series B Convertible Preferred Stock (the
"Series B Stock") in connection with the acquisition of SW Dental (Note 4).
The number of shares issued were equivalent to $1,550,000 divided by the initial
public offering price of the Company's common stock of $13.00 per share. The
Series B Stock will be convertible at the holder's option, for a thirty-day
period beginning one year after its issuance (the "Conversion Period"), into an
equivalent number of shares of the Company's common stock. Alternatively, during
the Conversion Period, the holder may require the Company to redeem the Series B
Stock in quarterly increments of $114,000. The Company may call the Series B
Stock at any time following the Conversion Period.
7. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
Future minimum lease payments under noncancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1997 (in thousands):
1998 $ 1,769
1999 1,618
2000 1,299
2001 961
2002 718
Thereafter 1,656
------------
Total minimum lease obligation $ 8,021
============
The Company has entered into operating leases for various types of office
equipment and for its building facilities. Certain building facility leases
include rent escalation clauses. Most leases contain purchase and renewal
options at fair market rental values.
LITIGATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
F-18
<PAGE>
7. COMMITMENT AND CONTINGENCIES, continued:
LITIGATION, CONTINUED
In July and August 1997, a dentist from whom the Company acquired Horizon Dental
Centers, in August 1996, contacted the Company asserting that the Company
misrepresented the value of the Common Stock issued to him as a part of the
consideration for the acquisition and demanded the issuance of approximately
200,000 shares of Common Stock as additional consideration for the transaction.
The Company believes that these asserted claims are without merit and has denied
the demand for the issuance of additional shares of Common Stock. In the event,
that litigation is initiated against the Company, the Company intends to defend
itself vigorously. In the opinion of management, resolution of these claims
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity.
DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY
Each Affiliated Dental Practice has entered into an employment agreement with
each full time dentist, orthodontist and other dental specialist it employs.
Although the form of contract varies somewhat among practices and among dentists
with different specialties, the typical contract provides for a defined
compensation arrangement, including performance-based compensation, liquidated
damages and a covenant not to compete. Each full-time dentist is required to
maintain professional liability insurance, and mandated coverage limits are
generally at least $1,000,000 per claim and $3,000,000 in aggregate. In
addition, many affiliated dental practices employ part-time dentists. Not all
part-time dentists have employment agreements, but all part-time dentists are
required to carry professional liability insurance in specified amounts.
Year 2000
The year 2000 issue is the result of computer programs using two digits to
define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system that is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.
As part of the Company's continuing program to update its information systems in
anticipation of future growth, the Company has recently completed the purchase
and installation of year 2000 compliant software for its operations. The Company
is also currently evaluating software systems for its operations and expects to
have year 2000 compliant software in place by the end of 1998. Accordingly, the
Company does not expect the year 2000 issue to have a material effect on its
financial position, results of operations or cash flows.
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
8. INCOME TAXES:
Significant components of the Company's deferred tax assets (liabilities) were
as follows:
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforward ...................... $ 758 $ 2,275
Deferred compensation ................................ 982 650
Allowances for bad debts ............................. 922 --
------- -------
Total deferred assets ............................ 2,662 2,925
------- -------
Deferred tax liabilities:
Unbilled receivables ................................. (622) (975)
Loss of Subchapter S status in connection with
changes in corporate form .......................... (1,059) (375)
Management services agreements ....................... (122) (250)
Property and equipment ............................... (108) (125)
Other ................................................ (16) (75)
------- -------
Total deferred tax liabilities ................... (1,927) (1,800)
------- -------
Net deferred tax assets ................................ 735 1,125
Less current portion ................................... 135 --
------- -------
Noncurrent ....................................... $ 600 $ 1,125
======= =======
Significant components of the provision for income taxes on continuing
operations were as follows:
DECEMBER 31,
------------------------
1995 1996 1997
------- --------- ------
Current tax provision:
Federal ...................................... $-- $-- $--
State ........................................ -- -- 100
----- ----- ----
Total current .............................. -- -- 100
Deferred tax provision (benefit):
Federal ...................................... (217) (512) 90
State ........................................ (108) (49) 10
----- ----- ----
Total deferred ............................. (325) (561) 100
----- ----- ----
Provision (benefit) for income taxes ............ $(325) $(561) $200
===== ===== ====
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
8. INCOME TAXES, CONTINUED:
The differences between the statutory federal tax rate and the Company's
effective tax rate on continuing operations were as follows (in thousands):
DECEMBER 31,
------------------------
1995 1996 1997
------- --------- ------
Tax at U.S. statutory rate (34%) .............. $(931) $(560) $ 208
State income taxes, net of federal tax ........ (71) (66) 24
Income not subject to corporate level
federal tax ................................. (83) -- --
Nondeductible expenses and other .............. 10 65 (32)
Effect of conversion to taxable entity ........ 750 -- --
----- ----- -----
$(325) $(561) $ 200
===== ===== =====
At December 31, 1997, the Company had net operating loss carryforwards available
to reduce future taxable income of approximately $6.0 million, expiring in 2017.
The Company has not recorded a valuation allowance for the potential inability
to realize its net deferred tax assets because, after consideration of the
affiliated dental practices' historical operating results and the Company's
planned operations, management believes that it is more likely than not that the
Company will realize those assets.
9. Stock Option Plans:
The Company grants stock options under the Castle Dental Centers, Inc. Omnibus
Stock and Incentive Plan, a stock-based incentive compensation plan (the
"Employees' Plan"), and the Non-employee Directors' Stock Option Plan (the
"Directors' Plan," together the "Plans") which are described below. The Company
applies APB Opinion 25 and related Interpretations in accounting for the Plan.
In 1995, the FASB issued FASB Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") which, if fully adopted by the Company, would change
the methods the Company applies in recognizing the cost of the Plan. Adoption of
the cost recognition provisions of SFAS 123 is optional and the Company has
decided not to elect these provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of SFAS
123 in 1995 are required by SFAS 123 and are presented below.
Under the Employees' Plan, the Company is authorized to issue 750,000 shares of
Common Stock pursuant to "Awards" granted to officers and key employees in the
form of stock options and restricted stock. Under the Directors' Plan, the
Company is authorized to issue 150,000 shares of Common Stock to non-employee
directors of the Company. There are 505,000 and 125,000 options granted under
the Employees' Plan and the Directors' Plan, respectively, at December 31, 1997.
The Compensation Committee administers the Plans.
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
9. Stock Option Plans, CONTINUED:
These stock options have contractual terms of 10 years and have an exercise
price no less than the fair market value of the stock at grant date. The options
vest at 20% per year over a five year period, beginning on the first anniversary
of the date of grant.
Following is a summary of the status of the Company's stock options as of
December 31, 1997 and the changes during the two-year period then ended:
<TABLE>
<CAPTION>
STOCK OPTIONS
-------------------------------------------------------------------------------------
1996 1997
-------------------- ---------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES OF AVERAGE SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
---------- --------- --------- ----------
<S> <C> <C>
Outstanding at beginning of the year - n/a 92,250 $10.29
---------- ---------
Granted at the money 64,250 $10.00 437,750 $10.00
Granted at a premium 28,000 $11.00 125,000 $13.00
---------- ---------
Total granted during the year 92,250 $10.29 562,750 $10.67
---------- ---------
Exercised - n/a - n/a
Forfeited - n/a 25,000 $11.00
Expired - n/a - n/a
---------- --------- --------- ----------
Outstanding at end of year 92,250 $10.29 630,000 $10.60
========== ========= ========= ==========
Exercisable at end of year - n/a 14,350 $10.04
========== ========= ==========
Weighted-average FV of options granted
at the money 3.03 5.24
Weighted-average FV of options granted
at a premium 2.46 4.48
Weighted-average FV of options granted
during the year 2.86 5.07
</TABLE>
The fair value of each stock option granted by the Company is estimated on the
date of grant using the minimum value method for 1996 and Black-Scholes option
pricing model for 1997 with the following weighted-average assumptions: dividend
yield of 0% for both years; expected volatility of 0% for 1996 and 45% for 1997;
risk-free interest rates are 6% for 1996 and 1997; and the expected lives of the
options average six years.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
AT CONTRACT AT
EXERCISE PRICES 12/31/97 LIFE PRICE 12/31/97 PRICE
---------------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$10.00 to $13.00 630,000 10 years $10.60 14,350 $10.04
</TABLE>
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
9. Stock Option Plans, CONTINUED:
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net loss and basic and
diluted net loss per common share for 1997 would approximate $2,920,000 or $0.71
per share. The pro forma effect for 1996 is immaterial.
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995.
10. EARNINGS PER SHARE:
A reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income follows:
DECEMBER 31,
------------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net Loss Attrib. To Common Stock(1) .................... (1,086) (4,714)
Preferred Stock Accretion............................... 1,930
--------------------
Net Loss................................................ (1,086) (2,784)
Less Extraordinary loss................................. - 3,195
--------- ---------
Income (Loss) Before
Extraordinary Loss...................................... $(1,086) $ 411
======= =======
Shares (denominator)
Shares - basic ....................................... 3,191 4,100
Options and warrants ................................. -- 32
------- -------
Shares - diluted ..................................... 3,191 4,132
======= =======
(1) The effect of the preferred stock acretion is excluded from earnings per
share. The preferred stock was converted to common stock at a nominal
value and those common shares were included in the calculation of Basic
shares outstanding for all periods.
Options to purchase an aggregate 125,000 shares of common stock at exercise
prices of $13.00 per share were excluded from the calculation of diluted
earnings per share for 1997 because their effect would have been antidilutive.
The options, which expire in 2007, were still outstanding at December 31, 1997.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
11. DEFINED CONTRIBUTION PLANS:
In August 1996, the Company adopted a defined contribution plan qualified under
Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan"). All
permanent employees of the Company, except those of the Tennessee subsidiary,
are eligible to participate in the 401(k) Plan upon the completion of six months
of service. The Company maintains a separate defined contribution 401(k) plan
for all permanent employees of the Company's Tennessee subsidiary ("Tennessee
401(k) Plan"). Employees are eligible to participate in the Tennessee 401(k)
Plan upon the completion of four months of service. The Company may match
contributions made by participants under both Plans each year in an amount
determined by the Company on a year-to-year basis.
The Company did not make any contributions to either Plan in 1996 or 1997.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1995 1996 1997
------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 87 $ 1,358 $ 1,707
Income taxes 1 - 44
Supplemental disclosure of noncash
investing and financing activities:
Effect of reorganization on
capital structure 39 -
Issuance of warrant 93 -
Issuance of notes payable for
accrued interest and purchase
of property and equipment - 576 450
Issuance of capital lease
obligation for
property and equipment - - 416
Issuance of Series B Preferred
Stock in connection with an acquisition - - 1,550
Issuance of Preferred Stock in
connection with related party
financing - - 1,144
Conversion to common stock of
Series A and Series C Preferred Stock - - 5,898
</TABLE>
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
13. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
CREDIT RISK
The Company grants customers credit in the normal course of business. The
Company does not require collateral on the extension of credit. Procedures are
in effect to monitor the creditworthiness of customers and appropriate
allowances are made to reduce accounts to their net realizable values.
The Company maintains cash balances at various financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. The Company's accounts at these institutions may, at times, exceed
the federally insured limits. The Company has not experienced any losses in such
accounts.
FAIR VALUE oF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and the revolving line of credit approximate fair values due to the
short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings and preferred stock as of December 31, 1996 and
1997, respectively, approximate their fair value based on the Company's current
incremental borrowing rates for similar type of borrowing arrangements.
The carrying amounts of the Company's Series B Stock and warrants approximate
their fair value based on the Company's financial condition at December 31,
1997.
14. RELATED PARTY TRANSACTIONS:
The Company maintains a management services agreement with one of the Company's
Texas affiliated dental practices (organized as professional corporations)
pursuant to which the shareholder receives an annual salary of $100,000 to take
actions necessary to maintain the dental license for the affiliated dental
practice in the state of Texas, for as long as he holds such license and is the
sole shareholder of the practice. Such compensation arrangement was negotiated
between the shareholder and previously unaffiliated investors in the Company. In
addition, the shareholder receives $131,500 per quarter pursuant to the terms of
the Deferred Compensation Agreement (Note 2).
During 1995, the Company entered into a lease agreement with Goforth, Inc., a
company owned by the Company's chairman and chief executive officer (the
"Affiliate"). The Company has agreed to pay the Affiliate a minimum guaranteed
rental of $12,000 per month through January 2001 and $13,200 per month from
January 2001 through January 2006 for rental of a dental center. The Company has
also agreed to pay additional rent of approximately $1,600 per month for
insurance, taxes and common area maintenance. The Company paid $188,000,
$235,000 and $174,000 under this agreement during 1995, 1996 and 1997,
respectively.
F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED:
15. Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Net revenues $ 3,216 $ 4,106 $ 5,924 $ 6,374
Operating income (loss) 580 430 330 (480)
Net income (loss) 77 (46) (283) (835)
Earnings (loss) per share 0.02 (0.02) (0.09) (0.25)
1997(1)
Net revenues 7,050 7,323 8,053 8,986
Operating income 803 740 835 941
Income (loss) before
extraordinary loss 21 (101) (30) 521
Extraordinary loss - - (3,195) -
Net income (loss) 21 (101) (3,225) 521
Basic and diluted
earnings per share:
Income (loss) before
extraordinary loss 0.01 (0.03) (0.01) 0.09
Extraordinary loss - - (0.85) -
--------- --------- --------- ----------
Net income (loss) 0.01 (0.03) (0.86) 0.09
========= ========= ========= ==========
</TABLE>
(1)Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per
share does not equal the total computed for the year due to stock
transactions which occurred.
The Company has restated its previously issued financial statements on Form 10-Q
for the third quarter of 1997. The restatement is attributable to a tax benefit
for the extraordinary loss with the early extinguishment of debt. The impact of
this adjustment is to decrease the extraordinary loss and net loss by $490,000
for the third quarter of 1997.
16. SUBSEQUENT EVENTS:
In February 1998, the Company entered into a definitive agreement to acquire 80%
of Dental Consulting Services L.L.C. ("DCS"), a California-based dental practice
management company. Consideration for the acquisition consists of a combination
of cash, notes and stock, of approximately $18.0 million.
In February 1998, the Company reached an agreement with its bank to increase its
bank credit facility to $42.5 million from $25.0 million.
In March 1998, the Company entered into a definitive agreement to acquire Dental
World, Inc., a dental practice management company in Houston, Texas.
Consideration for the acquisition consists of a combination of cash, notes and
stock, of approximately $3.8 million.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:
Our report on the financial statements of Castle Dental Centers, Inc. is
included on page F-2 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in item 14(a) in this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included herein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 26, 1998
S-1
<PAGE>
CASTLE DENTAL CENTERS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
BEGINNING ----------------------- AT END OF
OF YEAR EXPENSES DEDUCTIONS OTHER YEAR
---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for uncollectible
accounts - patient receivables $ 2,596 $ 1,284 $ 1,443 $ - $ 2,437
========== ========== =========== ========= ==========
Year ended December 31, 1996:
Allowance for uncollectible
accounts - patient receivables $ 2,437 $ 1,137 $ 1,324 $ 175(1) $ 2,425
========== ========== =========== ========= ==========
Year ended December 31, 1997:
Allowance for uncollectible
accounts - patient receivables $ 2,425 $ 1,698 $ 451 $ 207 $ 3,879
========== ========== =========== ========= ==========
BALANCE CHARGED TO BALANCE
BEGINNING ----------------------- AT END OF
OF YEAR EXPENSES DEDUCTIONS OTHER YEAR
---------- ---------- ----------- --------- ----------
Year ended December 31, 1995:
Allowance for uncollectible
accounts - unbilled patient
receivables $ 113 $ 115 $ - $ - $ 228
========== ========== =========== ========= ==========
Year ended December 31, 1996:
Allowance for uncollectible
accounts - unbilled patient
receivables $ 228 $ 90 $ - $ 43(1) $ 361
========== ========== =========== ========= ==========
Year ended December 31, 1997:
Allowance for uncollectible
accounts - unbilled patient
receivables $ 361 $ 199 $ - $ 8 $ 568
========== ========== =========== ========= ==========
</TABLE>
(1) ACQUIRED ALLOWANCES FOR UNCOLLECTIBLE ACCOUNTS OF AFFILIATED DENTAL
PRACTICES.
S-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- --------------------------------------------------------
*3.1 -- Certificate of Incorporation of
Castle Dental Centers, Inc., as
amended.
*3.2 -- Certificate of Amendment to
Certificate of Incorporation of
Castle Dental Centers, Inc. dated
August 28, 1996.
*3.3 -- Bylaws of Castle Dental Centers, Inc.
*3.4 -- Amendment to Bylaws of Castle Dental
Centers, Inc. dated August 16, 1996.
*3.5 -- Certificate of Amendment of
Certificate of Incorporation of
Castle Dental Centers, Inc. dated
June 16, 1997.
*3.6 -- Form of Certificate of Designation of
Series B Convertible Preferred Stock.
*3.7 -- Certificate of Designation of Series
C Convertible Preferred Stock, dated
June 16, 1997.
*4.1 -- Form of Certificate representing the
Common Stock, par value $.001 per
share, of Castle Dental Centers, Inc.
*4.2 -- Securityholders Agreement dated
December 18, 1995, among Castle
Dental Centers, Inc., Jack H. Castle,
D.D.S., P.C., certain investors in
the Company, certain stockholders of
Castle Dental Centers, Inc., and
certain shareholders of Jack H.
Castle, D.D.S., P.C.
*4.3 -- Amendment, Waiver and Consent dated
August 20, 1996 given by Pecks
Management Partners Ltd. on behalf of
Delaware State Employees' Retirement
Fund and the pension plans of Zeneca
Holdings, Inc. and ICI American
Holdings, Inc.
*4.4 -- Stockholders' Agreement dated May 19,
1996 among Castle Dental Centers,
Inc. and certain stockholders.
*4.5 -- Stockholders' Agreement dated May 31,
1996 by and among Castle Dental
Centers, Inc. and certain
stockholders.
*4.6 -- Stockholders' Agreement dated August
9, 1996 by and among Castle Dental
Centers, Inc. and certain
stockholders.
*4.7 -- Registration Rights Agreement dated
December 18, 1995, among Castle
Dental Centers, Inc. and Delaware
State Employees' Retirement Fund,
Declaration of Trust for Defined
Benefit Plan of ICI American
Holdings, Inc., Declaration of Trust
for Defined Benefit Plan of Zeneca
Holdings, Inc. and certain
stockholders and investors in the
Company.
*4.8 -- Registration Rights Agreement dated
May 19, 1996 between Castle Dental
Centers, Inc. and 1st Dental Care,
Inc.
*4.9 -- Registration Rights Agreement dated
May 31, 1996 by and between Castle
Dental Centers, Inc. and G. Powell
Bilyeu, D.D.S.
*4.10 -- Registration Rights Agreement dated
August 9, 1996 by and between Castle
Dental Centers, Inc., Joseph A.
Bonola, D.D.S. and Larry C. Jackson,
D.D.S.
4.11 -- Reserved.
*4.12 -- Amended and Restated Securityholders
Agreement dated June 16, 1997, among
Castle Dental Centers, Inc., Jack H.
Castle, D.D.S., P.C., certain
investors in the Company, certain
stockholders of Castle Dental
Centers, Inc., and certain sharehold-
ers of Jack H. Castle, D.D.S., P.C.
*4.13 -- Amended and Restated Registration
Rights Agreement dated June 16, 1997,
among Castle Dental Centers, Inc. and
Delaware State Employees' Retirement
Fund, Declaration of Trust for
Defined Benefit Plan of ICI American
Holdings, Inc., Declaration of Trust
for Defined Benefit Plan of Zeneca
Holdings, Inc. and certain
stockholders and investors in the
Company.
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- --------------------------------------------------------
*4.14 -- Registration Rights Agreement dated
as of June , 1997, by and between
Castle Dental Centers, Inc. and John
Goodman, D.D.S.
4.15 -- Registration Rights Agreement dated
December 31, 1997 between Castle Dental
Centers, Inc. and Steve W. Lebo, D.D.S.
*10.1 -- Securities Purchase Agreement dated
December 18, 1995 among Castle Dental
Centers, Inc., Jack H. Castle,
D.D.S., P.C., JHCDDS, Inc. and
certain investors.
*10.2 -- Amendment No. 1 to Securities
Purchase Agreement dated June 16,
1997 among Castle Dental Centers,
Inc., Jack H. Castle, D.D.S., P.C.,
JHCDDS, Inc. and certain investors.
*10.3 -- 12% Senior Subordinated Note due
December 18, 2002 between Castle
Dental Centers, Inc. and NAP &
Company in the principal amount of
$5,050,000.
*10.4 -- 12% Senior Subordinated Note due
December 18, 2002 between Castle
Dental Centers, Inc. and Fuelship &
Company in the principal amount of
$1,000,000.
*10.5 -- 12% Senior Subordinated Note due
December 18, 2002 between Castle
Dental Centers, Inc. and Northman &
Company in the principal amount of
$1,450,000.
*10.6 -- Management Services Agreement
effective December 18, 1995 by and
between Castle Dental Centers, Inc.
and Jack H. Castle, D.D.S., P.C.
*10.7 -- Amendment to Management Services
Agreement between Castle Dental
Centers, Inc. and Jack H. Castle,
D.D.S., P.C., dated as of August 15,
1996.
*10.8 -- Accounts Receivable Purchase
Agreement dated December 18, 1995,
between Jack H. Castle, D.D.S., P.C.
and Castle Dental Centers, Inc.
*10.9 -- Plan and Agreement of Merger of
Family Dental Services of Texas, Inc.
with and into Castle Dental Centers,
Inc. dated December 18, 1995.
*10.10 -- Stock Purchase Agreement dated
December 18, 1995 by and between Jack
H. Castle, D.D.S. and Castle Dental
Centers, Inc.
*10.11 -- Amendment to Stock Purchase Agreement
by and between Jack H. Castle, D.D.S.
and Castle Dental Centers, Inc.,
dated as of August 15, 1996.
*10.12 -- Deferred Compensation Agreement
effective December 18, 1995 by and
between Castle Dental Centers, Inc.
and Jack H. Castle, D.D.S.
*10.13 -- Indemnity Agreement dated December
18, 1995 by and between Castle Dental
Centers, Inc. and G. Kent Kahle.
*10.14 -- Indemnity Agreement dated December
18, 1995, by and between Castle
Dental Centers, Inc. and Jack H.
Castle, D.D.S.
*10.15 -- Indemnity Agreement dated December
18, 1995 by and between Castle Dental
Centers, Inc. and Jack H. Castle, Jr.
*10.16 -- Indemnity Agreement dated December
18, 1995 by and between Castle Dental
Centers, Inc. and Robert J. Cresci.
*10.17 -- Indemnity Agreement dated August 16,
1996 by and between Castle Dental
Centers, Inc. and Bannus B. Hudson.
*10.18 -- Indemnity Agreement dated August 16,
1996 by and between Castle Dental
Centers, Inc. and Elizabeth A.
Tilney.
*10.19 -- Asset Purchase Agreement dated May
19, 1996 by and among Castle Dental
Centers of Florida, Inc., and 1st
Dental Care, Inc., Hernando Dental
Center-Lester B. Greenberg, D.D.S.,
P.A., M&B Dental Lab, Inc., Lester B.
Greenberg, D.D.S. and Elisa
Greenberg.
*10.20 -- 10% Note due May 19, 2001 by and
between Castle Dental Centers, Inc.
and 1st Dental Care, Inc. in the
principal amount of $1,787,938.
*10.21 -- 6.36% Note due May 19, 2000 by and
between Castle Dental Centers, Inc.
and 1st Dental Care, Inc. in the
principal amount of $656,588.
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- --------------------------------------------------------
*10.22 -- 6.36% Note due May 19, 2000 by and
between Castle Dental Centers, Inc.
and M&B Dental Lab, Inc. in the
principal amount of $286,775.
*10.23 -- Management Services Agreement
effective May 19, 1996 by and between
Castle Dental Centers of Florida,
Inc. and Castle 1st Dental Care, P.A.
*10.24 -- Amendment to Management Services
Agreement between Castle Dental
Centers of Florida, Inc. and Castle
1st Dental Care, P.A., dated as of
August 16, 1996.
*10.25 -- Accounts Receivable Purchase
Agreement dated May 19, 1996, between
Castle 1st Dental Care, P.A. and
Castle Dental Centers of Florida,
Inc.
*10.26 -- Trade Name License Agreement
effective May 19, 1996 by and between
Castle Dental Centers of Florida,
Inc. and Castle 1st Dental Care, P.A.
*10.27 -- Trademark License Agreement effective
May 19, 1996 by and between Castle
Dental Centers of Florida, Inc. and
Castle 1st Dental Care, P.A.
*10.28 -- Employment Agreement dated May 19,
1996 by and between Castle Dental
Centers of Florida, Inc. and Lester
B. Greenberg, D.D.S.
*10.29 -- Asset Purchase Agreement dated April
29, 1996 by and among Castle Dental
Centers of Tennessee, Inc. and
Mid-South Dental Center, P.C. and G.
Powell Bilyeu, D.D.S.
*10.30 -- 10% Note due May 30, 2001 by and
between Castle Dental Centers, Inc.
and Mid-South Dental Centers, P.C. in
the principal amount of $750,000.
*10.31 -- Accounts Receivable Purchase
Agreement dated May 31, 1996, between
Castle Mid-South Dental Centers, P.C.
and Castle Dental Centers of
Tennessee, Inc.
*10.32 -- Management Services Agreement
effective May 31, 1996 by and between
Castle Dental Centers of Tennessee,
Inc. and Castle Mid-South Dental
Center, P.C.
*10.33 -- Amendment to Management Services
Agreement between Castle Dental
Centers of Tennessee, Inc. and Castle
Mid-South Dental Center, P.C., dated
as of August 16, 1996.
*10.34 -- Trade Name License Agreement
effective May 31, 1996 by and between
Castle Dental Centers of Tennessee,
Inc. and Castle Mid-South Dental
Centers, P.C.
*10.35 -- Trademark License Agreement effective
May 31, 1996 by and between Castle
Dental Centers of Tennessee, Inc. and
Castle Mid-South Dental Centers, P.C.
*10.36 -- Employment Agreement dated May 31,
1996 by and between Castle Dental
Centers of Tennessee, Inc., and G.
Powell Bilyeu, D.D.S.
*10.37 -- Asset Purchase Agreement dated August
9, 1996 by and among Castle Dental
Centers, Inc.; Castle Dental Centers
of Texas, Inc.; Consolidated
Industries, Inc.; S.A. Dental
Services, P.C.; C.A. Dental Services,
P.C.; S.C.A. Dental Services, P.C.;
Austin Periodontist Associates, Inc.;
Joseph A. Bonola, D.D.S.; and Kristen
Bonola.
*10.38 -- Plan and Agreement of Reorganization
dated August 9, 1996 by and among
Castle Dental Centers, Inc.; Castle
Dental Centers of Texas, Inc.; N.A.
Dental Services, P.C.; EFW Dental
Services, P.C.; HDC Dental Services,
P.C.; Midcities Dental Services,
P.C.; NEFW Dental Services, P.C.;
West Ft. Worth Dental Services, P.C.;
Joseph A. Bonola, D.D.S.; Kristen
Bonola; and Larry Charles Jackson.
*10.39 -- 10% Note due July 9, 2001 between
Castle Dental Centers, Inc. and
Joseph Bonola, D.D.S. in the
principal amount of $1,000,000.
*10.40 -- License Agreement effective August 9,
1996 by and between Joseph A. Bonola,
D.D.S. and Castle Dental Centers of
Texas, Inc.
*10.41 -- Employment Agreement dated August 9,
1996 by and between Jack H. Castle,
D.D.S., P.C., and Joseph A. Bonola,
D.D.S.
II-6
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- --------------------------------------------------------
*10.42 -- Escrow Agreement dated August 9, 1996
by and among N.A. Dental Services,
P.C.; EFW Dental Services P.C.; NEFW
Dental Services, P.C.; HDC Dental
Services, P.C.; Midcities Dental
Services, P.C.; West Ft. Worth Dental
Services, P.C.; Joseph A. Bonola and
Kristen Bonola; Castle Dental Centers
of Texas, Inc,.; and the escrow agent
named therein.
*10.43 -- 1996 Castle Dental Centers, Inc.
Omnibus Stock and Incentive Plan, as
amended.
*10.44 -- 1996 Castle Dental Centers, Inc.
Non-Employee Directors' Plan, as
amended.
10.45 -- Agreement and Plan of Merger dated as
of December 8, 1997 by and among Castle
Dental Centers of Texas, Inc and Steve W.
Lebo, D.D.S., Inc. and Steve W. Lebo, D.D.S.
10.46 -- Reserved
10.47 -- Reserved
10.48 -- Reserved
*10.49 -- Amended and Restated Credit Agreement
dated May 31, 1996 between Castle
Dental Centers, Inc. and NationsBank
of Texas, N.A.
*10.50 -- $3,000,000 Revolving Credit Note
dated May 31, 1996 between Castle
Dental Centers, Inc. and NationsBank
of Texas, N.A.
*10.51 -- $6,000,000 Term Note dated May 31,
1996 between Castle Dental Centers,
Inc. and NationsBank of Texas, N.A.
*10.52 -- $10,000,000 Advancing Term Note dated
May 31, 1996 between Castle Dental
Centers, Inc. and NationsBank of
Texas, N.A.
*10.53 -- Amended and Restated Security
Agreement (Stocks, Bonds and Other
Securities) dated May 31, 1996
between Castle Dental Centers, Inc.
and NationsBank of
Texas, N.A.
*10.54 -- Amended and Restated Security
Agreement (Accounts, Inventory,
Equipment, Chattel Paper, Documents,
Instruments, General Intangibles and
Other Property) dated May 31, 1996
between Castle Dental Centers, Inc.
and NationsBank of Texas, N.A.
*10.55 -- Amended and Restated Guaranty
Agreement dated May 31, 1996 by Jack
H. Castle, Jr. in favor of
NationsBank of Texas, N.A.
*10.56 -- Guaranty Agreement dated May 31, 1996
by JHCDDS, Inc. in favor of
NationsBank of Texas, N.A.
*10.57 -- Amended and Restated Security
Agreement (Accounts, Inventory,
Equipment, Chattel Paper, Documents,
Instruments, General Intangibles and
Other Property) dated May 31, 1996
between JHCDDS, Inc. and NationsBank
of Texas, N.A.
*10.58 -- Security Agreement (Accounts,
Inventory, Equipment, Chattel Paper,
Documents, Instruments, General
Intangibles and Other Property) dated
May 31, 1996 between Castle Dental
Centers of Florida, Inc. and
NationsBank of Texas, N.A.
*10.59 -- Guaranty Agreement dated May 31, 1996
by Castle Dental Centers of Florida,
Inc. in favor of NationsBank of
Texas, N.A.
*10.60 -- Security Agreement (Accounts,
Inventory, Equipment, Chattel Paper,
Documents, Instruments, General
Intangibles and Other Property) dated
May 31, 1996 between Castle Dental
Centers of Tennessee, Inc. and
NationsBank of Texas, N.A.
*10.61 -- Guaranty Agreement dated May 31, 1996
by Castle Dental Centers of
Tennessee, Inc. in favor of
NationsBank of Texas, N.A.
*10.62 -- Lease dated January 1, 1996 by and
between Goforth, Inc. and Family
Dental Services of Texas, Inc.
*10.63 -- Lease Agreement effective February
20, 1995 by and between Lehndorff
Four Oaks Place Joint Venture and
Family Dental Services of Texas, Inc.
10.64 -- Credit Agreement dated as of November 7, 1997
between Castle Dental Centers, Inc.
and NationsBank of Texas, N.A., as agent
10.65 -- First Amendment to Credit Agreement effective
as of February 11, 1998 between Castle Dental
Centers, Inc. and NationsBank of Texas, N.A.,
as agent.
10.66 -- Reserved
II-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- --------------------------------------------------------
*10.67 -- Option Agreement effective as of
December 18, 1995 by and between Jack
H. Castle, D.D.S. and Castle Dental
Centers, Inc.
*10.68 -- Option Agreement effective as of May
19, 1996 by and between Lester B.
Greenberg, D.D.S. and Castle Dental
Centers of Florida, Inc.
*10.69 -- Incentive Stock Option Agreement
dated May 31, 1996 between Castle
Dental Centers, Inc. and G. Powell
Bilyeu, D.D.S.
*10.70 -- Incentive Stock Option Agreement
dated May 31, 1996 between Castle
Dental Centers, Inc. and Phillip T.
Hamner.
*10.71 -- Incentive Stock Option Agreement
dated May 31, 1996 between Castle
Dental Centers, Inc. and David North.
*10.72 -- Option Agreement effective as of May
31, 1996 by and between G. Powell
Bilyeu and Castle Dental Centers of
Tennessee, Inc.
*10.73 -- Second Amendment and Supplement to
Amended and Restated Credit Agreement
dated as of June 16, 1997 between
Castle Dental Centers, Inc. and
NationsBank of Texas, N.A.
*10.74 -- 12% Senior Subordinated Note due
January 31, 1998 between Castle
Dental Centers, Inc. and NAP &
Company in the principal amount of
$1,347,000.
*10.75 -- 12% Senior Subordinated Note due
January 31, 1998 between Castle
Dental Centers, Inc. and Fuelship &
Company in the principal amount of
$267,000.
*10.76 -- 12% Senior Subordinated Note due
January 31, 1998 between Castle
Dental Centers, Inc. and Northman &
Co. in the principal amount of
$386,000.
*10.77 -- Amendment No. 1 to Deferred
Compensation Agreement dated June 16,
1997 by and between Castle Dental
Centers, Inc. and Jack H. Castle,
D.D.S.
*10.78 -- Option Agreement for the Purchase and
Sale of Businesses dated as of June
1, 1997 by and among Castle Dental
Centers of Texas, Inc., Castle Dental
Centers, Inc., Jack H. Castle,
D.D.S., P.C., SW Dental Associates,
LC, John Goodman, D.D.S. and Harold
Simpson, Jr.
*10.80 -- Member Interests Purchase Agreement
dated as of June 1, 1997 by and among
Castle Dental Centers of Texas, Inc.,
Castle Dental Centers, Inc., Jack H.
Castle, D.D.S., P.C., SW Dental
Associates, LC, John Goodman, D.D.S.
and Harold Simpson, Jr.
*10.81 -- Management Services Agreement
effective June 1, 1997 by and between
Castle Dental Centers of Texas, Inc.,
and SW Dental Associates, LC.
*10.82 -- Employment Agreement dated as of June
1, 1997 by and between Castle Dental
Centers of Texas, Inc. and John
Goodman, D.D.S.
*10.83 -- Consulting Agreement dated as of June
1, 1997 by and between Castle Dental
Centers of Texas, Inc. and Sheryl K.
Goodman.
*10.84 -- Option Agreement dated as of June 18,
1997 by and among Castle Dental
Centers, Inc., Castle Dental Centers
of Florida, Inc., Lester Greenberg
D.D.S. and NationsBank of Texas, N.A.
21 -- Subsidiaries of the Registrant.
27.1 -- Financial Data Schedule as of December 31, 1997.
27.2 -- Restated Financial Data Schedule as of December 31,
1996.
27.3 -- Restated Financial Data Schedule as of September 30,
1997
- ------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (registration number 333-1335)
II-8
EXHIBIT 4.15
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of December 31, 1997 (the
"Agreement"), by and between CASTLE DENTAL CENTERS, INC., a Delaware corporation
(the "Company"), and STEVE W. LEBO, D.D.S. (the "Holder").
1. INTRODUCTIONContemporaneously with the execution and delivery of this
Agreement, the Holder acquired an aggregate of 165,000 shares of the Company's
Common Stock $.001 par value per share ("Common Stock") on December 8, 1997,
subject to adjustment for stock splits, stock dividends, reclassification and
similar events. The Company has agreed to grant to the Holder and hereby grants
under this Agreement certain registration rights with respect to the shares of
Common Stock held by the Holder. Prior to the date hereof, the Company entered
into a Registration Rights Agreement dated as of December 18, 1995, as amended
and restated on June 16, 1997, with purchasers of the Company's Series A and
Series C Convertible Preferred Stock and certain other parties, as may be
amended from time to time (the "Original Registration Rights Agreement"), and
other agreements regarding registration of Common Stock with other parties.
Certain terms used herein which are not otherwise defined are defined in the
Original Registration Rights Agreement.
2. REGISTRATION UNDER SECURITIES ACT.
2.1 "PIGGYBACK" REGISTRATIONS.
(a) RIGHT TO INCLUDE HOLDER SECURITIES. If the Company at any
time proposes to register any Common Stock under the Securities Act (other than
by a registration on Form S-4, Form S-8 or any successor or similar form, or in
connection with a tender offer, merger, or other acquisition), for sale for its
own account, and such Common Stock is to be distributed by or through one or
more underwriters on a firm commitment basis, it will at such time give prompt
written notice to all Holders of Holder Securities (as hereinafter defined) of
its intention to do so and of such Holders' rights under this Section 2.1. Upon
the written request of any such Holder made within 20 days after the date of any
such notice given in accordance with Section 7 hereof, the Company will use its
reasonable best efforts to effect the registration under the Securities Act of
all Holder Securities which the Company has been so requested to register by the
Holders thereof, and to arrange for such underwriters to include all the Holder
Securities to be offered and sold by such Holder among the Common Stock to be
distributed by such underwriters, PROVIDED that if, at any time after giving
written notice of its intention to register its Common Stock and prior to the
effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of its Common Stock, the Company may, at its election, give
written notice of such determination to each Holder of Holder Securities and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Holder Securities in connection with such
registration (but not from its
<PAGE>
obligation to pay the Registration Expenses in connection therewith or to
include any Holder Securities in subsequent registrations), and (ii) in the case
of a determination to delay registering, shall be permitted to delay registering
any Holder Securities for the same period as the delay in registering its Common
Stock. The Holders of Holder Securities to be distributed by such underwriters
shall be parties to the underwriting agreement between the Company and such
underwriters. Any such Holder of Holder Securities shall not be required to make
any representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties, or agreements typical in an
offering of this type, including those regarding such Holder, such Holder's
Holder Securities and such Holder's intended method of distribution, any other
information supplied by such Holder to the Company for use in the registration
statement and any other representation required by law. The Company will pay all
Registration Expenses in connection with each registration of Holder Securities
requested pursuant to this Section 2.1.
(b) APPORTIONMENT IN "PIGGYBACK" REGISTRATIONS. If the
managing underwriter of such underwritten offering shall inform the Company and
the Holders of the Holder Securities requesting such registration in writing of
its belief that the aggregate number of shares of Common Stock requested to be
included in such registration (including any securities of other securityholders
of the Company included in such registration pursuant to the terms of the
Original Registration Rights Agreement) exceeds the number which can be sold in
(or during the time of) such offering or that the inclusion would adversely
affect the marketing or the selling price of the Common Stock to be sold by the
Company therein, then the Company may include all securities proposed by the
Company to be sold for its own account and may decrease or eliminate the number
of Holder Securities requested to be included in such registration to the extent
necessary to reduce the number of shares of Common Stock to be included in the
registration to the level recommended by the managing underwriter. In the event
that such a reduction is necessary, the number of Holder Securities to be
included in such registration shall be reduced, on a pro rata basis among
Holders (based on the total number of shares of Common Stock owned by Holders
and other parties (but excluding for purposes of this calculation Common Stock
which constitutes Registrable Inside Shareholder Securities and Registrable
Securities) and requested to be included in such registration), prior to any
reduction in the number of Registrable Inside Shareholder Securities and
Registrable Securities to be included in such registration.
2.2 REGISTRATION PROCEDURES. If and whenever the Company is required
to use its reasonable best efforts to effect the registration of any Holder
Securities under the Securities Act as provided in Section 2.1, the Company will
as expeditiously as possible:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and thereafter use its
reasonable best efforts to cause such registration statement to become
effective, PROVIDED that the Company may discontinue
-2-
<PAGE>
any registration of its securities at any time prior to the effective date
of the registration statement relating thereto;
(ii) prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered
by such registration statement until such time as all of such securities
have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof set forth in such
registration statement or for six months, whichever period is shorter;
(iii) furnish to each seller of Holder Securities
covered by such registration statement such number of conformed copies of
such registration statement and of each such amendment and supplement
thereto, such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 or Rule
430A under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents, as such seller may reasonably
request;
(iv) use its best efforts to register or qualify all
Holder Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each seller thereof
shall reasonably request, to keep such registration or qualification in
effect for so long as such registration statement remains in effect, and
take any other action which may be reasonably necessary to enable such
seller to consummate the disposition in such jurisdictions of the
securities owned by such seller, except that the Company shall not for any
such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the
requirements of this subdivision (iv) be obligated to be so qualified or
to consent to general service of process in any such jurisdiction or
subject itself to be required to pay any franchise or income taxes in any
such jurisdiction;
(v) use its reasonable best efforts to cause all Holder
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof to consummate the
disposition of such Holder Securities;
(vi) furnish to each seller of Holder Securities a
signed counterpart, addressed to such seller, of:
-3-
<PAGE>
(x) an opinion of counsel for the Company, dated
the date of the closing under the underwriting agreement, reasonably
satisfactory in form and substance to such underwriter, and
(y) a "comfort" letter, dated the effective date
of such registration statement and dated the date of the closing
under the underwriting agreement, signed by the independent public
accountants who have certified the Company's financial statements
included in such registration statement, addressed to each seller,
to the extent the same can be reasonably obtained, and addressed to
the underwriters, covering substantially the same matters with
respect to such registration statement (and the prospectus included
therein) and, in the case of the accountants' letter, with respect
to events subsequent to the date of such financial statements, as
are customarily covered in accountants' letters delivered to the
underwriters in underwritten public offerings of securities and such
other financial matters as such seller or the underwriters may
reasonably request;
(vii) notify each seller of Holder Securities covered by
such registration statement, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result of which,
the prospectus included in such registration statement, as then in effect,
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 not misleading in the light of the circumstances under
which they were made, and at the request of any such seller or Holder
promptly prepare to furnish to such seller or Holder a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the sellers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;
(viii)otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the Commission, and
make available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least 12 months, but not
more than 18 months, beginning with the first full calendar month after
the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section ll(a) of the Securities
Act;
(ix) provide and cause to be maintained a transfer agent
and registrar for all Holder Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement; and
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<PAGE>
(x) use its best efforts to list all Holder Securities
covered by such registration statement on any securities exchange on which
any of the Company's Common Stock is then listed.
The Company may require each proposed seller of Holder Securities as
to which any registration is being effected to promptly furnish the Company, as
a condition precedent to including such Holder's Holder Securities in any
registration, such information regarding such seller and the distribution of
such securities as the Company may from time to time reasonably request in
writing.
Each Holder of Holder Securities agrees by acquisition of such
Holder Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in subdivision (vii) of this
Section 2.2, such Holder will forthwith discontinue its disposition of Holder
Securities pursuant to the registration statement relating to such Holder
Securities until such Holder's receipt of the copies of the supplemented or
amended prospectus contemplated by subdivision (vii) of this Section 2.2 and, if
so directed by the Company, will deliver to the Company (at the Company's
expense) all copies, other than permanent file copies, then in such Holder's
possession of the prospectus relating to such Holder Securities current at the
time of receipt of such notice.
2.3 PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Holders of Holder
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel (such counsel representing Holders to be
appointed by the holders of more than 50% by number of shares of Common Stock
being registered other than shares being registered by the Company) the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and will give each of them such access
to its books and records and such opportunities to discuss the business of the
Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of such
Holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
2.4 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will indemnify and hold harmless the seller of any Holder Securities
covered by such registration statement, its directors and officers, and each
other Person, if any, who controls such seller within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such seller or any such director or officer or controlling
person may become subject under the Securities Act or
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<PAGE>
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse such seller and each such
director, officer and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding; PROVIDED, HOWEVER, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon (a) an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, said preliminary or final prospectus or said
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
seller, specifically for use in the preparation thereof or (b) an untrue
statement or alleged untrue statement, omission or alleged omission in a
prospectus if such untrue statement or alleged untrue statement, omission or
alleged omission is corrected in an amendment or supplement to the prospectus or
in the final prospectus, which amendment, supplement or final prospectus is
delivered to such seller and such seller thereafter fails to deliver such
prospectus as so amended or supplemented prior to or concurrently with the sale
of registered Holder Securities to the person asserting such loss, claim,
damage, liability or expense. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such seller or
any such director, officer or controlling person and shall survive the transfer
of such securities by such seller.
(b) INDEMNIFICATION BY THE HOLDERS. The Holders will, and
hereby do, indemnify and hold harmless (in the same manner and to the same
extent as set forth in subdivision (a) of this Section 2.4) the Company, each
director of the Company, each officer of the Company and each other Person, if
any, who controls the Company within the meaning of the Securities Act with
respect to any statement or alleged statement in or omission or alleged omission
from such registration statement, any preliminary prospectus, final prospectus
or summary prospectus contained therein, or any amendment or supplement thereto,
if such statement or alleged statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Holder for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement. Such indemnity shall remain in full force and effect,
regardless of any investigation made by or on behalf of the Company or any such
director, officer or controlling Person and shall survive the transfer of such
securities by such Holder.
(c) NOTICE. Promptly after receipt by an indemnified party of
notice of the commencement of any action or proceeding involving a claim
referred to in the preceding
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subdivisions of this Section 2.4, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the latter of the commencement of such action, PROVIDED that the failure of
any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subdivisions of this
Section 2.4, except to the extent that the indemnifying party is prejudiced by
such failure to give notice. In case any such action is brought against an
indemnified party, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified party and indemnifying parties may
exist in respect of such claim, the indemnifying party shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which 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 to such claim or litigation.
(d) INDEMNIFICATION PAYMENTS. The indemnification required by
this Section 2.4 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
2.5 ADJUSTMENTS AFFECTING HOLDER SECURITIES. The Company will not
effect or permit to occur any combination or subdivision of shares which would
adversely affect the ability of the holders of Holder Securities to include such
Holder Securities in any registration of its securities contemplated by this
Section 2 or the marketability of such Holder Securities under any such
registration.
3. DEFINITIONS. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
COMMISSION: The Securities and Exchange Commission or any other federal agency
at the time administering the Securities Act.
COMMON STOCK: Common Stock of the Company, $.001 par value per share, and stock
of any other class with which such shares may hereafter have been exchanged or
reclassified.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
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<PAGE>
HOLDER SECURITIES: The Common Stock (a) issued to the Holders on the date of
this Agreement and (b) issued to the Holders on conversion of the Preferred
Stock and any securities issued or issuable with respect to such Common Stock by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise upon any required adjustments.
As to any particular Holder Securities, such securities shall cease to be Holder
Securities when (a) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement, (b) they shall have been distributed to the public pursuant to Rule
144 (or any successor provision) under the Securities Act, (c) they are eligible
for distribution to the public under Rule 144(k), or (d) they shall have ceased
to be outstanding.
PERSON: A corporation, an association, a partnership, a business or other
business entity, an individual, a governmental or political sub-division thereof
or a governmental agency.
REGISTRABLE INSIDE SHAREHOLDER SECURITIES: Shall have the meaning assigned to
such term in the Original Registration Rights Agreement.
REGISTRABLE SECURITIES: Shall have the meaning assigned to such term in the
Original Registration Rights Agreement.
REGISTRATION EXPENSES: All expenses incident to the Company's performance of or
compliance with Section 2, including, without limitation, all registration,
filing and National Association of Securities Dealers, Inc. fees, all fees and
expenses of complying with securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the
reasonable fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special audits or
"comfort" letters required by or incident to such performance and compliance,
the reasonable fees and disbursements of one counsel (except in the event of a
conflict of interest, then such number of counsel as is appropriate to resolve
such conflict) retained by the holder or holders of more than 50% by number of
shares of Common Stock being registered other than shares registered by the
Company, premiums and other costs of policies of insurance obtained by the
Company against liabilities arising out of the public offering of the
Registrable Securities and the Holder Securities being registered and any fees
and disbursements of underwriters customarily paid by issuers or sellers of
securities, including reasonable fees of underwriters counsel including
qualification of securities under blue sky laws, but excluding all agency fees
and commissions, underwriting discounts and commissions and transfer taxes, if
any.
SECURITIES ACT: The Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
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<PAGE>
4. RULE 144. If the Company shall have filed a registration statement
pursuant to the requirements of Section 12 of the Exchange Act or a registration
statement pursuant to the requirements of the Securities Act, the Company will
file the reports required to be filed by it, and in the manner required to be
filed by it, under the Securities Act and the Exchange Act (or, if the Company
is not required to file such reports, will, upon the request of any Holder of
Holder Securities, make publicly available other information) and will take such
further action as any Holder of Holder Securities may reasonably request, all to
the extent required from time to time to enable such Holder to sell Holder
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144 under the Securities Act, as such
rule may be amended from time to time or (b) any similar rule or regulation
hereafter adopted by the Commission ("Rule 144"). Upon the request of any Holder
of Holder Securities, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
5. AMENDMENTS AND WAIVERS. This Agreement may be amended and the Company
may take any action herein prohibited or omit to perform any act herein required
to be performed by it, only if the Company shall have obtained the written
consent to such amendment, action or omission to act, of the holder or holders
of 662/3% or more (by number of shares) of Holder Securities. Each holder of any
Holder Securities at the time or thereafter outstanding shall be bound by any
consent authorized by this Section 5, whether or not such Holder Securities
shall have been marked to indicate such consent.
6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Holder Securities
are held by a nominee for the beneficial owner thereof, the beneficial owner
thereof may upon the giving of written notice to the Company, at its election,
be treated as the Holder of such Holder Securities for purposes of any request
or other action by any Holder or Holders of Holder Securities pursuant to this
Agreement or any determination of any number or percentage of shares of Holder
Securities held by any Holder or Holders of Holder Securities contemplated by
this Agreement. The Company may require assurances reasonably satisfactory to it
of such owner's beneficial ownership of such Holder Securities.
7. NOTICES. All communications provided for hereunder shall be sent by
first-class mail or overnight courier and (a) if addressed to a party other than
the Company, addressed to such party at the address set forth on the signature
page hereof, or at such other address as such party shall have furnished to the
Company in writing, or (b) if addressed to any other Holder of Holder
Securities, at the address that such Holder shall have furnished to the Company
in writing, or, until any such other holder so furnishes to the Company an
address, then to and at the address of the last holder of such Holder Securities
who has furnished an address to the Company, or (c) if addressed to the Company,
at 1360 Post Oak Boulevard, Suite 1300, Houston, Texas 77056, to the attention
of its President, or to the attention of such other officer, as the Company
shall have furnished to each Holder of Securities at the time outstanding.
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<PAGE>
8. ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the benefit
of the parties hereto other than the Company shall also be for the benefit of
and enforceable by any subsequent Holder of any Holder Securities.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning hereof.
10. GOVERNING LAW. This agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the state of Delaware.
11. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
12. EXTENSION OF ADDITIONAL REGISTRATION RIGHTS. The Holders acknowledge
that the Company retains the right to extend the same or similar registration
rights to other holders of its securities, and that such action by the Company
shall not constitute a breach of or a default under this Agreement. It is the
intent of the parties hereto that this Agreement be read consistently with the
Original Registration Rights Agreement, but in the event of a conflict
therewith, the provisions of the Original Registration Rights Agreement shall
control. If the Company shall hereafter grant any demand registration rights
with respect to the securities of the Company that are more favorable than the
rights granted under this Agreement, the Holder shall immediately be vested with
such more favorable rights.
13. LOCK-UP AGREEMENT. If requested in writing by the underwriters for any
underwritten public offering of securities of the Company, the Holders shall
agree not to sell publicly any shares of Common Stock (other than Common Stock
being registered in such offering), without the consent of such underwriters,
for a period of not more than 270 days following the effective date of the
registration statement relating to such offering.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
CASTLE DENTAL CENTERS, INC.
By: JACK H. CASTLE, JR.
Jack H. Castle, Jr.
Chairman and Chief Executive Officer
ADDRESS: HOLDER:
7505 Glenview, Suite 1 By:STEVE W. LEBO, D.D.S.
Tarrant, Texas 76180 Steve W. Lebo, D.D.S.
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EXHIBIT 10.45
AGREEMENT AND PLAN OF MERGER
Dated as of December 8, 1997
By and Among
Castle Dental Centers of Texas, Inc.
as Purchaser,
Steve W. Lebo, D.D.S., Inc.
as the Company
and
Steve W. Lebo, D.D.S.
as Shareholder
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
<S> <C> <C>
DEFINITIONS..............................................................................................1
1.1 Definitions.....................................................................................1
ARTICLE II
THE TRANSACTION..........................................................................................4
2.1 Merger..........................................................................................4
2.2 Articles of Incorporation; Bylaws...............................................................5
2.3 Directors; Officers.............................................................................5
2.4 Conversion of Company Common Stock..............................................................5
2.5 Exchange of Stock Certificates..................................................................5
2.6 Subsequent Actions..............................................................................6
2.7 Closing.........................................................................................6
ARTICLE III
PAYMENT OF PURCHASE PRICE................................................................................6
3.1 Amount; Allocation; Delivery....................................................................6
3.2 Additional Contingent Purchase Price Consideration..............................................6
3.3 Agency Relationship.............................................................................8
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANYAND THE SHAREHOLDER.........................................8
4.1 Representations and Warranties of the Company and the Shareholder. ............................8
4.2 Existence and Good Standing.....................................................................8
4.3 Authorization and Validity of Agreement.........................................................8
4.4 Capital Stock...................................................................................9
4.5 Consents and Approvals; No Violations...........................................................9
4.6 Subsidiaries and Affiliates.....................................................................9
4.7 Financial Statements; No Material Adverse Change...............................................10
4.8 Books and Records..............................................................................10
4.9 Title to Properties; Encumbrances; Condition...................................................10
4.10 Real Property..................................................................................11
4.11 Leases.........................................................................................11
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4.12 Material Contracts.............................................................................11
4.13 Permits........................................................................................12
4.14 Litigation.....................................................................................12
4.15 Taxes..........................................................................................12
4.16 Insurance......................................................................................13
4.17 Intellectual Properties........................................................................13
4.18 Compliance with Laws...........................................................................13
4.19 Employment Relations...........................................................................13
4.20 Employee Benefit Plans.........................................................................14
4.21 Environmental Laws and Regulations.............................................................14
4.22 Interests in Customers, Suppliers, Etc.........................................................14
4.23 Compensation of Employees......................................................................15
4.24 Payors. ......................................................................................15
4.25 Accounts Receivable; Accounts Payable..........................................................15
4.26 Investments....................................................................................15
4.27 Broker's or Finder's Fees......................................................................15
4.28 Copies of Documents............................................................................15
4.29 Investment Representations.....................................................................15
4.30 Due Diligence..................................................................................16
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER.............................................................16
5.1 Representations and Warranties of Purchaser....................................................16
5.2 Existence and Good Standing of Purchaser; Power and Authority..................................17
5.3 No Violations..................................................................................17
5.4 Capital Stock..................................................................................17
5.5 Litigation.....................................................................................18
5.6 Financial Statements...........................................................................18
5.7 Broker's or Finder's Fees......................................................................18
5.8 Business Information...........................................................................18
5.9 SEC Filings....................................................................................18
5.10 Absence of Certain Changes.....................................................................19
5.11 Compliance with Laws...........................................................................19
5.12 Environmental Laws and Regulations.............................................................19
5.13 Taxes..........................................................................................19
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ARTICLE VI
CONDITIONS TO THE SHAREHOLDER'S OBLIGATIONS.............................................................20
6.1 Truth of Representations and Warranties........................................................20
6.2 Performance of Agreements......................................................................20
6.3 No Litigation Threatened.......................................................................21
6.4 Consideration..................................................................................21
6.5 Governmental Approvals.........................................................................21
6.6 Proceedings....................................................................................21
6.7 Good Standing Certificates.....................................................................21
6.8 Employment Agreement...........................................................................21
6.9 Registration Rights Agreement..................................................................21
6.10 No Material Adverse Change.....................................................................21
6.11 Resolutions....................................................................................21
6.12 Legal Opinion..................................................................................22
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS...................................................................22
7.1 Truth of Representations and Warranties........................................................22
7.2 Performance of Agreements......................................................................22
7.3 Documents of Conveyance........................................................................22
7.4 No Litigation Threatened.......................................................................22
7.5 Governmental Approvals.........................................................................22
7.6 Consents.......................................................................................22
7.7 Legal Opinion..................................................................................23
7.8 Proceedings....................................................................................23
7.9 Castle PC......................................................................................23
7.10 Good Standing Certificates.....................................................................23
ARTICLE VIII
COVENANTS OF THE COMPANY AND THE SHAREHOLDER............................................................23
8.1 Cooperation by the Company and the Shareholder.................................................23
8.2 Amendment of Schedules.........................................................................24
8.3 Conduct of Business............................................................................24
8.4 Exclusive Dealing..............................................................................24
8.5 Review of the Assets...........................................................................24
8.6 Further Assurances.............................................................................24
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ARTICLE IX
COVENANTS OF PURCHASER..................................................................................25
9.1 Cooperation by Purchaser.......................................................................25
9.2 Amendment of Schedules.........................................................................25
9.3 Further Assurances.............................................................................25
9.4 Indemnification and Insurance..................................................................25
ARTICLE X
TERMINATION.............................................................................................26
10.1 Termination....................................................................................26
10.2 Effect on Obligations..........................................................................26
ARTICLE XI
SURVIVAL AND INDEMNIFICATION............................................................................27
11.1 Indemnification of the Company and the Shareholder.............................................27
11.2 Indemnification of the Purchaser...............................................................27
11.3 Demands........................................................................................27
11.4 Right to Contest and Defend....................................................................28
11.5 Cooperation....................................................................................28
11.6 Right to Participate...........................................................................29
11.7 Payment of Damages.............................................................................29
11.8 Right of Setoff................................................................................29
11.9 Dispute as to Right of Indemnification.........................................................29
11.10 Indemnification Deductible.....................................................................29
11.11 Indemnification Cap............................................................................29
11.12 Survival of Representations and Warranties.....................................................30
ARTICLE XII
MISCELLANEOUS...........................................................................................30
12.1 Shareholder Guarantees.........................................................................30
12.2 Entire Agreement...............................................................................30
12.3 Successors and Assigns.........................................................................30
12.4 Counterparts...................................................................................30
12.5 Headings.......................................................................................30
12.6 Modification and Waiver........................................................................30
12.7 No Third Party Beneficiary Rights..............................................................31
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12.8 Sales and Transfer Taxes.......................................................................31
12.9 Expenses.......................................................................................31
12.10 Notice.........................................................................................31
12.11 Governing Law..................................................................................32
12.12 Confidentiality; Publicity.....................................................................32
12.13 Attorneys' Fees................................................................................32
12.14 Consent to Jurisdiction........................................................................32
12.15 Severability...................................................................................32
12.16 Enforcement....................................................................................33
</TABLE>
SCHEDULES
Schedule 4.5 Consents
Schedule 4.6 Interests in Other Entities
Schedule 4.7 Material Adverse Change
Schedule 4.9 Encumbrances
Schedule 4.10 Real Property
Schedule 4.11 Leased Personal Property
Schedule 4.12 Material Contracts and Proposals
Schedule 4.13 Permits
Schedule 4.14 Litigation
Schedule 4.15 Taxes
Schedule 4.16 Insurance Policies
Schedule 4.17 Intellectual Property
Schedule 4.21 Environmental Matters
Schedule 4.22 Other Business Relationships
Schedule 4.23 Employee Compensation
Schedule 4.24 Payors
Schedule 4.25 Accounts Receivable
Schedule 5.6 Purchaser Financial Statement
Schedule 5.8 Business Information
Schedule 5.10 Certain Changes
Schedule 5.11 Compliance with Laws
Schedule 5.12 Environmental Matters
Schedule 5.13 Taxes
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EXHIBITS
Exhibit A-1 Form of Promissory Note
Exhibit A-2 Form of Promissory Note
Exhibit B Purchaser Suitability Questionnaire
Exhibit C Employment Agreement
Exhibit D Registration Rights Agreement
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of December 8, 1997 by and among
Castle Dental Centers of Texas, Inc., a Texas corporation ("Purchaser"), Steve
W. Lebo, D.D.S., Inc., a Texas professional corporation (the "Company") and
Steve W. Lebo the sole shareholder of the Company (the "Shareholder").
W I T N E S S E T H:
WHEREAS, Company is engaged in the Business and Purchaser is engaged in
the Business of managing certain non-dentistry aspects of dental practices;
WHEREAS, it is intended for federal income tax purposes that the
reorganization contemplated by this Agreement shall qualify as a reorganization
within the meaning of Section 368(a) of the Code;
NOW, THEREFORE, for the mutual covenants and other consideration
described herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto covenant and
agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. As used herein, the following terms have the meanings
set forth below (such meanings to be equally applicable to both the singular and
plural forms of the terms defined):
"ACCOUNTS PAYABLE": the payables of the Company to trade account and
other creditors.
"ACCOUNTS RECEIVABLE": all notes and accounts receivable of the
Company.
"AFFILIATE": with respect to any Person, any other Person directly or
indirectly controlling (including but not limited to all directors and officers
of such Person), controlled by, or under direct or indirect common control with
such Person.
"AGREEMENT": this Agreement and Plan of Merger.
"BUSINESS": the practice management of dentistry and periodontics and
all other management and related activities currently conducted by the Company.
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"BUSINESS DAY": a day other than a Saturday, Sunday or a legal holiday
on which commercial banks are required or authorized to close in the State of
Texas.
"CASTLE PC": Jack H. Castle, D.D.S., P.C., a Texas professional
corporation.
"CLOSING": as defined in Section 2.7 hereof.
"CLOSING BALANCE SHEET DATE": November 30, 1997.
"CLOSING DATE": as defined in Section 2.7 hereof.
"CLOSING DATE BALANCE SHEET": the Balance Sheet dated as of the Closing
Balance Sheet Date.
"CODE": the Internal Revenue Code of 1986, as amended from time to
time, and the regulations promulgated and rulings issued thereunder. Section
references to the Code are to the Code as in effect at the date of this
Agreement and any subsequent provisions of the Code amendatory thereof,
supplemental thereto or substituted therefor.
"COMPANY": as defined in the preamble of the Agreement.
"EMPLOYMENT AGREEMENT": the employment agreement executed pursuant
hereto substantially in the form of Exhibit B attached hereto.
"ENCUMBRANCES": liens, security interests, options, rights of first
refusal, easements, mortgages, charges, debentures, indentures, deeds of trust,
rights-of-way, restrictions, agreements, encroachments, licenses, leases,
permits, security agreements, or any other encumbrances and other restrictions
or limitations on use of real or personal property or irregularities in title
thereto that would have a Material Adverse Effect.
"ENVIRONMENTAL CLAIM": any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violations, investigations or proceedings relating in any way
to any Environmental Law (for purposes of this definition, "Claims"), including
without limitation (i) any and all Claims by governmental or regulatory
authorities for enforcement, cleanup, removal, remedial or other actions of
damages pursuant to any applicable Environmental Law and (ii) any and all Claims
by any third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from Hazardous Materials
or arising from alleged injury or threat of injury to health, safety or the
environment.
"ENVIRONMENTAL LAW": any federal, state or local statute, law, rule,
regulation, ordinance, code, policy or rule of common law now in effect and in
each case as amended and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree
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<PAGE>
or judgment, relating to Hazardous Materials, the environment or health relating
to or arising from environmental conditions, including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended 42 U.S.C. ss. 9601 ET SEQ.; the Hazardous Materials Transportation
Act, as amended, 49 U.S.C. ss. 1801 ET SEQ.; the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. ss. 6901 ET SEQ.; the Federal Water
Pollution Control Act, as amended, 33 U.S.C. ss. 1251 ET SEQ.; the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 ET SEQ.; the Clean Air Act, 42 U.S.C.
ss. 7401 ET SEQ.; the Safe Drinking Water Act, 42 U.S.C. ss. 3808 ET SEQ.; the
Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 ET SEQ.; and relevant state and
local laws.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder. Section references to ERISA are to ERISA as in effect at the date of
this Agreement and any subsequent provisions of ERISA amendatory thereof,
supplemental thereto or substituted therefor.
"FINANCIAL STATEMENTS": as defined in Section 4.7 hereof.
"GAAP": generally accepted accounting principles consistently applied
in the United States of America.
"HAZARDOUS MATERIALS": (i) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, transformers or other equipment that contain
dielectric fluid containing levels of polychlorinated biphenyls, and radon gas;
(ii) any chemicals, materials or substances defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," "contaminants" or "pollutants," or words of similar import
under any applicable Environmental Law; and (iii) any other chemical, material
or substance, exposure to which is prohibited, limited or regulated by an
governmental authority.
"INTELLECTUAL PROPERTY": domestic and foreign patents, patent
applications, registered and unregistered trademarks, service marks, trade names
and logos, registered and unregistered copyrights, computer programs, data
bases, trade secrets and proprietary information relating to the conduct of the
Business.
"KNOWLEDGE": actual knowledge.
"MATERIAL ADVERSE EFFECT": material adverse effect on the assets,
liabilities, business, financial condition, results of operations, of a Person,
taken as a whole.
"PERMITS": as defined in Section 4.13 hereof.
"PERMITTED ENCUMBRANCES": as defined in Section 4.9 hereof.
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"PERSON": any individual, partnership, joint venture, corporation,
trust, unincorporated organization, government or other department or agency
thereof or other entity.
"PLANS": as defined in Section 4.20 hereof.
"PRE-CLOSING PERIODS": as defined in Section 4.15(a) hereof.
"PRICE ALLOCATION": as defined in Section 3.1 hereof.
"PURCHASE PRICE": as defined in Section 3.1 hereof.
"PURCHASER": as defined in the preamble of this Agreement.
"RETURNS": as defined in Section 4.15(a) hereof.
"RELEASE": disposing, discharging, injecting, spilling, leaking,
leaching, dumping, emitting, escaping, emptying, seeping, placing and the like,
into or upon any land or water or air, or otherwise entering into the
environment.
"STOCK": as defined in Section 4.4 hereof.
"TAX": any net income, alternative or add-on minimum tax, advance,
corporation, gross income, gross receipts, sales, use, AD VALOREM, franchise,
profits, license, value added, withholding, payroll, employment, excise, stamp
or occupation tax, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or any penalty imposed by any
governmental authority with respect thereto, and any liability for such amounts
as a result either of being a member of an affiliated group or of a contractual
obligation to indemnify any other entity.
ARTICLE II
THE TRANSACTION
2.1 MERGER. Subject to and upon the terms and conditions contained
herein, on the Closing Date, the Company shall be merged with and into Purchaser
(or its designated affiliate, in which case, the references herein to Purchaser
shall be to such designated affiliate and its shares of common stock) in
accordance with this Agreement and the separate corporate existence of the
Company shall thereupon cease ("Merger"). Purchaser shall be the surviving
corporation in the Merger ("Surviving Corporation") and shall continue to be
governed by the laws of the State of Texas and the separate corporate existence
of Purchaser with all rights, privileges, powers, immunities and purposes shall
continue unaffected by the Merger. The Merger shall have the effects specified
in the Texas Business Corporation Act. If all the conditions to the Merger set
forth herein
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shall have been fulfilled or waived in accordance herewith and this Agreement
shall not have been terminated in accordance herewith, the parties hereto shall
cause to be properly executed and filed on the Closing Date Articles of Merger
for the Company meeting the applicable legal requirements. The Merger shall
become effective on the Closing Date or the filing of such documents, in
accordance with applicable law, or at such later time as the parties hereto have
agreed upon and designated in such merger filings.
2.2 ARTICLES OF INCORPORATION; BYLAWS. The Articles of Incorporation
and Bylaws of Purchaser shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation until duly amended in accordance with their terms.
2.3 DIRECTORS; OFFICERS. The persons who are directors of Purchaser
immediately prior to the effective date of the Merger shall be the directors of
the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws. The persons who are officers of Purchaser immediately prior to the
effective date of the Merger shall be the officers of the Surviving Corporation
and shall hold their respective offices until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal.
2.4 CONVERSION OF COMPANY COMMON STOCK. As a result of the Merger and
without any action on the part of the holder thereof, all shares of the
Company's common stock issued and outstanding on the effective date of the
Merger shall cease to be outstanding and shall be cancelled and retired and
shall cease to exist, and the holder of a certificate representing shares of
Company common stock shall thereafter cease to have any rights with respect to
such shares except the right to receive the consideration set forth in Article
III as the Purchase Price (the "Merger Consideration"). Each share of common
stock of the Company held in treasury at the effective date of the Merger shall
cease to be outstanding and shall be cancelled and retired without payment of
any consideration therefor. On the effective date of the Merger, each share of
Purchaser common stock issued and outstanding shall, by virtue of the Merger,
and without any action on the part of the holder thereof, continue unchanged and
remain outstanding as a share of validly issued, fully paid and nonassessable
Surviving Corporation common stock.
2.5 EXCHANGE OF STOCK CERTIFICATES. On the effective date of the
Merger, the Shareholder, as the holder of a certificate or certificates
representing all outstanding shares of Company common stock, shall, upon
surrender of such certificate or certificates, receive the Merger Consideration.
All shares of Common Stock issuable to the Shareholder in the Merger shall be
deemed for all purposes to have been issued on the Closing Date. The Shareholder
shall deliver to Purchaser at Closing the certificate or certificates
representing the Company common stock owned by him, duly endorsed in blank by
the Shareholder, or accompanied by a duly executed blank stock power, and with
all necessary transfer tax and other revenue stamps, acquired at the
Shareholder's expense, affixed and cancelled.
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2.6 SUBSEQUENT ACTIONS. If, at any time after the Closing Date,
Purchaser shall consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in Purchaser its
right, title or interest in, or under any of the Company's assets or otherwise
to carry out this Agreement, in return for the consideration set forth in this
Agreement, the Company and Shareholder shall execute and deliver all such deeds,
bills of sale, assignments and assurances and take and do all such other actions
and things as may be reasonably necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under the Company's
assets in Purchaser or otherwise to carry out this Agreement.
2.7 CLOSING. Subject to the satisfaction of the conditions to closing
set forth herein, the closing (the "Closing") of the transactions contemplated
hereby shall be held at the offices of Bracewell & Patterson, L.L.P., Houston,
Texas, on or before December 12, 1997, or such other place, date and time as may
be mutually agreed upon by the parties. Such time and date are referred to
herein as the "Closing Date."
ARTICLE III
PAYMENT OF PURCHASE PRICE
3.1 AMOUNT; ALLOCATION; DELIVERY. At the Closing, Purchaser shall pay
to Shareholder the following (the "Purchase Price"):
(a) One Million, Four Hundred Forty-Eight Thousand, Eight
Hundred Twelve Dollars and 50/100 ($1,448,812.50) (the "Cash Amount")
in cash on January 2, 1998. The Cash Amount shall be evidenced by an
interest-free promissory note in substantially the form attached hereto
as Exhibit A-1.
(b) A number of shares of Common Stock, $.001 par value, of
Castle Dental Centers, Inc. ("Castle Dental" or "Parent"), equal to One
Hundred Sixty-Five Thousand (165,000 shares). Such shares (the "Castle
Dental Shares") shall be issued in the name of Steve W. Lebo, D.D.S. in
his individual capacity.
3.2 ADDITIONAL CONTINGENT PURCHASE PRICE CONSIDERATION. Shareholder
shall be eligible to receive additional consideration for the Merger as follows:
(a) In the event that the earnings attributable to the
Business operations of the Company before interest, taxes, depreciation
and amortization, excluding any general corporate overhead allocation
or charges with respect to general and administrative expenses of
Castle Dental or Purchaser, but including a cost of capital charge for
the interest expense associated with the outstanding indebtedness of
the Company as of the Closing Date and the
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build-out and equipment pursuant to the Company's planned expansion
into the new dental center in North Richland Hills, Texas ("EBITDA")
for the period commencing January 1, 1998, and ending as of the close
of business on December 31, 1998 (the "1998 Fiscal Year") exceeds
$750,000 (the "Excess Amount"), Shareholder shall be entitled to
receive, as an addition to the Purchase Price and not as compensation,
an amount equal to the product determined by multiplying the Excess
Amount by 4.25 (the "Earnout Amount"); provided, however, that in no
event shall the Earnout Amount exceed $500,000. At the option of
Purchaser, to be determined by Purchaser prior to the end of the 1998
Fiscal Year, the Earnout Amount shall be payable in cash or by the
delivery by Purchaser to Shareholder of a note in the form of Exhibit
A-2 attached hereto (the "Note"). The Earnout Amount shall be due and
payable to Shareholder on or before, but not later than, March 31,
1999.
(b) EBITDA, the Excess Amount and the Earnout Amount for the
1998 Fiscal Year shall be calculated by Purchaser's Chief Financial
Officer or Treasurer (the "Purchaser's Accountant"). The operations of
the Company, the books and records, and the accounting systems and
procedures utilized in connection therewith, shall be maintained in a
manner so as to enable EBITDA, the Excess Amount and the Earnout Amount
for the 1998 Fiscal Year to be determined. Within forty-five (45)
calendar days of the close of the 1998 Fiscal Year, Purchaser will
prepare and deliver to Shareholder an income statement as of the close
of the 1998 Fiscal Year (the "1998 Fiscal Year Income Statement")
showing the computation of EBITDA for the 1998 Fiscal Year, computed in
accordance with the provisions set forth herein. The 1998 Fiscal Year
Income Statement will be prepared, and EBITDA as set forth on such
income statement will be determined, in accordance with GAAP (to the
extent applicable to such calculation) applied on a basis consistent
with that theretofore used in, and in accordance with the same
accounting principles theretofore applied on an historical basis in,
the preparation of the Company's financial statements for the period
prior to the Closing Date. The 1998 Fiscal Year Income Statement shall
also set forth the calculations of the Excess Amount and the Earnout
Amount computed in accordance with the provisions set forth herein.
Within fifteen (15) calendar days following receipt of the 1998 Fiscal
Year Income Statement, Shareholder shall notify Purchaser in writing as
to whether Shareholder agrees with the calculations of EBITDA, the
Excess Amount and the Earnout Amount as calculated by Purchaser's
Accountant. In the event Shareholder does not agree with such
calculations, or to the extent Shareholder does not agree with such
calculations, the 1998 Fiscal Year Income Statement shall be reviewed
by Coopers & Lybrand, L.L.P., or any successor entity thereto (the
"Independent Accountants") who shall determine EBITDA, the Excess
Amount and the Earnout Amount to the extent disputed by Shareholder. If
the Shareholder does not provide the foregoing notice within said
fifteen (15) day period or to the extent Shareholder does not disagree
with any of the calculations made by the Purchaser's Accountant, such
financial statements or calculations, as the case may be, shall be
deemed accepted by the Shareholder. Such 1998 Fiscal Year Income
Statement shall be reviewed by the Independent Accountants and shall
include a schedule prepared by the Independent Accountants showing such
of the computations of EBITDA, the Excess Amount and the
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Earnout Amount disputed by Shareholder. In determining EBITDA, the
Excess Amount and the Earnout Amount for the 1998 Fiscal Year, the 1998
Fiscal Year Income Statement and the accompanying schedules setting
forth EBITDA, the Excess Amount and the Earnout Amount, as prepared by
the Independent Accountants, shall be conclusive on the parties as to
whether any Earnout Amount is payable with respect to the 1998 Fiscal
Year.
(c) Within fifteen (15) calendar days after receipt by
Purchaser and Shareholder of the 1998 Fiscal Year Income Statement
pursuant to which the Earnout Amount is payable, such Earnout Amount
shall be payable to Shareholder either in cash or by delivery of the
Note.
3.3 AGENCY RELATIONSHIP. In the event that, following the Closing Date,
the Shareholder receives any funds, documents or instruments which constitute or
are delivered in respect of the dental operations of the Company, the
Shareholder agrees to hold such funds, documents or instruments in trust for
Purchaser and as Purchaser's agent therefor.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE SHAREHOLDER
4.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SHAREHOLDER.
As an inducement to the Purchaser to enter into and perform this Agreement, the
Company and the Shareholder, jointly and severally, hereby represent and warrant
to Purchaser as follows:
4.2 EXISTENCE AND GOOD STANDING. The Company is a professional
corporation duly organized and validly existing under the laws of the State of
Texas. The Company has all requisite corporate power and authority to own, lease
and operate its property and to carry on the Business as now being conducted.
The Company is duly qualified or licensed to do business in each jurisdiction in
which the character or location of the properties owned or leased by the Company
or the nature of the business conducted by the Company makes such qualification
necessary, except where the failure to be so qualified or licensed would not
have a Material Adverse Effect on the Company.
4.3 AUTHORIZATION AND VALIDITY OF AGREEMENT. The Company has all
requisite corporate power and authority, and the Shareholder has all requisite
power and authority, to execute and deliver this Agreement, to perform their
respective obligations hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by the Company
and the consummation by it of the transactions contemplated hereby, have been
duly authorized and approved by the Board of Directors and the Shareholder of
the Company, and no other action on the part of the Company or its Shareholder
is necessary to authorize the execution, delivery and performance of this
Agreement by the Company and the consummation of the
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transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company and the Shareholder and is a valid and binding
obligation of the Company and the Shareholder enforceable against each in
accordance with its terms, except to the extent that its enforceability may be
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles.
4.4 CAPITAL STOCK. The authorized capital stock of the Company consists
solely of 1,000 shares of common stock the ("Stock") of which 1,000 shares have
been issued, and are outstanding, all of which are owned by the Shareholder. All
of the shares of common stock of the Company have been duly and validly
authorized and issued, and are fully paid and nonassessable and free of any
liens or encumbrances.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. Except as set forth on
Schedule 4.5, the execution, delivery and performance of this Agreement by the
Company and the Shareholder and the consummation by the Company and the
Shareholder of the transactions contemplated hereby will not, with or without
the giving of notice or the lapse of time or both: (a) violate, conflict with,
or result in a breach or default under any provision of the organizational
documents of the Company; (b) to the knowledge of the Company and Shareholder,
violate any statute, ordinance, rule, regulation, order, judgment or decree of
any court or of any governmental or regulatory body, agency or authority
applicable to the Company or the Shareholder or by which any of their respective
properties or assets may be bound; (c) to the knowledge of the Company and
Shareholder, require any filing by the Company or the Shareholder with, or
require the Company or the Shareholder to obtain any permit, consent or approval
of, or require the Company or the Shareholder to give any notice to, any
governmental or regulatory body, agency or authority other than as set forth on
Schedule 4.5 attached hereto, except where the failure to make any such filing,
give any such notice or obtain any such permit, consent or approval would not
have a Material Adverse Effect on the Company; or (d) result in a violation or
breach by the Company or the Shareholder of, conflict with, constitute (with or
without due notice or lapse of time or both) a default by the Company or the
Shareholder (or give rise to any right of termination, cancellation, payment or
acceleration) under or result in the creation of any Encumbrance upon any of the
properties or assets of the Company or the Shareholder under any of the terms,
conditions, or provisions of any note, bond, mortgage, indenture, license,
franchise, permit, agreement, lease franchise agreement or other instrument or
obligation to which the Company or the Shareholder is a party, or by which the
Company or any of its properties or assets may be bound, which would have a
Material Adverse Effect on the Company.
4.6 SUBSIDIARIES AND AFFILIATES. Except as set forth on Schedule 4.6,
the Company has no subsidiaries and has not conducted business under any other
name except its legal name in its articles of incorporation. Except as set forth
on Schedule 4.6, the Company does not own, of record or beneficially, or
control, directly or indirectly, any capital stock, securities convertible into
capital stock or any other equity interest in any corporation, association or
other business entity, and the
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Company is not, directly or indirectly, a participant in any joint venture,
partnership or other non-corporate entity.
4.7 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. The Company has
heretofore furnished Purchaser with the unaudited balance sheet of the Company
as of the Closing Balance Sheet Date (the "Closing Date Balance Sheet") and the
unaudited statements of operations and cash flows for the period then ended
described on Schedule 4.7 (together with the Closing Date Balance Sheet, the
"Company Financial Statements"). The Financial Statements fairly present in all
material respects the financial position of the Company at the date thereof and
the results of operations of the Company and its cash flows for the period
indicated. Except as set forth on Schedule 4.7, since the Closing Balance Sheet
Date there has been no material adverse change in the assets or liabilities, or
in the business or financial condition or in the results of operations of the
Company.
Other than as (i) disclosed on the Financial Statements, (ii) incurred
since the Closing Balance Sheet Date in the ordinary course of business or (iii)
disclosed on Schedule 4.7 or another Schedule hereto, the Company has no direct
or indirect indebtedness, liability, claim, deficiency, obligation or
responsibility, known or unknown, fixed or contingent, liquidated or
unliquidated, accrued, absolute or otherwise.
4.8 BOOKS AND RECORDS. The Company has previously made available to
Purchaser true, correct and complete copies of its articles of incorporation and
bylaws, and all amendments to each. The minute book of the Company, as
previously made available to Purchaser and its representatives, contains
accurate records in all material respects of the meetings of the shareholders
and Board of Directors of the Company.
4.9 TITLE TO PROPERTIES; ENCUMBRANCES; CONDITION. Except as set forth
on Schedule 4.9, and except for properties and assets reflected in the Company
Financial Statements or acquired since the Closing Balance Sheet Date which have
been sold or otherwise disposed of in the ordinary course of business, the
Company has good and valid title to its assets, subject to no Encumbrances
except for (i) Encumbrances consisting of easements, permits and other
restrictions or limitations on the use of real property or irregularities in
title thereto that do not materially detract from the value of, or materially
impair the use of, such property by the Company in the operation of the
Business, (ii) Encumbrances for current taxes, assessments or governmental
charges or levies on property not yet due or delinquent, (iii) Encumbrances
created by Purchaser, or (iv) Encumbrances which would not reasonably be
expected to have a Material Adverse Effect on the Company (Encumbrances of the
type described in clauses (i), (ii), (iii) and (iv) above are hereinafter
sometimes referred to as "Permitted Encumbrances"). The Company has heretofore
furnished Purchaser with a fixed asset ledger which sets forth all fixed assets
owned by the Company as of the Closing Balance Sheet Date. To the knowledge of
the Company and the Shareholder, there are no defects in such assets that would
have a Material Adverse Effect on the ability of Purchaser to use such assets in
the ordinary course of its Business, ordinary wear and tear excepted.
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4.10 REAL PROPERTY. Schedule 4.10 identifies all interests in real
property (the "Property") owned or used by the Company in the Business,
including leases, and includes the name of the record title holder thereof. All
of the buildings, structures and appurtenances situated on the Property owned by
the Company and the premises leased by the Company are in good operating
condition sufficient for their intended use, and in a state of good maintenance
and repair, subject to ordinary wear and tear and except where the failure to be
maintained or the sufficiency of the condition would not have a Material Adverse
Effect on the Company. The Property has adequate rights of ingress and egress
for operation of the Business in the ordinary course. No condemnation or similar
proceeding is pending or, to the knowledge of the Company and the Shareholder,
threatened, which would preclude or impair the use of any such property, except
where such proceeding would not have a Material Adverse Effect on the Company.
4.11 LEASES. Schedule 4.11 contains an accurate and complete list of
all material personal property leases to which the Company is a party (as lessee
or lessor). Copies of each of such leases have been made available to Purchaser.
Each lease set forth on Schedule 4.11 is in full force and effect, and no event
has occurred that with the giving of notice, the passage of time or both would
constitute a default thereunder except for any default which would not have a
Material Adverse Effect on the Company.
4.12 MATERIAL CONTRACTS. Schedule 4.12 contains an accurate and
complete list of all material contracts, commitments and similar agreements to
which the Company is a party or by which it or any of its properties are bound
(including but not limited to, contracts with significant customers, joint
venture or partnership agreements, contracts with any labor organizations,
strategic alliances and options to purchase land). Except as set forth on
Schedule 4.12, none of such contracts include (a) any agreement, contract or
commitment relating to the employment of any person by the Company, (b) any
agreement, indenture or other instrument which contains restrictions with
respect to payment of profits, dividends or any other distributions, (c) any
agreement, contract or commitment relating to capital expenditures in excess of
$5,000; (d) any loan or advance to, or investment in, any Person or any
agreement, contract or commitment relating to the making of any such loan,
advance or investment, (e) any guarantee or other contingent liability in
respect of any indebtedness or obligation of any Person, (f) any management
service, consulting or any other similar type contract, (g) any agreement,
contract or commitment limiting the freedom of the Company to engage in any line
of business or to compete with any Person, or (h) any agreement, contract or
commitment which involves $5,000 or more and is not cancelable without penalty
within 30 days. Also set forth on such Schedule 4.12 is a list of all proposals
submitted by the Company to any third party that, if accepted by such third
party, would require disclosure on Schedule 4.12. Except where it would not have
a Material Adverse Effect on the Company, each contract or agreement set forth
on Schedule 4.12 is in full force and effect except for any contracts or leases
described thereon which expire by their terms prior to the Closing and there
exists no default or event of default or event, occurrence, condition or act
(including the Merger hereunder) which, with the giving of notice, the lapse of
time or the happening of any other event or condition, would
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become a default or event of default thereunder except for any such default,
event of default, event, occurrence, condition or act which would not have a
Material Adverse Effect on the Company.
4.13 PERMITS. Schedule 4.13 lists all of the material governmental and
other third party permits (including occupancy permits), licenses, consents and
authorizations ("Permits") required, to the knowledge of the Company and the
Shareholder, in connection with the use, operation or ownership of the Company's
assets and the conduct of the Business as currently conducted. The Company or
Shareholder holds all of the Permits listed on Schedule 4.13, and none is
presently subject to revocation or challenge except for those Permits which
expire by their terms prior to the Closing or which if revoked would not have a
Material Adverse Effect on the Company. Except as set forth on Schedule 4.13,
all such Permits will be assignable by the Company to Purchaser or Castle PC
pursuant to Section 7.9 of the Agreement.
4.14 LITIGATION. Except as set forth on Schedule 4.14, there is no
action, suit, proceeding at law or in equity, arbitration or administrative or
other proceeding by or before (or any investigation by) any governmental or
other instrumentality or agency, pending, or, to the knowledge of the Company
and the Shareholder, threatened, against or affecting the properties, rights or
goodwill of the Company, the Shareholder, or employees of the Company, and the
Company and the Shareholder do not know of any valid basis for any such action,
proceeding or investigation which, if determined adversely to the Company, would
have a Material Adverse Effect on the Company. There are no such suits, actions,
claims, proceedings or investigations pending or to the knowledge of the Company
and the Shareholder threatened, seeking to prevent or challenge the transactions
contemplated by this Agreement. Schedule 4.14 also describes any actions, suits,
disciplinary proceedings and investigations undertaken by the Dental Board of
the State of Texas, or other body regulating the activities of dentists, against
the Company, the Shareholder or any employee of the Company or the Shareholder.
4.15 TAXES. (a) Except as set forth on Schedule 4.15, all returns and
reports for Taxes for all taxable years or periods that end on or before the
Closing Date and, with respect to any taxable year or period beginning before
and ending after the Closing Date the portion of such taxable year or period
ending on and including the Closing Date ("Pre-Closing Periods"), which are
required to be filed by or with respect to the Company (collectively, the
"Returns") have been or will be filed when due in a timely fashion and such
Returns as filed are or will be accurate in all material respect except where
the failure to file any of the Returns in a timely fashion would not have a
Material Adverse Effect on the Company.
(b) Except as set forth on Schedule 4.15, there is no material
action, suit, proceeding, investigation, audit, or claim now pending or, to the
knowledge of the Company or the Shareholder, threatened by any authority
regarding any Taxes relating to the Company for any Pre-Closing Period.
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(c) There are no liens or security interests outstanding on
any of the assets of the Company that arose in connection with any failure (or
alleged failure) to pay any Taxes.
(d) Except as set forth on Schedule 4.15, there are no
agreements for the extension or waiver of the time for assessment of any Taxes
relating to the Company for any Pre-Closing Period and the Company has not been
requested to enter into any such agreement or waiver.
(e) All Taxes relating to the Company which the Company is
required by law to withhold or collect have been duly withheld or collected, and
have been timely paid over to the proper authorities to the extent due and
payable.
(f) The Company is not now nor has ever been a party to any
Tax allocation or sharing agreement that would result in any liability to
Purchaser.
4.16 INSURANCE. Schedule 4.16 sets forth a complete list of insurance
policies that the Company maintains with respect to its Business and properties
or on its employees. Such policies are in full force and effect except for those
policies which by their terms expire prior to the Closing. In the judgment of
the Company, such policies, with respect to their amounts and types of coverage,
are adequate to insure against risks to which the Company and its property and
assets are normally exposed in the operation of the Business, subject to
customary deductibles and policy limits.
4.17 INTELLECTUAL PROPERTIES. Schedule 4.17 sets forth all material
Intellectual Property used in the Business and the owner of such Intellectual
Property. To the knowledge of the Company and the Shareholder, the operation of
the Business as conducted by the Company as of the Closing Date requires no
rights under Intellectual Property other than rights under Intellectual Property
listed on Schedule 4.17 and rights granted to the Company pursuant to agreements
listed on Schedule 4.17 except where the failure to obtain such rights would not
have a Material Adverse Effect on the Company. Except as otherwise set forth on
Schedule 4.17, the Company owns all right, title and interest in the
Intellectual Property listed on Schedule 4.17. No litigation is pending or, to
the knowledge of the Company or the Shareholder, threatened wherein the Company
is accused of infringing or otherwise violating the Intellectual Property rights
of another, or of breaching a contract conveying rights under Intellectual
Property.
4.18 COMPLIANCE WITH LAWS. The Company is in compliance in all material
respects with all applicable laws, regulations, orders, judgments and decrees
applicable to the Business except for non-compliance which would not have a
Material Adverse Effect on the Company.
4.19 EMPLOYMENT RELATIONS. (a) The Company is not now engaging and has
not engaged in any unfair labor practice; (b) to the knowledge of the Company
and the Shareholder, no representation question exists respecting the employees
of the Company; (c) the Company has not been notified of any grievance that
would have a Material Adverse Effect on the Company and no
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arbitration proceeding arising out of or under any collective bargaining
agreement is pending; and (f) no collective bargaining agreement is currently
being negotiated by the Company.
4.20 EMPLOYEE BENEFIT PLANS. The Company has delivered or made
available to Purchaser true and complete copies of all employee benefit plans,
policies, programs and arrangements and all related contracts, agreements and
other descriptions thereof with respect to the employee benefits provided to the
employees of the Business prior to the Closing Date (the "Plans"). Each of the
Plans has, to the knowledge of the Company and the Shareholder, been maintained
in compliance with its terms and the requirements of all applicable laws except
for non-compliance which would not have a Material Adverse Effect on the
Company. None of the Plans are subject to Title IV of ERISA or the minimum
funding obligations of Section 412 of the Code, and the Company and any entity
required to be aggregated therewith pursuant to Section 414(b) or (c) of the
Code have no liability under Title IV of ERISA or under Section 412(f) or 412(n)
of the Code.
4.21 ENVIRONMENTAL LAWS AND REGULATIONS. Except as set forth in
Schedule 4.21, and except where it would not have a Material Adverse Effect on
the Company (a) Hazardous Materials have not been generated, used, treated or
stored on, or transported to or from, any Company Property or any property
adjoining any Company Property by the Company, its employees or, to the
knowledge of the Company and the Shareholder, its authorized agents or its
independent contractors (including suppliers), (b) Hazardous Materials have not
been Released or disposed of by the Company, its employees or, to the knowledge
of the Company and the Shareholder, its authorized agents or its independent
contractors (including suppliers) on any Company Property or any property
adjoining any Company Property except such Releases which do not violate any
Environmental Laws, (c) the Company is, to its and the Shareholder's knowledge,
in compliance with all applicable Environmental Laws and the requirements of any
Permits issued under such Environmental Laws with respect to any Company
Property, (d) there are no pending or, to the knowledge of the Company and the
Shareholder, threatened Environmental Claims against the Company or any Company
Property, (e) there are no facts or circumstances, conditions, pre-existing
conditions or occurrences on any Company Property known to the Company or the
Shareholder that could reasonably be anticipated (A) to form the basis of an
Environmental Claim against the Company or any Company Property, or (B) to cause
such Company Property to be subject to any restrictions on the ownership,
occupancy use or transferability of such Company Property under any
Environmental Law, (f) there are not now, and to the knowledge of the Company
and the Shareholder, there never have been any underground storage tanks located
on any Company Property, and (g) the Company has not in the ordinary course of
business transported or stored Hazardous Materials.
4.22 INTERESTS IN CUSTOMERS, SUPPLIERS, ETC. Except for relationships
with Affiliates or as set forth on Schedule 4.22, the Company does not possess,
directly or indirectly, any financial interest in, and the Shareholder does not
serve as a director, officer or employee of, any corporation, firm, association
or business organization which is a supplier, customer, lessor, lessee, or
competitor of the Company.
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4.23 COMPENSATION OF EMPLOYEES. Set forth on Schedule 4.23 is an
accurate and complete list showing the names of all current employees of the
Company whose compensation from the Company during the current fiscal year
exceeded an annualized rate of $20,000, together with a statement of the full
amount paid or payable to each such person for services rendered during the
current fiscal year to date.
4.24 PAYORS. Schedule 4.24 sets forth the eight largest payors of the
Company for the most recently completed fiscal year. The relationship of the
Company with each of such payors as of the date of this Agreement is a good
commercial working relationship, and except as set forth on Schedule 4.24 no
significant payor has canceled or otherwise terminated or, to the knowledge of
the Company or the Shareholder, threatened to cancel or otherwise terminate its
relationship with the Company within the last three years.
4.25 ACCOUNTS RECEIVABLE; ACCOUNTS PAYABLE. Except as set forth on
Schedule 4.25, the Accounts Receivable on the Closing Date Balance Sheet are
collectible in the ordinary course of business, net of the reserves established
with respect thereto. Except as set forth on Schedule 4.25, there has been no
material adverse change since the Closing Balance Sheet Date (other than in the
ordinary course of business) in the amount of the Accounts Receivable or other
fees or debts due to the Company or the allowances with respect thereto, or any
material adverse change in Accounts Payable by the Company, from that reflected
in the Closing Date Balance Sheet.
4.26 INVESTMENTS. The assets of the Company do not include any capital
stock or other equity ownership or proprietary interest in any other
corporation, partnership, association, trust, joint venture or other entity.
4.27 BROKER'S OR FINDER'S FEES. Except for a broker's fee payable by
Shareholder, no agent, broker, Person or firm acting on behalf of the Company
is, or will be, entitled to any fee, commission or broker's or finder's fees
from the Company or Shareholder in connection with this Agreement or any of the
transactions contemplated hereby.
4.28 COPIES OF DOCUMENTS. The Company has caused to be made available
for inspection and copying by Purchaser and its advisers, true, complete and
correct copies of all documents referred to in this Article IV or in any
Schedule attached hereto.
4.29 INVESTMENT REPRESENTATIONS.
(a) Shareholder understands that the Castle Dental Shares have
not been registered under the Securities Act of 1933, as amended (the
"Securities Act"). Shareholder also understands that the Castle Dental
Shares are being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon his
representations contained in this Agreement.
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(b) Shareholder, in consultation with his accountants,
attorneys and financial advisors has, the requisite experience in
evaluating and investing in private placement transactions of
securities so that he is capable of evaluating the merits and risks of
his investment in Castle Dental and has the capacity to protect his own
interests. Shareholder understands that he must bear the economic risk
of this investment indefinitely unless the Castle Dental Shares are
registered pursuant to the Securities Act, or an exemption from
registration is available. Shareholder also understands that there is
no assurance that any exemption from registration under the Securities
Act will be available and that, even if available, such exemption may
not allow him to transfer all or any portion of the Castle Dental
Shares under the circumstances, in the amounts or at the times it might
propose.
(c) Shareholder is acquiring the Castle Dental Shares for his
own account for investment only, and not with a view towards
distribution.
(d) Shareholder represents that by reason of his business or
financial experience, he has the capacity to protect his own interests
in connection with the transactions contemplated in this Agreement.
(e) Shareholder represents that he is an accredited investor
within the meaning of Regulation D under the Securities Act.
(f) Shareholder has truthfully completed and delivered to
Castle Dental a Purchaser Suitability Questionnaire in the form
attached hereto as Exhibit B.
4.30 DUE DILIGENCE. The Company and Shareholder have had reasonable
access to the records and management of Castle Dental and Purchaser, and have
satisfactorily completed their due diligence review of Castle Dental and
Purchaser and have determined from such review that nothing materially and
adversely affects their appraisal of the business, prospects and financial
condition of Castle Dental.
4.31 DISCLAIMER. No other representations or warranties of the Company
or Shareholder are made or given and all such representations and warranties are
disclaimed.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF PURCHASER
5.1 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents
and warrants to the Shareholder as follows:
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5.2 EXISTENCE AND GOOD STANDING OF PURCHASER; POWER AND AUTHORITY.
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas. Purchaser has full corporate power and
authority to make, execute, deliver and perform this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized and approved by all required corporate
action of Purchaser. This Agreement has been duly executed and delivered by
Purchaser and is a valid and binding obligation of Purchaser enforceable against
Purchaser in accordance with its terms, except to the extent that its
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles. Purchaser is
duly qualified and licensed to do business and is in good standing in each
jurisdiction in which the character or location of its properties or the leasing
of its assets or the nature of its business makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
would not have a Material Adverse Effect on Purchaser. No other action on the
part of Purchaser is necessary to authorize the execution, delivery and
performance of this agreement by Purchaser and the consummation of the
transactions contemplated hereby.
5.3 NO VIOLATIONS. The execution, delivery and performance of this
Agreement by Purchaser and the consummation by Purchaser of the transactions
contemplated hereby will not, with or without the giving of notice or the lapse
of time or both; (a) violate, conflict with, or result in a breach or default
under any provision of the certificate of incorporation or by-laws of Purchaser;
(b) to the knowledge of Purchaser, violate any statute, ordinance, rule,
regulation, order, judgment or decree of any court or of any governmental or
regulatory body, agency or authority applicable to Purchaser or by which any of
its properties or assets may be bound; (c) to the knowledge of Purchaser,
require any filing by Purchaser with, or require Purchaser to obtain any permit,
consent or approval of, or require Purchaser to give any notice to, any
governmental or regulatory body, agency or authority or any third party; or (d)
result in a violation or breach by Purchaser of, conflict with, constitute (with
or without due notice or lapse of time or both) a default by Purchaser (or give
rise to any right of termination, cancellation, payment or acceleration) under,
or result in the creation of any Encumbrance upon any of the properties or
assets of Purchaser pursuant to, any of the terms, conditions or provision of
any note, bond, mortgage, indenture, license, franchise, permit, agreement,
lease, franchise agreement or other instrument or obligation to which Purchaser
is a party, or by which it or any of its properties or assets may be bound,
except in the case of Subsections 5.3(b), (c), and (d), for such violations,
consents, breaches, defaults, terminations and accelerations which in the
aggregate would not have a Material Adverse Effect.
5.4 CAPITAL STOCK. The authorized capital stock of Castle Dental
consists solely of 30,000,000 shares of Castle Dental Common Stock of which
6,064,239 shares have been issued, and 5,000,000 shares of Castle Dental
Preferred Stock, $.001 par value per share ("Preferred Stock"), of which 119,231
shares have been issued. All of the Castle Dental Shares of Castle Dental
delivered pursuant to Section 3.1 hereof have been duly and validly authorized,
and, upon issuance and
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delivery to Shareholder, will be validly issued, fully paid, nonassessable and
free of any liens or Encumbrances.
5.5 LITIGATION. There is no action, suit, proceeding at law or in
equity, arbitration or administrative or other proceeding by or before (or any
investigation by) any governmental or other instrumentality or agency, pending,
or, to the knowledge of Purchaser, threatened, against or affecting the
properties, rights or goodwill of Castle Dental, Purchaser or their employees,
except where such Proceeding would not have a Material Adverse Effect on the
assets, liabilities, business, condition (financial or otherwise), results of
operations or prospects of Castle Dental or Purchaser, and Purchaser does not
know of any valid basis for any such action, proceeding or investigation. There
are no such Proceedings pending or, to the knowledge of Purchaser, threatened,
seeking to prevent or challenge the transactions contemplated by this Agreement.
5.6 FINANCIAL STATEMENTS. The audited financial statements of Castle
Dental as of December 31, 1996, and the financial statements of Purchaser
described on Schedule 5.6 (collectively, the "Purchaser Financial Statements"),
are complete and correct in all material respects and present fairly in
accordance with generally accepted accounting principles consistently applied,
the respective financial condition of Castle Dental and Purchaser and the
results of their respective operations as of the dates thereof and for the
periods indicated.
5.7 BROKER'S OR FINDER'S FEES. No agent, broker, Person or firm acting
on behalf of Purchaser is, or will be, entitled to any fee, commission or
broker's or finder's fee in connection with this Agreement or any of the
transactions contemplated hereby.
5.8 BUSINESS INFORMATION. Parent has delivered to Shareholder accurate
and complete copies of the information with respect to Parent and Purchaser set
forth on Schedule 5.8 (collectively the "Business Information"). As of the date
hereof, the information contained in the Business Information is true and
correct in all material respects and does not omit any material fact necessary
to be stated therein or required to be stated therein in order to make any
statement contained therein not misleading.
5.9 SEC FILINGS. Parent has timely made all filings with the SEC
pursuant to the provisions of the Securities Act and the Securities Exchange Act
of 1934 (the "Exchange Act") (collectively the "Public Reports"). Each of the
Public Reports complies in all material respects with the Securities Act and the
Exchange Act, including but without limitation, the current public information
requirements set forth in Rule 144 of the Securities Act. None of the Public
Reports, as of their respective dates, contains any untrue statement of any
material fact or omits to state material fact necessary in order to make any
statements made therein, in light of the circumstances under which they were
made, not misleading. Parent has delivered to Shareholder a correct and complete
copy of each Public Report (together with all exhibits and schedules thereto and
as amended to date).
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5.10 ABSENCE OF CERTAIN CHANGES. Except as disclosed on Schedule 5.10,
since the date of the latest of the Purchaser Financial Statements (i) there has
not been any material adverse change in Parent or Purchaser, or any event or
condition that might reasonably be expected to result in any material adverse
change in Parent or Purchaser; (ii) Parent's and Purchaser's business has been
conducted only in the ordinary course consistent with past practice; or (iii)
neither Parent nor Purchaser has suffered any material loss, damage, destruction
or other casualty to any of their respective assets (whether or not covered by
insurance).
5.11 COMPLIANCE WITH LAWS. Except as set forth on Schedule 5.11,
Purchaser has complied in all material respects with all applicable laws
relating to the ownership or operation of its assets and properties or the
operation of its business, except for noncompliance with such applicable laws
which would not have a Material Adverse Effect on Purchaser. Purchaser is not
charged or, to the knowledge of Purchaser, threatened with, or, under
investigation with respect to, any violation of any applicable laws relating to
any aspect of the ownership or operation of its assets or the operation of its
business.
5.12 ENVIRONMENTAL LAWS AND REGULATIONS. Except as set forth on
Schedule 5.12, and except where it would not have a Material Adverse Effect on
the Purchaser (a) Hazardous Materials have not been generated, used, treated or
stored on, or transported to or from, any Purchaser property or any property
adjoining any Purchaser property by the Purchaser, its employees or, to the
knowledge of the Purchaser, its authorized agents or its independent contractors
(including suppliers), (b) Hazardous Materials have not been Released or
disposed of by the Purchaser, its authorized agents or its independent
contractors (including suppliers) on any Purchaser property or any property
adjoining any Purchaser property except such Releases which do not violate any
Environmental Laws, (c) the Purchaser is, to its knowledge, in compliance with
all applicable Environmental Laws and the requirements of any Permits issued
under such Environmental Laws with respect to any Purchaser property, (d) there
are no pending or, to the knowledge of the Purchaser, threatened Environmental
Claims against the Purchaser or any Purchaser property, (e) there are no facts
or circumstances, conditions, pre-existing conditions or occurrences on any
Purchaser property known to the Purchaser that could reasonably be anticipated
(A) to form the basis of an Environmental Claim against the Purchaser or any
Purchaser property, or (B) to cause such Purchaser property to be subject to any
restrictions on the ownership, occupancy use or transferability of such
Purchaser property under any Environmental Law, (f) there are not now and there
never have been any underground storage tanks located on any Purchaser property,
and (g) the Purchaser has not in the ordinary course of business transported or
stored Hazardous Materials.
5.13 TAXES. (a) Except as set forth on Schedule 5.13, all returns and
reports for Taxes for all Pre-Closing Periods, which are required to be filed by
or with respect to the Purchaser and Parent (collectively, the "Purchaser
Returns") have been or will be filed when due in a timely fashion and such
Purchaser Returns as filed are or will be accurate in all material respect
except where the failure to file any of the Purchaser Returns in a timely
fashion would not have a Material Adverse Effect on the Parent or Purchaser.
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(b) Except as set forth on Schedule 5.13, there is no material
action, suit, proceeding, investigation, audit, or claim now pending or, to the
knowledge of the Purchaser, threatened by any authority regarding any Taxes
relating to the Purchaser or Parent for any Pre-Closing Period.
(c) There are no liens or security interests outstanding on
any of the assets of the Purchaser or Parent that arose in connection with any
failure (or alleged failure) to pay any Taxes.
(d) Except as set forth on Schedule 5.13, there are no
agreements for the extension or waiver of the time for assessment of any Taxes
relating to the Purchaser or Parent for any Pre-Closing Period and neither the
Purchaser nor Parent has been requested to enter into any such agreement or
waiver.
(e) All Taxes relating to the Purchaser or Parent which the
Purchaser or Parent is required by law to withhold or collect have been duly
withheld or collected, and have been timely paid over to the proper authorities
to the extent due and payable.
(f) Neither Purchaser nor Parent is now or has ever been a
party to any Tax allocation or sharing agreement that would result in any
liability to Purchaser or Parent.
5.14 DISCLAIMER. No other representations or warranties of the
Purchaser are made or given and all such representations and warranties are
disclaimed.
ARTICLE VI
CONDITIONS TO THE SHAREHOLDER'S OBLIGATIONS
The obligations of the Shareholder under this Agreement to consummate
the Merger and the other transactions contemplated hereby shall be subject to
the satisfaction (or waiver by the party entitled to performance) on or prior to
the Closing Date of all of the following conditions:
6.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser contained in this Agreement shall be true and correct in
all material respects on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of the
Closing Date, and Purchaser shall have delivered to the Shareholder on the
Closing Date a certificate of an authorized officer of Purchaser, dated the
Closing Date, to such effect.
6.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of Purchaser to be performed on or before the Closing Date pursuant to
the terms hereof shall have been duly performed in all material respects, and
Purchaser shall have delivered to the Shareholder a certificate of an authorized
officer of Purchaser, dated the Closing Date, to such effect.
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6.3 NO LITIGATION THREATENED. No action or proceedings shall have been
instituted before a court or other governmental body or by any public authority
to restrain or prohibit any of the transactions contemplated hereby, and
Purchaser shall have delivered to the Shareholder a certificate of an authorized
officer of Purchaser, dated the Closing Date, to such effect to the knowledge of
such officer.
6.4 CONSIDERATION. The Shareholder shall have received the Purchase
Price described in Section 3.1.
6.5 GOVERNMENTAL APPROVALS. All governmental consents and approvals, if
any, necessary to permit the consummation of the transactions contemplated by
this Agreement shall have been received.
6.6 PROCEEDINGS. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to the Shareholder and
his counsel, and the Shareholder shall have received copies of all such
documents and other evidence as his or his counsel may reasonably request in
order to establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
6.7 GOOD STANDING CERTIFICATES. The Shareholder shall have received
good standing and corporate existence certificates respecting Purchaser and
Castle Dental.
6.8 EMPLOYMENT AGREEMENT. Shareholder and Castle PC shall have entered
into an Employment Agreement, substantially in the form of Exhibit C (the
"Employment Agreement").
6.9 REGISTRATION RIGHTS AGREEMENT. Shareholder and Castle Dental shall
have entered into the Registration Rights Agreement, substantially in the form
of Exhibit D (the "Registration Rights Agreement").
6.10 NO MATERIAL ADVERSE CHANGE. Except as disclosed in this Agreement
or in any of the schedules to the Parent Disclosure Letter, since the latest of
the Purchaser Financial Statements, there shall be no event, circumstance or
condition which, individually or in the aggregate, could have a Material Adverse
Effect on either Parent or Purchaser.
6.11 RESOLUTIONS. Shareholder shall have received copies of the
resolutions of the boards of directors of Parent and Purchaser authorizing the
execution, delivery and performance by Purchaser of this Agreement, the other
agreements to be executed in connection with this Agreement and the transactions
contemplated hereby, certified by the secretary or an assistant secretary of
Parent and Purchaser.
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6.12 LEGAL OPINION. Purchaser shall have delivered to Shareholder the
opinion of its counsel, such opinion to be in form and substance satisfactory to
Shareholder's counsel.
ARTICLE VII
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligations of Purchaser under this Agreement to consummate the
Merger and the other transactions contemplated hereby shall be subject to the
satisfaction (or waiver by Purchaser) on or prior to the Closing Date of all of
the following conditions:
7.1 TRUTH OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company and the Shareholder contained herein shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date, except that any such representations and warranties which
expressly relate only to an earlier date shall be true and correct on the
Closing Date as of such earlier date; and the Company and the Shareholder shall
have delivered to Purchaser on the Closing Date a certificate of an authorized
representative of the Company and the Shareholder, dated the Closing Date, to
such effect.
7.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements and
covenants of the Company to be performed on or before the Closing Date pursuant
to the terms hereof shall have been duly performed in all material respects, and
the Company shall have delivered to Purchaser a certificate of an authorized
representative of the Company, dated the Closing Date, to such effect.
7.3 DOCUMENTS OF CONVEYANCE. Purchaser shall have received from
Shareholder the Stock duly endorsed or accompanied by a blank stock power, duly
endorsed and otherwise in form sufficient to transfer the Stock to Purchaser.
7.4 NO LITIGATION THREATENED. No action or proceedings shall have been
instituted before a court or other governmental body or by any public authority
to restrain or prohibit any of the transactions contemplated hereby, and the
Company shall have delivered to Purchaser a certificate of an authorized
representative of the Company, dated the Closing Date, to such effect to the
knowledge of such officer.
7.5 GOVERNMENTAL APPROVALS. All governmental consents and approvals, if
any, necessary to permit the consummation of the transactions contemplated by
this Agreement shall have been received.
7.6 CONSENTS. Each of the consents referred to in Schedule 4.5 attached
hereto shall have been obtained, and Purchaser shall have also received the
consent of all other parties, including its senior lender, whose consent is
required to permit Purchaser to perform its obligations hereunder.
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7.7 LEGAL OPINION. The Company and Shareholder shall have delivered to
Purchaser the opinion of their counsel, such opinion to be in form and substance
satisfactory to Purchaser's counsel.
7.8 PROCEEDINGS. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
shall be reasonably satisfactory in form and substance to Purchaser and its
counsel, and Purchaser shall have received copies of all such documents and
other evidence as it or its counsel may reasonably request in order to establish
the consummation of such transactions and the taking of all proceedings in
connection therewith.
7.9 CASTLE PC. Castle PC shall have entered into the Employment
Agreement and the Company shall have duly and validly assigned to Castle PC all
reimbursement contracts with third party insurance companies, managed care
companies and other reimbursement sources. The Company shall also have delivered
to Castle PC all patient records and shall have duly and validly assigned to
Castle PC all Permits and such other of the assets of the Company as are
required for Castle PC to perform its obligations under the Management Services
Agreement with Purchaser. In addition, the Company shall have duly and validly
transferred to Castle PC all other assets the ownership and operation of which
requires a valid license to practice dentistry.
7.10 GOOD STANDING CERTIFICATES. Purchaser shall have received good
standing and corporate existence certificates respecting the Company.
ARTICLE VIII
COVENANTS OF THE COMPANY AND THE SHAREHOLDER
The Company and the Shareholder hereby covenant and agree with
Purchaser as follows:
8.1 COOPERATION BY THE COMPANY AND THE SHAREHOLDER. Pending the
Closing, the Company and the Shareholder shall use their reasonable best efforts
to cooperate with Purchaser to secure all necessary consents, approvals,
authorizations, exemptions and waivers from third parties as shall be required
in order to enable the Company and the Shareholder to effect the transactions
contemplated on its or his part hereby, and the Company and the Shareholder
shall otherwise use their reasonable best efforts to cause the consummation of
such transactions in accordance with the terms and conditions hereof and to
cause all conditions contained in this Agreement over which it has control to be
satisfied. The Company and the Shareholder further agree to deliver to Purchaser
prompt written notice of any event or condition which if it existed on the date
of this Agreement, would result in any of the representations and warranties of
the Company or the Shareholder contained herein being untrue in any material
respect.
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8.2 AMENDMENT OF SCHEDULES. Company and Shareholder agree that, with
respect to the representations and warranties of Company and Shareholder
contained in this Agreement, Company and Shareholder shall have the continuing
obligation until the Closing to supplement or amend promptly any schedules
attached hereto with respect to any matter hereafter arising or discovered
which, if existing or known at the date of this Agreement, would have been
required to be set forth or described in any schedules attached hereto;
provided, however, that any supplement or amendment to any schedules attached
hereto shall not cure any breach of any representations or warranties hereunder.
8.3 CONDUCT OF BUSINESS. Except as Purchaser may otherwise consent to
in writing (which consent will not be unreasonably withheld), between the date
hereof and the Closing Date, the Company shall, (a) conduct the Business only in
the ordinary course, (b) use its reasonable efforts to keep available the
services of its employees and maintain satisfactory relationships with
licensors, suppliers, lessors, distributors, customers, clients and others, (c)
maintain, consistent with past practice and good business judgment, all of the
Company's assets in customary repair, order and condition, ordinary wear and
tear excepted, and insurance upon all of the Company's assets used in the
conduct of the Business in such amounts and of such kinds comparable to that in
effect on the date hereof, to the extent available at current premiums, and (d)
maintain the Company's books and records in the usual, regular and ordinary
manner, on a basis consistent with past practice.
8.4 EXCLUSIVE DEALING. During the period from the date of this
Agreement to the earlier of the Closing Date or the termination of this
Agreement, neither the Company nor the Shareholder shall take any action to,
directly or indirectly, encourage, initiate or engage in discussions or
negotiations with, or provide any information to, any Person other than
Purchaser, concerning the Merger or any material part thereof or a similar
transaction involving the Company or the Shareholder.
8.5 REVIEW OF THE ASSETS. Purchaser may, prior to the Closing Date,
through its representatives, review (a) the assets of the Company, (b) the
complete working papers of the Company's certified public accountants used in
their preparation of financial statements for the Company and (c) the books and
records of the Company and to otherwise review the financial and legal condition
of the Company as Purchaser deems necessary or advisable to familiarize itself
with the Business and related matters; such review shall not, however, affect
the representations and warranties made by the Company and the Shareholder
hereunder or the remedies of Purchaser for breaches of those representations and
warranties. Such review shall occur only during normal business hours upon
reasonable notice by Purchaser. The Company and the Shareholder shall permit
Purchaser and its representatives to have, after the execution of this
Agreement, full access to employees of any Company who can furnish Purchaser
with financial and operating data and other information with respect to the
Business as Purchaser shall from time to time reasonably request.
8.6 FURTHER ASSURANCES. At any time or from time to time after the
Closing Date, the Company and the Shareholder shall, at the reasonable request
of Purchaser and at Purchaser's
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expense, execute and deliver any further instruments or documents and take all
such further action as Purchaser may reasonably request in order to consummate
and make effective the Merger.
ARTICLE IX
COVENANTS OF PURCHASER
Purchaser hereby covenants and agrees with the Company and the
Shareholder as follows:
9.1 COOPERATION BY PURCHASER. Purchaser will use its reasonable best
efforts, and will cooperate with the Company and the Shareholder, to secure all
necessary consents, approvals, authorizations, exemptions and waivers from third
parties as shall be required in order to enable Purchaser to effect the
transactions contemplated on its part hereby, and Purchaser will otherwise use
its reasonable best efforts to cause the consummation of such transactions in
accordance with the terms and conditions hereof and to cause all conditions
contained in this Agreement over which it has control to be satisfied. Purchaser
further agrees to deliver to the Company and the Shareholder prompt written
notice of any event or condition, which if it existed on the date of this
Agreement, would result in any of the representations and warranties of
Purchaser contained herein being untrue in any material respect.
9.2 AMENDMENT OF SCHEDULES. Purchaser agrees that, with respect to the
representations and warranties of Purchaser contained in this Agreement,
Purchaser shall have the continuing obligation until the Closing to supplement
or amend promptly any schedules attached hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in any
schedules attached hereto; provided, however, that any supplement or amendment
to any schedules attached hereto shall not cure any breach of any
representations or warranties hereunder.
9.3 FURTHER ASSURANCES. At any time or from time to time after the
Closing Date, Purchaser shall, at the request of the Company or the Shareholder
and at such Company's expense, execute and deliver any further instruments or
documents and take all such further action as the Company may reasonably request
in order to consummate and make effective the Merger.
9.4 INDEMNIFICATION AND INSURANCE. From and after the Closing, the
Company (or any successor thereto), Purchaser and Parent, and their respective
affiliates, shall at all times fully perform all of their respective obligations
to present and past officers and directors of the Company (collectively the
"Indemnified Parties") under and pursuant to the provisions existing on the date
of Closing set forth in the Articles of Incorporation, Bylaws and any other
indemnification agreements of the Company (collectively, the "Company
Indemnification Obligations"). The Company, Purchaser and Parent each covenant
and agree, jointly and severally, not to take any action or fail to take any
action, the effect or result of which would be to amend, alter, impair, reduce
or eliminate,
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in whole or in part, any of the Company Indemnification Obligations. The
Company, Purchaser and Parent, jointly and severally, covenant and agree to and
with Shareholder to discharge promptly and fully all of the Company
Indemnification Obligations.
ARTICLE X
TERMINATION
10.1 TERMINATION. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Closing Date:
(a) by the mutual written consent of Purchaser, the
Shareholder and the Company; or
(b) by Purchaser or the Shareholder in writing without
liability on the part of the terminating party on account of such
termination (provided the terminating party is not otherwise in default
or in breach of this Agreement), if the Closing shall not have occurred
on or before December 31, 1997; or
(c) by either Purchaser, on the one hand, or the Shareholder
and the Company, on the other hand, in writing, without liability on
the part of the terminating party on account of such termination
(provided the terminating party is not otherwise in default or breach
of this Agreement), if the other party shall (i) fail to perform its or
their covenants or agreements contained herein required to be performed
prior to the Closing Date, or (ii) have breached any of its
representations or warranties contained herein.
10.2 EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to
this Article shall terminate all obligations of the parties hereunder, except as
set forth in this Section 10.2 or in Sections 12.9 and 12.12 hereof. Upon any
termination of this Agreement each party hereto will redeliver all documents,
work papers and other material of any other party relating to the transactions
contemplated hereby, and all copies of such materials, whether so obtained
before or after the execution hereof, to the party furnishing the same. The
rights and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies available either at law or in equity, it being the intent of
the parties hereto that if this Agreement is terminated by reason of a default
or breach of this Agreement by the non-terminating party or parties, the
terminating party shall be entitled to recover its damages, costs and expenses
by reason thereof.
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ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 INDEMNIFICATION OF THE COMPANY AND THE SHAREHOLDER. The Purchaser,
from and after the Closing Date, shall indemnify, defend and hold the Company
and the Shareholder and their respective Affiliates (the "Company Indemnitees")
harmless from and against any and all damages (including exemplary damages and
penalties, losses, deficiencies, costs, expenses, obligations, fines,
expenditures, claims and liabilities, including reasonable counsel fees and
reasonable expenses of investigation, defending and prosecuting litigation
(collectively, the "Damages")), suffered by any Company Indemnitee as a result
of, caused by, arising out of, or in any way relating to (a) any
misrepresentation, breach of warranty or breach, nonperformance, nonobservance
or nonfulfillment of any agreement or covenant on the part of the Purchaser
under this Agreement or any misrepresentation in or omission from any list,
schedule, certificate, or other instrument furnished or to be furnished to the
Shareholder by the Purchaser pursuant to the terms of this Agreement or (b) any
liability or obligation (other than those for which Purchaser is being
indemnified by the Company and the Shareholder hereunder) which pertains to the
ownership, operation or conduct of the Business or the Company's assets arising
from any acts, omissions, events, conditions or circumstances occurring on or
after the Closing Date.
11.2 INDEMNIFICATION OF THE PURCHASER. The Company and the Shareholder,
jointly and severally, shall indemnify and hold Purchaser and its Affiliates
(the "Purchaser Indemnitees") harmless from and against any and all Damages
suffered by any Purchaser Indemnitee as a result of, caused by, arising out of,
or in any way relating to (a) any misrepresentation, breach of warranty, or
nonfulfillment of any agreement or covenant on the part of the Company or the
Shareholder under this Agreement or any misrepresentation in or omission from
any list, schedule, certificate, or other instrument furnished or to be
furnished to the Purchaser by the Company pursuant to the terms of this
Agreement or (b) any liability or obligation (other than those for which the
Company and the Shareholder are being indemnified by Purchaser hereunder) which
pertains to the ownership, operation or conduct of the Business arising from any
acts, omissions, events, conditions or circumstances occurring before the
Closing Date.
11.3 DEMANDS. Each indemnified party hereunder agrees that promptly
upon its discovery of facts giving rise to a claim for indemnity under the
provisions of this Agreement, including receipt by it of notice of any demand,
assertion, claim, action or proceeding, judicial or otherwise, by any third
party (such third party actions being collectively referred to herein as the
"Claim"), with respect to any matter as to which it claims to be entitled to
indemnity under the provisions of this Agreement, it will give prompt notice
thereof in writing to the indemnifying party, together with a statement of such
information respecting any of the foregoing as it shall have. Such notice shall
include a formal demand for indemnification under this Agreement. The
indemnifying party shall not be obligated to indemnify the indemnified party
with respect to any Claim if the indemnified party knowingly failed to notify
the indemnifying party thereof in accordance with the provisions
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of this Agreement in sufficient time to permit the indemnifying party or its
counsel to defend against such matter and to make a timely response thereto
including, without limitation, any responsive motion or answer to a complaint,
petition, notice or other legal, equitable or administrative process relating to
the Claim, only insofar as such knowing failure to notify the indemnifying party
has actually resulted in prejudice or damage to the indemnifying party.
11.4 RIGHT TO CONTEST AND DEFEND. The indemnifying party shall be
entitled at its cost and expense to contest and defend by all appropriate legal
proceedings any Claim with respect to which it is called upon to indemnify the
indemnified party under the provisions of this Agreement using counsel
reasonably acceptable to the indemnified party; provided, that notice of the
intention so to contest shall be delivered by the indemnifying party to the
indemnified party within 20 days from the date of receipt by the indemnifying
party of notice by the indemnified party of the assertion of the Claim and if
such notice is not so delivered, the indemnified party shall have the right to
contest, defend and settle such Claim at the expense of the indemnifying party
using counsel of its own choosing. Any such contest may be conducted in the name
and on behalf of the indemnifying party or the indemnified party as may be
appropriate. Such contest shall be conducted by reputable counsel employed by
the indemnifying party, but the indemnified party shall have the right but not
the obligation to participate in such proceedings and to be represented by
counsel of its own choosing at its sole cost and expense. The indemnifying party
shall have full authority to determine all action to be taken with respect
thereto provided it assumes the defense of the Claim; provided, however, that
the indemnifying party will not have the authority to subject the indemnified
party to any obligation whatsoever, other than the performance of purely
ministerial tasks or obligations not involving expense. If the indemnifying
party does not elect to contest any such Claim, the indemnifying party shall be
bound by the result obtained with respect thereto by the indemnified party. At
any time after the commencement of the defense of any Claim, the indemnifying
party may request the indemnified party to agree in writing to the abandonment
of such contest or to the payment or compromise by the indemnified party of the
asserted Claim, whereupon such action shall be taken unless the indemnified
party determines that the contest should be continued, and so notifies the
indemnifying party in writing within 15 days of such request from the
indemnifying party. If the indemnified party determines that the contest should
be continued, the indemnifying party shall be liable hereunder only to the
extent of the amount that the other party to the contested Claim had agreed
unconditionally to accept in payment or compromise as of the time the
indemnifying party made its request therefor to the indemnified party. The
indemnifying party shall not compromise or settle any Claim, in whole or in
part, or incur any costs or expenses or otherwise assume any contractual
obligation, or admit any liability, with respect to any Claim, without the prior
written consent of the indemnified party being first obtained and unless the
indemnified party is given an absolute and unqualified release. Further, the
indemnified party shall not compromise or settle any Claim, in whole or in part,
unless or until the indemnifying party has been given an absolute and
unconditional release of all liability and responsibility with respect to such
Claim.
11.5 COOPERATION. If requested by the indemnifying party, the
indemnified party agrees to cooperate with the indemnifying party and its
counsel in contesting any Claim that the
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indemnifying party elects to contest or, if appropriate, in making any
counterclaim against the person asserting the Claim, or any cross-complaint
against any person, and the indemnifying party will reimburse the indemnified
party for any expenses incurred by it in so cooperating. At no cost or expense
to the indemnified party, the indemnifying party shall cooperate with the
indemnified party and its counsel in contesting any Claim.
11.6 RIGHT TO PARTICIPATE. The indemnified party agrees to afford the
indemnifying party and its counsel the opportunity to be present at, and to
participate in, conferences with all persons, including governmental
authorities, asserting any Claim against the indemnified party or conferences
with representatives of or counsel for such persons.
11.7 PAYMENT OF DAMAGES. The indemnifying party shall pay to the
indemnified party in immediately available funds any amounts to which the
indemnified party may become entitled by reason of the provisions of this
Agreement, such payment to be made within five days after any such amounts are
finally determined either by mutual agreement of the parties hereto or pursuant
to the final unappealable judgment of a court of competent jurisdiction.
11.8 RIGHT OF SETOFF. Purchaser shall have the right to set off any
amounts owed by the Company or Shareholder under this Article XI against any
Earnout Amount Purchaser may owe pursuant to Section 3.2.
11.9 DISPUTE AS TO RIGHT OF INDEMNIFICATION. In the event the question
of the right of indemnification is submitted to a court of competent
jurisdiction, arbitration panel or other tribunal for determination, all
attorneys' fees and other costs and expenses in determining the question of the
right of an indemnified party to indemnification shall be awarded to the
prevailing party and against the party against whom such determination is
rendered.
11.10 INDEMNIFICATION DEDUCTIBLE. No Claim shall be asserted by an
indemnified party pursuant to the provisions of this Article XI unless and until
the amount of such indemnified party's Damages in the aggregate exceed $30,000
(the "Deductible"). An indemnifying party shall be liable for Damages in excess
of the Deductible but limited to the Indemnification Cap (as defined below).
11.11 INDEMNIFICATION CAP. The aggregate amount of Damages recoverable
under this Agreement or in respect hereof (the "Indemnification Cap") by each of
all of the Company Indemnitees and all of the Purchaser Indemnitees shall be
limited to an amount equal to the Cash Amount and the fair market value of the
Castle Dental Shares at the time the Damages are incurred. Shareholder shall
have the right to tender Castle Dental Shares in satisfaction of any Damages for
which he is responsible hereunder and receive credit therefore. Purchaser shall
have the right to have an independent appraiser who is reasonably acceptable to
Shareholder determine the fair market value of Shareholder's shares.
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11.12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made by any party hereto to the other pursuant to the terms of
this Agreement shall survive the Closing, and continue in full force and effect
until the second anniversary of the Closing Date (the "Survival Date"). From and
after the Survival Date, no party hereto shall be under any liability whatsoever
pursuant to this Article XI with respect to any matter for which indemnification
may be sought except with respect to matters for which notice has been received
in accordance with the provisions of this Article XI or matters known but not
disclosed.
ARTICLE XII
MISCELLANEOUS
12.1 SHAREHOLDER GUARANTEES. Purchaser agrees to use its commercially
reasonable efforts to remove Shareholder as a personal guarantor or otherwise
from personal liability on any obligation of the Company.
12.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules) set forth the entire understanding of the parties with respect to the
subject matter hereof. Any previous agreements or understandings (whether oral
or written) between the parties regarding the subject matter hereof are merged
into and superseded by this Agreement.
12.3 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors,
permitted assigns, heirs, executors, administrators, receivers, trustees or
legal representatives of the parties hereto; provided that this Agreement,
including the representations and warranties herein, may not be assigned to any
Persons by any party hereto without the prior written consent of the
non-assigning party. Any assignment in violation of this Section 12.2 shall not
be effective to transfer any rights or obligations under this Agreement.
12.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
12.5 HEADINGS. The headings of the Articles, Sections and paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
12.6 MODIFICATION AND WAIVER. No amendment, modification or alteration
of the terms or provisions of this Agreement shall be binding unless the same
shall be in writing and duly executed by the parties hereto, except that any of
the terms or provisions of this Agreement may be waived in writing at any time
by the party which is entitled to the benefits of such waived terms or
provisions. No waiver of any of the provisions of this Agreement shall be deemed
to or shall
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<PAGE>
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
12.7 NO THIRD PARTY BENEFICIARY RIGHTS. This Agreement is not intended
to and shall not be construed to give any Person (other than the parties
signatory hereto any interest or rights (including, without limitation, any
third party beneficiary rights) with respect to or in connection with any
agreement or provision contained herein or contemplated hereby.
12.8 SALES AND TRANSFER TAXES. Purchaser shall be responsible for and
pay all applicable sales, stamp, transfer, documentary, use, registration,
filing and other taxes and fees (including any penalties and interest) that may
become due or payable in connection with this Agreement and the transactions
contemplated hereby.
12.9 EXPENSES. Except as otherwise provided in this Agreement, the
Company, the Shareholder and Purchaser shall each pay all costs and expenses
incurred by them or on their behalf in connection with this Agreement and the
transactions contemplated hereby.
12.10 NOTICE. All notices, requests, demands, or other communications
required or permitted to be given or made hereunder by any party hereto shall be
given in writing and shall be deemed to have been duly given or made if
delivered personally, or three Business Days after deposit in the United States
Mail and transmitted by first class registered or certified mail, postage
prepaid, return receipt requested, or when sent by telecopier with confirmed
receipt or when sent by prepaid overnight delivery service to the parties at the
following addresses (or at such other addresses as shall be specified by the
parties) by like notice:
if to Purchaser, to:
John M. Slack
Castle Dental Centers of Texas, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056-3021
with a copy to:
William D. Gutermuth
Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
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if to the Company or the Shareholder to:
Steve W. Lebo, D.D.S.
7505 Glenview, Suite 1
North Richland Hills, Texas 76180
with a copy to:
Richard S. Tucker
Jackson Walker L.L.P.
777 Main Street, Suite 1800
Fort Worth, Texas 76102
12.11 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas without regards to conflict of
law rules thereof.
12.12 CONFIDENTIALITY; PUBLICITY. The terms and conditions of this
Agreement shall not be disclosed by any party hereto without the prior written
consent of the other parties; provided, however, that Purchaser may disclose
such information as is required to comply with the requirements of its lenders
and investors and to comply with applicable securities laws. No party hereto
shall issue any press release or make any other public statement, in each case
relating to or connected with or arising out of this Agreement or the matters
contained herein, without obtaining the prior approval of the other party hereto
to the contents and the manner of presentation and publication thereof.
12.13 ATTORNEYS' FEES. If any action at law or in equity, including any
action for injunctive or declaratory relief, is brought to enforce or interpret
any of the provisions of this Agreement, the prevailing party shall be entitled
to recover reasonable attorneys' fees and expenses from the other party, which
fees and expenses may be set by the court in the trial of such action or may be
enforced in a separate action brought for that purpose and which fees and
expenses shall be in addition to any other relief which may be awarded.
12.14 CONSENT TO JURISDICTION. Any judicial proceeding brought against
any of the parties to this Agreement on any dispute arising out of this
Agreement or any matter related hereto shall be brought in any federal or state
court located in Harris County, Texas, and, by execution and delivery of this
Agreement, each of the parties to this Agreement accepts for itself the
exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be
bound by any judgment rendered thereby in connection with this Agreement.
12.15 SEVERABILITY. If any provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of law or public policy, all
other provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the
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transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled.
12.16 ENFORCEMENT. The parties hereto agree that the remedy at law for
any breach of this Agreement is inadequate and that should any dispute arise any
of the terms or provisions of this Agreement or any transactions contemplated
hereby, this Agreement shall be enforceable in a court of equity by an
injunction or a decree of specific performance. Such remedies shall, however, be
cumulative and nonexclusive, and shall be in addition to any other remedies
which the parties hereto may have.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf as of the date first above written.
PURCHASER:
CASTLE DENTAL CENTERS OF TEXAS, INC.
____________________________________
John M. Slack
Vice President
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COMPANY:
STEVE W. LEBO, D.D.S., INC.
____________________________________
Steve W. Lebo, D.D.S.
President
SHAREHOLDER:
____________________________________
Steve W. Lebo, D.D.S.
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EXHIBIT 10.64
CREDIT AGREEMENT
DATED AS OF NOVEMBER 7, 1997
AMONG
CASTLE DENTAL CENTERS, INC.
AS BORROWER,
NATIONSBANK OF TEXAS, N.A.,
AS AGENT,
AND
THE LENDERS SIGNATORY HERETO
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
<S> <C> <C> <C>
Section 1.01 TERMS DEFINED ABOVE....................................................1
Section 1.02 CERTAIN DEFINED TERMS..................................................1
ARTICLE II
LOANS AND LETTERS OF CREDIT
Section 2.01 LOANS AND LETTERS OF CREDIT...........................................15
Section 2.02 BORROWINGS, CONTINUATIONS AND CONVERSIONS, LETTERS OF CREDIT..........15
Section 2.03 CHANGES OF REVOLVING CREDIT COMMITMENTS...............................17
Section 2.04 FEES..................................................................18
Section 2.05 SEVERAL OBLIGATIONS...................................................18
Section 2.06 NOTES.................................................................19
Section 2.07 PREPAYMENTS...........................................................19
Section 2.08 ASSUMPTION OF RISKS...................................................20
Section 2.09 OBLIGATION TO REIMBURSE AND TO PREPAY.................................21
Section 2.10 LENDING OFFICES.......................................................23
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS....................................................23
Section 3.02 INTEREST..............................................................23
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS..............................................................24
Section 4.02 PRO RATA TREATMENT....................................................25
Section 4.03 COMPUTATIONS..........................................................25
Section 4.04 NON-RECEIPT OF FUNDS BY THE AGENT.....................................25
Section 4.05 SET-OFF, SHARING OF PAYMENTS, ETC.....................................26
Section 4.06 TAXES.................................................................26
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ARTICLE V
CAPITAL ADEQUACY
<S> <C> <C> <C>
Section 5.01 CAPITAL ADEQUACY; ADDITIONAL COSTS....................................29
Section 5.02 LIMITATION ON EURODOLLAR LOANS........................................31
Section 5.03 ILLEGALITY............................................................31
Section 5.04 BASE RATE LOANS PURSUANT TO SECTIONS 5.01, 5.02 AND 5.03..............31
Section 5.05 COMPENSATION..........................................................31
Section 5.06 REPLACEMENT LENDERS...................................................32
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING.......................................................33
Section 6.02 INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT....................35
Section 6.03 CONDITIONS PRECEDENT FOR THE BENEFIT OF LENDERS.......................36
Section 6.04 NO WAIVER.............................................................36
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 CORPORATE EXISTENCE...................................................37
Section 7.02 FINANCIAL CONDITION...................................................37
Section 7.03 LITIGATION............................................................38
Section 7.04 NO BREACH.............................................................38
Section 7.05 AUTHORITY.............................................................38
Section 7.06 APPROVALS.............................................................38
Section 7.07 USE OF LOANS..........................................................38
Section 7.08 ERISA.................................................................39
Section 7.09 TAXES.................................................................39
Section 7.10 TITLES, ETC...........................................................40
Section 7.11 NO MATERIAL MISSTATEMENTS.............................................40
Section 7.12 INVESTMENT COMPANY ACT................................................40
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT....................................40
Section 7.14 SUBSIDIARIES..........................................................40
Section 7.15 LOCATION OF BUSINESS AND OFFICES......................................41
Section 7.16 DEFAULTS..............................................................41
Section 7.17 ENVIRONMENTAL MATTERS.................................................41
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 7.18 COMPLIANCE WITH THE LAW...............................................41
Section 7.19 INSURANCE.............................................................41
Section 7.21 RESTRICTION ON LIENS..................................................42
Section 7.23 HEDGING AGREEMENTS....................................................43
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 REPORTING REQUIREMENTS................................................43
Section 8.02 LITIGATION............................................................45
Section 8.03 MAINTENANCE, ETC......................................................45
Section 8.04 ENVIRONMENTAL MATTERS.................................................46
Section 8.05 FURTHER ASSURANCES....................................................46
Section 8.06 PERFORMANCE OF OBLIGATIONS............................................47
Section 8.07 ERISA INFORMATION AND COMPLIANCE......................................47
Section 8.08 MANAGEMENT SERVICES AGREEMENTS AND ACCOUNTS RECEIVABLE PURCHASE
AGREEMENTS............................................................47
Section 8.09 GUARANTEE BY ACQUIRED ENTITIES........................................47
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 DEBT..................................................................48
Section 9.02 LIENS.................................................................48
Section 9.03 INVESTMENTS, LOANS AND ADVANCES.......................................49
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS..............................50
Section 9.05 SALES AND LEASEBACKS..................................................50
Section 9.06 NATURE OF BUSINESS....................................................50
Section 9.07 MERGERS, ETC..........................................................51
Section 9.08 PROCEEDS OF NOTES.....................................................51
Section 9.09 ERISA COMPLIANCE......................................................51
Section 9.10 SALE OR DISCOUNT OF RECEIVABLES.......................................52
Section 9.11 RATIO OF FUNDED DEBT TO CAPITALIZATION................................52
Section 9.12 NET WORTH.............................................................52
Section 9.13 LEVERAGE RATIO........................................................52
Section 9.14 FIXED CHARGE COVERAGE RATIO...........................................53
Section 9.15 CAPITAL EXPENDITURES..................................................53
Section 9.16 ENVIRONMENTAL MATTERS.................................................53
Section 9.17 TRANSACTIONS WITH AFFILIATES..........................................53
Section 9.18 SUBSIDIARIES..........................................................53
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 9.19 NEGATIVE PLEDGE AGREEMENTS............................................54
Section 9.20 OTHER AGREEMENTS......................................................54
Section 9.21 ACQUIRED ENTITIES.....................................................54
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT....................................................54
Section 10.02 REMEDIES.............................................................56
ARTICLE XI
THE AGENT
Section 11.01 APPOINTMENT, POWERS AND IMMUNITIES...................................57
Section 11.02 RELIANCE BY AGENT....................................................57
Section 11.03 DEFAULTS.............................................................57
Section 11.04 RIGHTS AS A LENDER...................................................58
Section 11.05 INDEMNIFICATION......................................................58
Section 11.06 NON-RELIANCE ON AGENT AND OTHER LENDERS..............................58
Section 11.07 ACTION BY AGENT......................................................59
Section 11.08 RESIGNATION OR REMOVAL OF AGENT......................................59
ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER...............................................................60
Section 12.02 NOTICES..............................................................60
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC................................60
Section 12.04 AMENDMENTS, ETC......................................................62
Section 12.05 SUCCESSORS AND ASSIGNS...............................................63
Section 12.06 ASSIGNMENTS AND PARTICIPATIONS.......................................63
Section 12.07 INVALIDITY...........................................................64
Section 12.08 COUNTERPARTS.........................................................64
Section 12.09 REFERENCES...........................................................64
Section 12.10 SURVIVAL.............................................................65
Section 12.11 CAPTIONS.............................................................65
Section 12.12 NO ORAL AGREEMENTS...................................................65
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION............................65
Section 12.14 INTEREST.............................................................66
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 12.15 CONFIDENTIALITY......................................................67
Section 12.16 EFFECTIVENESS........................................................68
Section 12.18 EXCULPATION PROVISIONS...............................................69
</TABLE>
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<PAGE>
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Maximum Revolving Credit Amounts and Term Loans
Exhibit A-1 - Form of Revolving Credit Note
Exhibit A-2 - Form of Term Note
Exhibit B - Form of Borrowing, Continuation and Conversion Request
Exhibit C - Form of Compliance Certificate
Exhibit D - List of Security Instruments
Exhibit E - Form of Borrowing Base Report
Exhibit F - Form of Officer's Certificate
Exhibit G - Due Diligence Items
Exhibit H - Form of Subordination Agreement
Schedule 3.01 - Term Loan Amortization Schedule
Schedule 7.02 - Liabilities
Schedule 7.14 - Subsidiaries
Schedule 7.19 - Insurance
Schedule 7.22 - Material Agreements
Schedule 7.23 - Hedging Agreements
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
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THIS CREDIT AGREEMENT dated as of November 7, 1997 is among
Castle Dental Centers, Inc., a corporation formed under the laws of the State of
Delaware (the "BORROWER"); each of the lenders that is a signatory hereto or
which becomes a signatory hereto as provided in Section 12.06 (individually,
together with its successors and assigns, a "LENDER" and, collectively, the
"LENDERS"); and NationsBank of Texas N.A., a national banking association (in
its individual capacity, "NATIONSBANK"), as agent for the Lenders (in such
capacity, together with its successors in such capacity, the "AGENT").
R E C I T A L S
A. The Borrower has requested that the Lenders provide certain loans to
and extensions of credit on behalf of the Borrower; and
B. The Lenders have agreed to make such loans and extensions of credit
subject to the terms and conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans, extensions of credit and commitments hereinafter
referred to, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE. As used in this Agreement, the
terms "AGENT," "BORROWER," "LENDER," "LENDERS," and "NATIONSBANK" shall have the
meanings indicated above.
Section 1.02 CERTAIN DEFINED TERMS. As used herein, the following
terms shall have the following meanings (all terms defined in this Article I or
in other provisions of this Agreement in the singular to have the same meanings
when used in the plural and VICE VERSA):
"ACCOUNTS RECEIVABLE PURCHASE AGREEMENTS" shall mean the Accounts
Receivable Purchase Agreements either previously or hereafter entered into
between an Acquired Entity, as seller, and Borrower or any Subsidiary, as buyer,
in form and substance satisfactory to Agent.
"ACQUIRED ENTITY" shall mean JHCDDS, Inc., 1st Dental Care, P.A.,
Mid-South Dental Centers, P.C., Horizon Dental Centers, SW Dental Associates,
LC, and all entities (of whatever form) whose assets are acquired by the
Borrower or any Subsidiary in connection with New Acquisitions, and all new
professional corporations, professional associations or other Persons which
become a party to future Management Services Agreements and Accounts Receivable
Purchase Agreements with Borrower or any Subsidiary pursuant to New
Acquisitions.
"ADDITIONAL COSTS" shall have the meaning assigned such term in Section
5.01(a).
"AFFECTED LOANS" shall have the meaning assigned such term in Section
5.04.
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"AFFILIATE" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, (ii) any director or officer of such first Person or of any Person
referred to in clause (i) above and (iii) if any Person in clause (i) above is
an individual, any member of the immediate family (including parents, spouse and
children) of such individual and any trust whose principal beneficiary is such
individual or one or more members of such immediate family and any Person who is
controlled by any such member or trust. For purposes of this definition, any
Person which owns directly or indirectly 10% or more of the securities having
ordinary voting power for the election of directors or other governing body of a
corporation or 10% or more of the partnership or other ownership interests of
any other Person (other than as a limited partner of such other Person) will be
deemed to "CONTROL" (including, with its correlative meanings, "CONTROLLED BY"
and "UNDER COMMON CONTROL WITH") such corporation or other Person.
"AGREEMENT" shall mean this Credit Agreement, as the same may from time
to time be amended or supplemented.
"AGGREGATE MAXIMUM REVOLVING CREDIT AMOUNTS" at any time shall equal the
sum of the Maximum Revolving Credit Amounts of the Lenders ($25,000,000.00), as
the same may be reduced pursuant to Section 2.03(b) or increased pursuant to
2.03(d).
"AGGREGATE COMMITMENTS" at any time shall equal the sum of the Aggregate
Revolving Credit Commitments and the Aggregate Term Commitments.
"AGGREGATE REVOLVING CREDIT COMMITMENTS" at any time shall equal the
amount calculated in accordance with Section 2.03.
"AGGREGATE TERM COMMITMENTS" at any time shall equal the sum of the Term
Commitments of the Lenders.
"APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each
Type of Loan, the lending office of such Lender (or an Affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
offices of such Lender (or of an Affiliate of such Lender) as such Lender may
from time to time specify to the Agent and the Borrower as the office by which
its Loans of such Type are to be made and maintained.
"APPLICABLE MARGIN" the applicable per annum percentage set forth at the
appropriate intersection in the table shown below, based on the ratio of Funded
Debt to EBITDA, determined as of the end of the most recent fiscal quarter of
the Borrower:
APPLICABLE MARGIN
FUNDED DEBT TO EBITDA EURODOLLAR BASE RATE
Greater than or equal to 2.5 4.25% 1.5%
Greater than or equal to 2.0,
but less than 2.5 3.75% 1.0%
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Greater than or equal to 1.5,
but less than 2.0 3.25% 0.5%
Greater than or equal to 1.0,
but less than 1.5 2.75% 0.0%
Less than 1.0 2.25% 0.0%
Each change in the Applicable Margin resulting from a change in the ratio of
Funded Debt to EBITDA shall take effect as of the date of determination of the
ratio of Funded Debt to EBITDA.
"ASSET PURCHASE" shall mean the acquisition of all or substantially all
of the assets of any Acquired Entity by Borrower or any Subsidiary pursuant to
an Asset Purchase Agreement.
"ASSET PURCHASE AGREEMENTS" shall mean Asset Purchase Agreements entered
into by Borrower or any Subsidiary in form and substance satisfactory to Agent
in connection with New Acquisitions.
"ASSIGNMENT" shall have the meaning assigned such term in Section
12.06(b).
"BASE RATE" shall mean, with respect to any Base Rate Loan, for any day,
the higher of (i) the Federal Funds Rate for any such day plus 1/2 of 1% or (ii)
the Prime Rate for such day. Each change in any interest rate provided for
herein based upon the Base Rate resulting from a change in the Base Rate shall
take effect at the time of such change in the Base Rate.
"BASE RATE LOANS" shall mean Loans that bear interest at rates based
upon the Base Rate.
"BORROWING BASE" shall mean at any time the amount equal to three (3)
times EBITDA as of the end of the most recent fiscal quarter of Borrower
(calculated on a rolling four quarters basis). For any calculation period which
would include one or more quarters prior to any Stock Purchase or any Asset
Purchase or any other future acquisition of an entity, the "rolling four
quarters" shall include the "pro forma" EBITDA of the applicable Acquired Entity
for such prior periods adjusted to reflect costs and expenses which such
Acquired Entity would have incurred had the Management Services Agreements
between Borrower and/or any Subsidiary and such Acquired Entity been in effect
(adding back appropriate executive salaries and non-cash charge offs relating to
this transaction).
"BUSINESS DAY" shall mean any day other than a day on which commercial
banks are authorized or required to close in Houston, Texas and, where such term
is used in the definition of "Quarterly Date" or if such day relates to a
borrowing or continuation of, a payment or prepayment of principal of or
interest on, or a conversion of or into, or the Interest Period for, a
Eurodollar Loan or a notice by the Borrower with respect to any such borrowing
or continuation, payment, prepayment, conversion or Interest Period, any day
which is also a day on which dealings in Dollar deposits are carried out in the
London interbank market.
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"CAPITALIZATION" shall mean shareholder's equity plus Total Funded Debt.
"CASTLE FLORIDA" shall mean Castle Dental Centers of Florida, Inc., a
Florida corporation and a wholly owned Subsidiary of the Borrower.
"CASTLE TENNESSEE" shall mean Castle Dental Centers of Tennessee, Inc.,
a Tennessee corporation and a wholly owned Subsidiary of the Borrower.
"CASTLE TEXAS" shall mean Castle Dental Centers of Texas, Inc., a Texas
corporation and a wholly owned Subsidiary of the Borrower.
"CHANGE OF CONTROL" shall mean at any time, as a result of one or more
transactions after the date of this Agreement, any "person" or "group" of
persons acting in concert (other than persons owning common stock of the
Borrower on the Closing Date) shall have "beneficial ownership" of more than 51%
of the outstanding common stock of the Borrower (within the meaning of Section
13(d) or 14 (d) of the Securities Exchange Act of 1934, as amended, and the
applicable rules and regulations thereunder), PROVIDED that the relationships
among the respective shareholders of the Borrower on the date of this Agreement
shall not be deemed to constitute all or any combination of them as a "group".
"CLOSING DATE" shall mean November 7, 1997.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time and any successor statute.
"COMMITMENT" shall mean, for any Lender, its Revolving Credit Commitment
and/or its Term Commitment, as applicable.
"CONSOLIDATED NET INCOME" shall mean with respect to the Borrower and
its Consolidated Subsidiaries, for any period, the aggregate of the net income
(or loss) of the Borrower and its Consolidated Subsidiaries after allowances for
taxes for such period, determined on a consolidated basis in accordance with
GAAP; PROVIDED that there shall be excluded from such net income (to the extent
otherwise included therein) the following: (i) the net income of any Person in
which the Borrower or any Consolidated Subsidiary has an interest (which
interest does not cause the net income of such other Person to be consolidated
with the net income of the Borrower and its Consolidated Subsidiaries in
accordance with GAAP), except to the extent of the amount of dividends or
distributions actually paid in such period by such other Person to the Borrower
or to a Consolidated Subsidiary, as the case may be; (ii) the net income (but
not loss) of any Consolidated Subsidiary to the extent that the declaration or
payment of dividends or similar distributions or transfers or loans by that
Consolidated Subsidiary is not at the time permitted by operation of the terms
of its charter or any agreement, instrument or Governmental Requirement
applicable to such Consolidated Subsidiary, or is otherwise restricted or
prohibited in each case determined in accordance with GAAP; (iii) the net income
(or loss) of any Person acquired in a pooling-of-interests transaction for any
period prior to the date of such transaction; (iv) any nonrecurring gains or
losses acceptable to the Majority Lenders and any extraordinary gains or losses,
including gains or losses attributable to Property sales not in the ordinary
course of business; and (v) the cumulative effect of
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a change in accounting principles and any gains or losses attributable to
writeups or write downs of assets.
"CONSOLIDATED SUBSIDIARIES" shall mean each Subsidiary of the Borrower
(whether now existing or hereafter created or acquired) the financial statements
of which shall be (or should have been) consolidated with the financial
statements of the Borrower in accordance with GAAP.
"DEBT" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments (including principal,
interest, fees and charges); (ii) all obligations of such Person (whether
contingent or otherwise) in respect of bankers' acceptances, letters of credit,
surety or other bonds and similar instruments; (iii) all obligations of such
Person to pay the deferred purchase price of Property or services (other than
for borrowed money); (iv) all obligations under leases which shall have been, or
should have been, in accordance with GAAP, recorded as capital leases in respect
of which such Person is liable (whether contingent or otherwise); (v) all
obligations under leases which require such Person or its Affiliate to make
payments over the term of such lease, including payments at termination, which
are substantially equal to at least eighty percent (80%) of the purchase price
of the Property subject to such lease plus interest as an imputed rate of
interest; (vi) all Debt (as described in the other clauses of this definition)
and other obligations of others secured by a Lien on any asset of such Person,
whether or not such Debt is assumed by such Person; (vii) all Debt (as described
in the other clauses of this definition) and other obligations of others
guaranteed by such Person or in which such Person otherwise assures a creditor
against loss of the debtor or obligations of others; (viii) all obligations or
undertakings of such Person to maintain or cause to be maintained the financial
position or covenants of others or to purchase the Debt or Property of others;
(ix) obligations to deliver goods or services in consideration of advance
payments; and (x) all obligations of such Person under Hedging Agreements.
"DEFAULT" shall mean an Event of Default or an event which with notice
or lapse of time or both would become an Event of Default.
"DOLLARS" and "$" shall mean lawful money of the United States of
America.
"EBITDA" shall mean, for any period, the sum of Consolidated Net Income
for such period plus the following expenses or charges to the extent deducted
from Consolidated Net Income in such period: interest, taxes, depreciation,
depletion and amortization.
"ENVIRONMENTAL LAWS" shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all jurisdictions
in which the Borrower or any Subsidiary is conducting or at any time has
conducted business, or where any Property of the Borrower or any Subsidiary is
located, including without limitation, the Oil Pollution Act of 1990 ("OPA"),
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
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Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation
Act, as amended, and other environmental conservation or protection laws. The
term "oil" shall have the meaning specified in OPA, the terms "hazardous
substance" and "release" (or "threatened release") have the meanings specified
in CERCLA, and the terms "solid waste" and "disposal" (or "disposed") have the
meanings specified in RCRA; PROVIDED, HOWEVER, that (i) in the event either OPA,
CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date of
such amendment and (ii) to the extent the laws of the state in which any
Property of the Borrower or any Subsidiary is located establish a meaning for
"oil," "hazardous substance," "release," "solid waste" or "disposal" which is
broader than that specified in either OPA, CERCLA or RCRA, such broader meaning
shall apply.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time and any successor statute.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with the Borrower or any Subsidiary would be deemed
to be a "single employer" within the meaning of section 4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of section 414 of the Code.
"ERISA EVENT" shall mean (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder, (ii) the withdrawal of the
Borrower, any Subsidiary or any ERISA Affiliate from a Plan during a plan year
in which it was a "substantial employer" as defined in Section 4001(a)(2) of
ERISA, (iii) the filing of a notice of intent to terminate a Plan or the
treatment of a Plan amendment as a termination under Section 4041 of ERISA, (iv)
the institution of proceedings to terminate a Plan by the PBGC or (v) any other
event or condition which might constitute grounds under Section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer, any Plan.
"EURODOLLAR LOANS" shall mean Loans the interest rates on which are
determined on the basis of rates referred to in the definition of "Eurodollar
Rate".
"EURODOLLAR RATE" shall mean, for any Eurodollar Loan 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 "Eurodollar Rate" shall mean, for any Eurodollar
Loan 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.
"EVENT OF DEFAULT" shall have the meaning assigned such term in Section
10.01.
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"EXCEPTED LIENS" shall mean: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due or which are being contested in good
faith by appropriate action and for which adequate reserves have been
maintained; (ii) Liens in connection with workmen's compensation, unemployment
insurance or other social security, old age pension or public liability
obligations not yet due or which are being contested in good faith by
appropriate action and for which adequate reserves have been maintained in
accordance with GAAP; (iii) operators', vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction or other like
Liens arising by operation of law in the ordinary course of business or
statutory landlord's liens, each of which is in respect of obligations that have
not been outstanding more than 90 days or which are being contested in good
faith by appropriate proceedings and for which adequate reserves have been
maintained in accordance with GAAP; (iv) any Liens reserved in leases for rent
and for compliance with the terms of leases in the case of leasehold estates, to
the extent that any such Lien referred to in this clause does not materially
impair the use of the Property covered by such Lien for the purposes for which
such Property is held by the Borrower or any Subsidiary or materially impair the
value of such Property subject thereto; (v) encumbrances (other than to secure
the payment of borrowed money or the deferred purchase price of Property or
services), easements, restrictions, servitudes, permits, conditions, covenants,
exceptions or reservations in any rights of way or other Property of the
Borrower or any Subsidiary for the purpose of roads, pipelines, transmission
lines, transportation lines, distribution lines for the removal of gas, oil,
coal or other minerals or timber, and other like purposes, or for the joint or
common use of real estate, rights of way, facilities and equipment, and defects,
irregularities, zoning restrictions and deficiencies in title of any rights of
way or other Property which in the aggregate do not materially impair the use of
such rights of way or other Property for the purposes of which such rights of
way and other Property are held by the Borrower or any Subsidiary or materially
impair the value of such Property subject thereto; (vi) deposits of cash or
securities to secure the performance of bids, trade contracts, leases, statutory
obligations and other obligations of a like nature incurred in the ordinary
course of business; and (vii) Liens permitted by the Security Instruments.
"FEDERAL FUNDS RATE" shall mean, 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 a
member 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 (i) if the date for which such rate is
to be determined 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 (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to the Agent on such day on such transactions as determined by the
Agent.
"FINAL MATURITY DATE" shall mean the earlier to occur of (i) the fifth
anniversary of the Closing Date and (ii) the date that the Notes are accelerated
pursuant to Section 10.02.
"FINANCIAL STATEMENTS" shall mean the financial statement or statements
of the Borrower and its Consolidated Subsidiaries described or referred to in
Section 7.02.
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"FUNDED DEBT" shall mean, at any date and with respect to the Borrower
and its Subsidiaries, all Debt for borrowed money (excluding Debt expressly
subordinated to the Indebtedness in form and substance satisfactory to the
Lenders), any capital lease obligations of and any guaranty with respect to
Funded Debt of another person.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's Property is
located or which exercises valid jurisdiction over any such Person or such
Person's Property, and any court, agency, department, commission, board, bureau
or instrumentality of any of them including monetary authorities which exercises
valid jurisdiction over any such Person or such Person's Property. Unless
otherwise specified, all references to Governmental Authority herein shall mean
a Governmental Authority having jurisdiction over, where applicable, the
Borrower, its Subsidiaries or any of their Property or the Agent or any Lender
or any Applicable Lending Office.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code, ordinance,
order, determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other directive or requirement
(whether or not having the force of law), including, without limitation,
Environmental Laws, energy regulations and occupational, safety and health
standards or controls, of any Governmental Authority.
"GUARANTORS" shall mean each Subsidiary which may execute a Guaranty
Agreement pursuant to Section 9.18.
"GUARANTY AGREEMENT" shall mean an agreement executed by the Guarantors
in form and substance satisfactory to the Agent guarantying, unconditionally,
payment of the Indebtedness, as the same may be amended, modified or
supplemented from time to time.
"HEDGING AGREEMENTS" shall mean any interest rate swap, cap, floor,
collar, forward agreement or other protection agreements or any option with
respect to any such transaction.
"HIGHEST LAWFUL RATE" shall mean, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from time to time
may be contracted for, taken, reserved, charged or received on the Notes or on
other Indebtedness under laws applicable to such Lender which are presently in
effect or, to the extent allowed by law, under such applicable laws which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow.
"INDEBTEDNESS" shall mean any and all amounts owing or to be owing by
the Borrower or any Subsidiary to the Agent, the Issuing Bank and/or the Lenders
in connection with the Loan Documents, the Letter of Credit Agreements, and any
Hedging Agreements now or hereafter entered into between the Borrower and the
Lenders or any Affiliate of a Lender, and all renewals, extensions and/or
rearrangements of any of the above.
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"INDEMNIFIED PARTIES" shall have the meaning assigned such term in
Section 12.03(a)(ii).
"INDEMNITY MATTERS" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands and
causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (including, without limitation,
consequential damages) or reasonable costs and expenses of any kind or nature
whatsoever incurred by such Person whether caused by the sole or concurrent
negligence of such Person seeking indemnification.
"INITIAL FUNDING" shall mean the initial funding of the Loans or
issuance of the initial Letters of Credit upon satisfaction of the conditions
set forth in Sections 6.01 and 6.02.
"INTEREST PERIOD" shall mean, with respect to any Eurodollar Loan, the
period commencing on the date such Eurodollar Loan is made and ending on the
numerically corresponding day in the first, second, third or sixth calendar
month thereafter, as the Borrower may select as provided in Section 2.02 (or
such longer period as may be requested by the Borrower and agreed to by the
Majority Lenders), except that each Interest Period which commences on the last
Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may end after the
Final Maturity Date; (ii) no Interest Period may end after the due date of any
installment, if any, provided for in Section 3.01 to the extent that such
Eurodollar Loan would need to be prepaid prior to the end of such Interest
Period in order for such installment to be paid when due; (iii) each Interest
Period which would otherwise end on a day which is not a Business Day shall end
on the next succeeding Business Day (or, if such next succeeding Business Day
falls in the next succeeding calendar month, on the next preceding Business
Day); and (iv) no Interest Period shall have a duration of less than one month
and, if the Interest Period for any Eurodollar Loans would otherwise be for a
shorter period, such Loans shall not be available hereunder.
"ISSUING BANK" shall mean NationsBank or any other Lender agreed to
among the Borrower and the Agent to issue Letters of Credit.
"LC COMMITMENT" at any time shall mean $2,000,000.
"LC EXPOSURE" at any time shall mean the difference between (i)
aggregate face amount of all undrawn and uncancelled Letters of Credit and the
aggregate of all amounts drawn under all Letters of Credit and not yet
reimbursed, minus (ii) the aggregate amount of all cash securing outstanding
Letters of Credit pursuant to Section 2.10(b).
"LETTER OF CREDIT AGREEMENTS" shall mean the written agreements with the
Issuing Bank, as issuing lender for any Letter of Credit, executed in connection
with the issuance by the Issuing Bank of the Letters of Credit, such agreements
to be on the Issuing Bank's customary form for letters of
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credit of comparable amount and purpose as from time to time in effect or as
otherwise agreed to by the Borrower and the Issuing Bank
"LETTERS OF CREDIT" shall mean the letters of credit issued pursuant to
Section 2.01(c) and all reimbursement obligations pertaining to any such letters
of credit, and "Letter of Credit" shall mean any one of the Letters of Credit
and the reimbursement obligations pertaining thereto.
"LIEN" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to the
lien or security interest arising from a mortgage, encumbrance, pledge, security
agreement, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "LIEN" shall include reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances affecting Property. For the
purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to be
the owner of any Property which it has acquired or holds subject to a
conditional sale agreement, or leases under a financing lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person in a transaction intended to create a financing.
"LOANS" shall mean the Revolving Credit Loans and the Term Loans.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes and the Security
Instruments.
"MAJORITY LENDERS" shall mean Lenders holding at least sixty-six and
two-thirds percent (662/3%) of the outstanding aggregate principal amount of the
Loans (without regard to any sale by a Lender of a participation in any Loan
under Section 12.06(c)).
"MANAGEMENT SERVICES AGREEMENTS" shall mean Management Service
Agreements previously or hereafter entered into between an Acquired Entity and
Borrower or any Subsidiary, in form and substance satisfactory to Lenders.
"MATERIAL ADVERSE EFFECT" shall mean any material and adverse effect on
(i) the assets, liabilities, financial condition, business, operations or
affairs of the Borrower and its Subsidiaries taken as a whole different from
those reflected in the Financial Statements or from the facts represented or
warranted in any Loan Document, or (ii) the ability of the Borrower and its
Subsidiaries taken as a whole to carry out their business as at the Closing Date
or as proposed as of the Closing Date to be conducted or meet their obligations
under the Loan Documents on a timely basis.
"MAXIMUM REVOLVING CREDIT AMOUNT" shall mean, as to each Lender, the
amount set forth opposite such Lender's name on ANNEX I under the caption
"Maximum Revolving Credit Amounts" (as the same may be reduced pursuant to
Section 2.03(b) pro rata to each Lender based on its Percentage Share), as
modified from time to time to reflect any assignments permitted by Section
12.06(b).
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"MULTIEMPLOYER PLAN" shall mean a Plan defined as such in Section 3(37)
or 4001(a)(3) of ERISA.
"NET WORTH" shall mean, as at any date, the sum of the following for the
Borrower and its Consolidated Subsidiaries determined (without duplication) in
accordance with GAAP:
(i) the amount of preferred stock and common stock at par plus the
amount of surplus of the Borrower, PLUS
(ii) the retained earnings (or, in the case of retained earnings
deficit, MINUS the amount of such deficit).
"NEW ACQUISITION" shall mean the acquisition of dental practices and/or
management service organizations using proceeds of the Revolving Credit Loans as
permitted by the Agreement.
"NOTES" shall mean the Revolving Credit Notes and the Term Notes,
together with any and all renewals, extensions for any period, increases,
rearrangements, substitutions or modifications thereof.
"OTHER TAXES" shall have the meaning assigned such term in Section
4.06(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
"PERCENTAGE SHARE" shall mean the percentage of the Aggregate
Commitments to be provided by a Lender under this Agreement as indicated on
ANNEX I hereto, as modified from time to time to reflect any assignments
permitted by Section 12.06(b).
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
"PLAN" shall mean any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained
or contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii)
was at any time during the preceding six calendar years sponsored, maintained or
contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate.
"POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan
or any other amount payable by the Borrower under this Agreement or any other
Loan Document, a rate per annum during the period commencing on the date of
occurrence of an Event of Default until such amount is paid in full or all
Events of Default are cured or waived equal to 2% per annum above the Base Rate
as in effect from time to time plus the Applicable Margin (if any), but in no
event to exceed the Highest Lawful Rate; provided however, for a Eurodollar
Loan, the "POST-DEFAULT RATE" for such principal shall be, for the period
commencing on the date of occurrence of an Event of Default and ending on the
earlier to occur of the last day of the Interest Period therefor or the date all
Events of
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Default are cured or waived, 2% per annum above the interest rate for such Loan
as provided in Section 3.02(a), but in no event to exceed the Highest Lawful
Rate.
"PRIME RATE" shall mean the rate of interest from time to time announced
publicly by the Agent at the Principal Office as its prime commercial lending
rate. Such rate is set by the Agent as a general reference rate of interest,
taking into account such factors as the Agent may deem appropriate, it being
understood that many of the Agent's commercial or other loans are priced in
relation to such rate, that it is not necessarily the lowest or best rate
actually charged to any customer and that the Agent may make various commercial
or other loans at rates of interest having no relationship to such rate.
"PRINCIPAL OFFICE" shall mean the principal office of the Agent,
presently located at 700 Louisiana, Houston, Harris County, Texas 77002.
"PROPERTY" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"QUARTERLY DATES" shall mean the fifteenth day of each March, June,
September, and December, in each year, the first of which shall be December 15,
1997; PROVIDED, HOWEVER, that if any such day is not a Business Day, such
Quarterly Date shall be the next succeeding Business Day.
"REGULATION D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
"REGULATORY CHANGE" shall mean, with respect to any Lender, any change
after the Closing Date in any Governmental Requirement (including Regulation D)
or the adoption or making after such date of any interpretations, directives or
requests applying to a class of lenders (including such Lender or its Applicable
Lending Office) of or under any Governmental Requirement (whether or not having
the force of law) by any Governmental Authority charged with the interpretation
or administration thereof.
"REQUIRED PAYMENT" shall have the meaning assigned such term in Section
4.04.
"RESPONSIBLE OFFICER" shall mean, as to any Person, the Chief Executive
Officer, the President or any Vice President of such Person and, with respect to
financial matters, the term "Responsible Officer" shall include the Chief
Financial Officer of such Person. Unless otherwise specified, all references to
a Responsible Officer herein shall mean a Responsible Officer of the Borrower.
"REVOLVING CREDIT COMMITMENT" shall mean, for any Lender, its obligation
to make Revolving Credit Loans and participate in the issuance of Letters of
Credit as provided in Section 2.01(c) up to the lesser of (i) such Lender's
Maximum Revolving Credit Amount and (ii) the Lender's Percentage Share of the
then effective Borrowing Base.
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"REVOLVING CREDIT LOANS" shall mean revolving credit loans made pursuant
to Section 2.01(a).
"REVOLVING CREDIT NOTES" shall mean the promissory note or notes
(whether one or more) of the Borrower described in Section 2.06 and being in the
form of EXHIBIT A-1.
"REVOLVING CREDIT PERIOD" shall mean the period from the Closing Date to
and ending on the Revolving Credit Termination Date.
"REVOLVING CREDIT TERMINATION DATE" shall mean the earlier to occur of
(i) the second anniversary of the Closing Date and (ii) the date that the
Revolving Credit Commitments are sooner terminated pursuant to Sections 2.03(b)
or 10.02.
"SEC" shall mean the Securities and Exchange Commission or any successor
Governmental Authority.
"SECURITY INSTRUMENTS" shall mean the Letters of Credit, the Letter of
Credit Agreements, the agreements or instruments described or referred to in
EXHIBIT D, and any and all other agreements or instruments now or hereafter
executed and delivered by the Borrower or any other Person (other than
participation or similar agreements between any Lender and any other lender or
creditor with respect to any Indebtedness pursuant to this Agreement) in
connection with, or as security for the payment or performance of the Notes or
this Agreement, or reimbursement obligations under the Letters of Credit, as
such agreements may be amended, supplemented or restated from time to time.
"SPECIAL ENTITY" shall mean any joint venture, limited liability company
or partnership, general or limited partnership or any other type of partnership
or company other than a corporation in which the Borrower or one or more of its
other Subsidiaries is a member, owner, partner or joint venturer and owns,
directly or indirectly, at least a majority of the equity of such entity or
controls such entity, but excluding any tax partnerships that are not classified
as partnerships under state law. For purposes of this definition, any Person
which owns directly or indirectly an equity investment in another Person which
allows the first Person to manage or elect managers who manage the normal
activities of such second Person will be deemed to "control" such second Person
(E.G. a sole general partner controls a limited partnership).
"STOCK PURCHASE" shall mean any acquisition of all capital stock of any
Acquired Entity by Borrower or a Subsidiary pursuant to a Stock Purchase
Agreement
"STOCK PURCHASE AGREEMENTS" shall mean that certain Stock Purchase
Agreement dated as of December 19, 1995, between the Borrower and Jack H.
Castle, D.D.S., and such future stock purchase agreements (including stock
option agreements) entered into by Borrower or any Subsidiary, in form and
substance satisfactory to Agent, in connection with New Acquisitions.
"SUBORDINATED DEBT" shall mean Debt of the Borrower or any Subsidiary
that is subordinated to the Indebtedness pursuant to a subordination agreement
substantially in the form of Exhibit H.
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"SUBSIDIARY" shall mean (i) any corporation of which at least a majority
of the outstanding shares of stock having by the terms thereof ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned or
controlled by the Borrower or one or more of its Subsidiaries or by the Borrower
and one or more of its Subsidiaries and (ii) any Special Entity. Unless
otherwise indicated herein, each reference to the term "Subsidiary" shall mean a
Subsidiary of the Borrower.
"TAXES" shall have the meaning assigned such term in Section 4.06(a).
"TERM COMMITMENT" shall mean, as to each Lender, its obligation to make
a Term Loan in the amount set forth opposite such Lender's name under "Term
Loans" on ANNEX I, as the same may be modified from time to time to reflect any
assignments permitted by Section 12.06(b).
"TERM LOANS" shall mean the term loans made pursuant to Section 2.01(b).
"TERM LOAN PERIOD" shall mean the period commencing on the next
succeeding day after the Revolving Credit Termination Date and ending on the
Final Maturity Date.
"TERM NOTES" shall mean the promissory note or notes (whether one or
more) of the Borrower described in Section 2.06 and being in the form of EXHIBIT
A-2.
"TOTAL FUNDED DEBT" shall mean Funded Debt plus all debt expressly
subordinated to the Indebtedness, in form and substance satisfactory to the
Lenders.
"TYPE" shall mean, with respect to any Loan, a Base Rate Loan or a
Eurodollar Loan.
"WHOLLY-OWNED SUBSIDIARY" shall mean, as to the Borrower, any Subsidiary
of which all of the outstanding shares of capital stock or other equity
interests, on a fully-diluted basis, are owned by the Borrower or one or more of
the Wholly-Owned Subsidiaries or by the Borrower and one or more of the
Wholly-Owned Subsidiaries.
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Agent or the Lenders hereunder shall be
prepared, in accordance with GAAP, applied on a basis consistent with the
audited financial statements of the Borrower referred to in Section 7.02 (except
for changes concurred with by the Borrower's independent public accountants).
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ARTICLE II
LOANS AND LETTERS OF CREDIT
Section 2.01 LOANS AND LETTERS OF CREDIT.
(a) REVOLVING CREDIT LOANS. Each Lender severally agrees, on the terms
and conditions of this Agreement, to make loans to the Borrower during the
Revolving Credit Period in an aggregate principal amount at any one time
outstanding up to, but not exceeding, the amount of such Lender's Revolving
Credit Commitment as then in effect; PROVIDED, HOWEVER, that the aggregate
principal amount of all such Revolving Credit Loans by all Lenders hereunder at
any one time outstanding, PLUS the LC Exposure, PLUS the principal balance of
the Term Loan at any one time outstanding shall not exceed the Aggregate
Revolving Credit Commitments. Subject to the terms of this Agreement, during the
Revolving Credit Period, the Borrower may borrow, repay and reborrow the amount
described in this Section 2.01(a).
(b) TERM LOANS. Each Lender severally agrees, subject to the terms and
conditions of this Agreement, to make a term loan to the Borrower not to exceed
its Term Commitment. Such Term Loan shall be made by way of a single borrowing
made on the Closing Date. Any portion of each Lender's Term Commitment not
utilized by such borrowing on such date shall be permanently canceled.
(c) LETTERS OF CREDIT. The Issuing Bank, as issuing bank for the
Lenders, agrees to extend credit for the account of the Borrower and its
Subsidiaries at any time and from time to time by issuing, renewing, increasing,
extending or reissuing Letters of Credit; PROVIDED HOWEVER, the LC Exposure at
any one time outstanding shall not exceed the lesser of (i) the LC Commitment
and (ii) the Aggregate Revolving Credit Commitments, as then in effect, minus
the aggregate principal amount of all Revolving Credit Loans then outstanding.
The Lenders shall participate in such Letters of Credit according to their
respective Percentage Shares. Each of the Letters of Credit shall (i) be issued
by the Issuing Bank, (ii) contain such terms and provisions as are reasonably
required by the Issuing Bank, (iii) be for the account of the Borrower and its
Subsidiaries and (iv) expire not later than two (2) days before the Final
Maturity Date.
(d) LIMITATION ON TYPES OF LOANS. Subject to the other terms and
provisions of this Agreement, at the option of the Borrower, the Loans may be
Base Rate Loans or Eurodollar Loans; provided that, without the prior written
consent of the Majority Lenders, no more than ten (10) Eurodollar Loans may be
outstanding at any time.
Section 2.02 BORROWINGS, CONTINUATIONS AND CONVERSIONS, LETTERS OF
CREDIT.
(a) BORROWINGS. The Term Loans shall be made by way of a single advance
by the Lenders on the Closing Date. The Borrower shall give the Agent (which
shall promptly notify the Lenders) advance notice as hereinafter provided of
each borrowing hereunder, which shall specify (i) the aggregate amount of such
borrowing, (ii) the Type and (iii) the date (which shall be a Business Day) of
the Loans to be borrowed, and (iv) (in the case of Eurodollar Loans) the
duration of the Interest Period therefor.
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(b) MINIMUM AMOUNTS. All Base Rate Loan borrowings shall be in amounts
of at least $100,000 or the remaining balance of the Aggregate Revolving Credit
Commitments, if less, or any whole multiple of $100,000 in excess thereof, and
all Eurodollar Loans shall be in amounts of at least $100,000 or any whole
multiple of $100,000 in excess thereof.
(c) NOTICES. All borrowings, continuations and conversions shall require
advance written notice to the Agent (which shall promptly notify the Lenders) in
the form of EXHIBIT B (or telephonic notice promptly confirmed by such a written
notice), which in each case shall be irrevocable, from the Borrower to be
received by the Agent not later than 11:00 a.m. Houston time at least one
Business Day prior to the date of each Base Rate Loan borrowing and three
Business Days prior to the date of each Eurodollar Loan borrowing, continuation
or conversion. Without in any way limiting the Borrower's obligation to confirm
in writing any telephonic notice, the Agent may act without liability upon the
basis of telephonic notice believed by the Agent in good faith to be from the
Borrower prior to receipt of written confirmation. In each such case, the
Borrower hereby waives the right to dispute the Agent's record of the terms of
such telephonic notice except in the case of gross negligence or willful
misconduct by the Agent.
(d) CONTINUATION OPTIONS. Subject to the provisions made in this Section
2.02(d), the Borrower may elect to continue all or any part of any Eurodollar
Loan beyond the expiration of the then current Interest Period relating thereto
by giving advance notice as provided in Section 2.02(c) to the Agent (which
shall promptly notify the Lenders) of such election, specifying the amount of
such Loan to be continued and the Interest Period therefor. In the absence of
such a timely and proper election, the Borrower shall be deemed to have elected
to convert such Eurodollar Loan to a Base Rate Loan pursuant to Section 2.02(e).
All or any part of any Eurodollar Loan may be continued as provided herein,
provided that (i) any continuation of any such Loan shall be (as to each Loan as
continued for an applicable Interest Period) in amounts of at least $100,000 or
any whole multiple of $100,000 in excess thereof and (ii) no Default shall have
occurred and be continuing. If a Default shall have occurred and be continuing,
each Eurodollar Loan shall be converted to a Base Rate Loan on the last day of
the Interest Period applicable thereto.
(e) CONVERSION OPTIONS. The Borrower may elect to convert all or any
part of any Eurodollar Loan on the last day of the then current Interest Period
relating thereto to a Base Rate Loan by giving advance notice to the Agent
(which shall promptly notify the Lenders) of such election. Subject to the
provisions made in this Section 2.02(e), the Borrower may elect to convert all
or any part of any Base Rate Loan at any time and from time to time to a
Eurodollar Loan by giving advance notice as provided in Section 2.02(c) to the
Agent (which shall promptly notify the Lenders) of such election. All or any
part of any outstanding Loan may be converted as provided herein, provided that
(i) any conversion of any Base Rate Loan into a Eurodollar Loan shall be (as to
each such Loan into which there is a conversion for an applicable Interest
Period) in amounts of at least $100,000 or any whole multiple of $100,000 in
excess thereof and (ii) no Default shall have occurred and be continuing. If a
Default shall have occurred and be continuing, no Base Rate Loan may be
converted into a Eurodollar Loan.
(f) ADVANCES. Not later than 11:00 a.m. Houston time on the date
specified for each borrowing hereunder, each Lender shall make available the
amount of the Loans to be made by it on such date to the Agent, to an account
which the Agent shall specify, in immediately available funds,
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for the account of the Borrower. The amounts so received by the Agent shall,
subject to the terms and conditions of this Agreement, be made available to the
Borrower by depositing the same, in immediately available funds, in an account
of the Borrower, designated by the Borrower and maintained at the Principal
Office.
(g ) LETTERS OF CREDIT. The Borrower shall give the Issuing Bank (which
shall promptly notify the Lenders of such request and their Percentage Share of
such Letter of Credit) advance notice to be received by the Issuing Bank not
later than 11:00 a.m. Houston time not less than three (3) Business Days prior
thereto of each request for the issuance, and at least five (5) Business Days
prior to the date of the renewal, increase or extension, of a Letter of Credit
hereunder which request shall specify (i) the amount of such Letter of Credit,
(ii) the date (which shall be a Business Day) such Letter of Credit is to be
issued, increase, renewed or extended, (iii) the duration thereof, (iv) the name
and address of the beneficiary thereof, (v) the form of the Letter of Credit and
(vi) such other information as the Agent may reasonably request, all of which
shall be reasonably satisfactory to the Agent. Subject to the terms and
conditions of this Agreement, on the date specified for the issuance, increase,
renewal or extension of a Letter of Credit, the Agent shall issue, increase,
renew or extend such Letter of Credit to the beneficiary thereof.
In conjunction with the issuance of each Letter of Credit, the Borrower,
shall execute a Letter of Credit Agreement. In the event of any conflict between
any provision of a Letter of Credit Agreement and this Agreement, the Borrower,
the Issuing Bank, the Agent and the Lenders hereby agree that the provisions of
this Agreement shall govern.
The Issuing Bank will send to the Borrower and each Lender, immediately
upon issuance of any Letter of Credit, or an amendment thereto, a true and
complete copy of such Letter of Credit, or such amendment thereto.
Section 2.03 CHANGES OF REVOLVING CREDIT COMMITMENTS.
(a) The Aggregate Revolving Credit Commitments shall at all times be
equal to the lesser of (i) the Aggregate Maximum Revolving Credit Amounts after
adjustments resulting from reductions pursuant to Section 2.03(b) or (ii) the
Borrowing Base as determined from time to time.
(b) The Borrower shall have the right to terminate or to reduce the
amount of the Aggregate Maximum Revolving Credit Amounts at any time, or from
time to time, upon not less than three (3) Business Days' prior notice to the
Agent (which shall promptly notify the Lenders) of each such termination or
reduction, which notice shall specify the effective date thereof and the amount
of any such reduction (which shall not be less than $100,000 or any whole
multiple of $100,000 in excess thereof) and shall be irrevocable and effective
only upon receipt by the Agent.
(c) The Aggregate Maximum Revolving Credit Amounts once terminated or
reduced may not be reinstated.
(d) The Agent, on a best efforts basis, will seek to find an additional
financial institution that will agree to become a Lender under the Credit
Agreement with a Revolving Credit Commitment of $5,000,000 and assume a
16.66666667% interest in the Term Loan. If such
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additional Lender becomes a party to the Credit Agreement (which may only be
done prior to the Revolving Credit Termination Date), the Aggregate Maximum
Credit Amounts will increase from $25,000,000 to $30,000,000 and a revised Annex
I reflecting such change and any changes in Percentage Shares and Term Loan
amounts of each Lender will be distributed to all parties to the Credit
Agreement.
Section 2.04 FEES.
(a) COMMITMENT FEE. The Borrower shall pay to the Agent for the account
of each Lender a commitment fee based on the daily average unused amount of the
Aggregate Revolving Credit Commitments less the outstanding principal amount of
the Term Loans for the period from and including the Closing Date, up to, but
excluding the earlier of the date the Aggregate Revolving Credit Commitments are
terminated or the Revolving Credit Termination Date at a rate per annum equal to
applicable per annum percentage set forth at the appropriate intersection in the
table shown below, based on the ratio of Funded Debt to EBITDA as in effect from
time to time. Accrued commitment fees shall be payable quarterly in arrears on
each Quarterly Date and on the earlier of the date the Aggregate Revolving
Credit Commitments are terminated or the Revolving Credit Termination Date.
FUNDED DEBT TO EBITDA COMMITMENT FEE PERCENTAGE
Greater than or equal to 2.5 .5%
Greater than or equal to 2.0 but less than 2.5 .375%
Greater than or equal to 1.5 but less than 2.0 .375%
Greater than or equal to 1.0 but less than 1.5 .25%
Less than 1.0 .125%
(b) LETTER OF CREDIT FEES. The Borrower agrees to pay the Agent, for the
account of each Lender, commissions for issuing the Letters of Credit on the
daily average outstanding of the maximum liability of the Issuing Bank existing
from time to time under such Letter of Credit (calculated separately for each
Letter of Credit) at the rate of 2% per annum, provided that each Letter of
Credit shall bear a minimum commission of $1,000.00. Each Letter of Credit shall
be deemed to be outstanding up to the full face amount (plus any increases) of
the Letter of Credit until the Issuing Bank has received the canceled Letter of
Credit or a written cancellation of the Letter of Credit from the beneficiary of
such Letter of Credit in form and substance acceptable to the Issuing Bank, or
for any reductions in the amount of the Letter of Credit (other than from a
drawing), written notification from the beneficiary of such Letter of Credit.
Such commissions are payable quarterly in arrears on each Quarterly Date and
upon cancellation or expiration of each such Letter of Credit.
(c) FEE LETTER. The Borrower shall pay to the Agent for its account such
other fees as are set forth in the fee letter between Borrower and Agent, dated
of even date herewith, on the dates specified therein to the extent not paid
prior to the Closing Date.
Section 2.05 SEVERAL OBLIGATIONS. The failure of any Lender to make any
Loan to be made by it or to provide funds for disbursements or reimbursements
under Letters of Credit on the date
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specified therefor shall not relieve any other Lender of its obligation to make
its Loan or provide funds on such date, but no Lender shall be responsible for
the failure of any other Lender to make a Loan to be made by such other Lender
or to provide funds to be provided by such other Lender.
Section 2.06 NOTES. The Revolving Credit Loans made by each Lender shall
be evidenced by a single promissory note of the Borrower in substantially the
form of EXHIBIT A-1, dated (i) the Closing Date or (ii) the effective date of an
Assignment pursuant to Section 12.06(b), payable to the order of such Lender in
a principal amount equal to its Maximum Revolving Credit Amount as originally in
effect and otherwise duly completed and such substitute Notes as required by
Section 12.06(b). The Term Loans made by each Lender shall be evidenced by a
single promissory note of the Borrower in substantially the form of EXHIBIT A-2,
dated as of (i) the Closing Date or (ii) the effective date of an Assignment
pursuant to Section 12.06(b), payable to the order of such Lender and otherwise
duly completed and such substitute Notes as required by Section 12.06(b). The
date, amount, Type, interest rate and Interest Period of each Loan made by each
Lender, and all payments made on account of the principal thereof, shall be
recorded by such Lender on its books for its Notes, and, prior to any transfer
may be endorsed by such Lender on the schedule attached to such Notes or any
continuation thereof or on any separate record maintained by such Lender.
Failure to make any such notation or to attach a schedule shall not affect any
Lender's or the Borrower's rights or obligations in respect of such Loans or
affect the validity of such transfer by any Lender of its Notes.
Section 2.07 PREPAYMENTS.
(a) VOLUNTARY PREPAYMENTS. The Borrower may prepay the Base Rate Loans
upon not less than one (1) Business Day's prior notice to the Agent (which shall
promptly notify the Lenders), which notice shall specify the prepayment date
(which shall be a Business Day) and the amount of the prepayment (which shall be
at least $10,000 or the remaining aggregate principal balance outstanding on the
Notes) and shall be irrevocable and effective only upon receipt by the Agent,
provided that interest on the principal prepaid, accrued to the prepayment date,
shall be paid on the prepayment date. The Borrower may prepay Eurodollar Loans
on the same conditions as for Base Rate Loans (except that prior notice to the
Agent shall be not less than three (3) Business Days for Eurodollar Loans) and
in addition such prepayments of Eurodollar Loans shall be subject to the terms
of Section 5.05 and shall be in an amount equal to all of the Eurodollar Loans
for the Interest Period prepaid.
Notwithstanding the foregoing, if the Borrower should prepay the
Revolving Credit Loans in their entirety, Borrower shall pay to the Agent, for
the benefit of the Lenders, a prepayment fee calculated as follows:
(i) if such prepayment occurs on or before the first
anniversary of the Closing Date, 1.5% of the Aggregate
Revolving Credit Commitment as of the Closing Date; or
(ii) if such prepayment occurs after the first anniversary of
the Closing Date, but on or before the second anniversary
of the Closing Date, 1.0% of the Aggregate Revolving
Credit Commitment as of the Closing Date.
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(b) MANDATORY PREPAYMENTS.
(i) If, after giving effect to any termination or reduction of
the Aggregate Maximum Revolving Credit Amounts pursuant to Section
2.03(b), the outstanding aggregate principal amount of the Revolving
Credit Loans plus the LC Exposure exceeds the Aggregate Maximum
Revolving Credit Amounts, the Borrower shall (A) prepay the Revolving
Credit Loans on the date of such termination or reduction in an
aggregate principal amount equal to the excess, together with interest
on the principal amount paid accrued to the date of such prepayment and
(B) if any excess remains after prepaying all of the Revolving Credit
Loans because of LC Exposure, pay to the Agent on behalf of the Lenders
an amount equal to the excess to be held as cash collateral as provided
in Section 2.09(b) hereof.
(ii) Upon any redetermination of the amount of the Borrowing
Base, if the redetermined Borrowing Base is less than the aggregate
outstanding principal amount of the Revolving Credit Loans plus the LC
Exposure, then the Borrower shall within thirty (30) days of receipt of
written notice thereof (A) prepay the Revolving Credit Loans in an
aggregate principal amount equal to such excess, together with interest
on the principal amount paid accrued to the date of such prepayment and
(B) if a Borrowing Base deficiency remains after prepaying all of the
Revolving Credit Loans because of LC Exposure, the Borrower shall pay to
the Agent on behalf of the Lenders an amount equal to such Borrowing
Base deficiency to be held as cash collateral as provided in Section
2.09(b).
(iii) If the Borrower raises any cash proceeds by the offering of
equity, 50% of the net cash proceeds obtained from such equity offering
shall be used to prepay the outstanding principal on the Loans, applied
in accordance with Section 2.07(c) to either the Term Loans and/or the
Revolving Credit Loans as the Borrower shall elect.
(c) GENERALLY. Any prepayments on the Revolving Credit Loans made during
the Revolving Credit Period may be reborrowed pursuant to Section 2.01(a). Any
prepayments made on the Revolving Credit Loans during the Term Loan Period shall
be applied to installments of the Revolving Credit Notes in the inverse order of
maturity. Any prepayments on the Term Loans may not be reborrowed and shall be
applied to installments on the Term Notes in the inverse order of maturity.
Prepayments of Eurodollar Loans required by Section 2.07(b) shall be subject to
the terms of Section 5.05 and shall be in an amount equal to all of the
Eurodollar Loans for the Interest Period prepaid.
Section 2.08 ASSUMPTION OF RISKS. The Borrower assumes all risks of the
acts or omissions of any beneficiary of any Letter of Credit or any transferee
thereof with respect to its use of such Letter of Credit or the proceeds
thereof. Neither the Issuing Bank (except in the case of willful misconduct or
gross negligence on the part of the Issuing Bank or any of its employees), its
correspondents nor any Lender shall be responsible for the validity, sufficiency
or genuineness of certificates or other documents or any endorsements thereon,
even if such certificates or other documents should in fact prove to be invalid,
insufficient, fraudulent or forged; for errors, omissions, interruptions or
delays in transmissions or delivery of any messages by mail, telex, or
otherwise,
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whether or not they be in code; for errors in translation or for errors in
interpretation of technical terms; the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason; the failure
of any beneficiary or any transferee of any Letter of Credit to comply fully
with conditions required in order to draw upon any Letter of Credit; or for any
other consequences arising from causes beyond the Issuing Bank's control or the
control of the Issuing Bank's correspondents. In addition, neither the Issuing
Bank, the Agent nor any Lender shall be responsible for any error, neglect, or
default of any of the Issuing Bank's correspondents, except as a result of the
Issuing Bank's, the Agent's or any Lender's wilful misconduct or gross
negligence; and none of the above shall affect, impair or prevent the vesting of
any of the Issuing Bank's, the Agent's or any Lender's rights or powers
hereunder, or under the Letter of Credit Agreements, all of which rights shall
be cumulative. The Issuing Bank and its correspondents may accept certificates
or other documents that appear on their face to be in order, without
responsibility for further investigation of any matter contained therein
regardless of any notice or information to the contrary. In furtherance and not
in limitation of the foregoing provisions, the Borrower agrees that any action,
inaction or omission taken or not taken by the Issuing Bank or by any
correspondent for the Issuing Bank in good faith in connection with any Letter
of Credit, or any related drafts, certificates, documents or instruments, shall
be binding on the Borrower and shall not put the Issuing Bank or its
correspondents under any resulting liability to the Borrower, except as a result
of the Issuing Bank's, the Agent's or any Lender's wilful misconduct or gross
negligence.
Section 2.09 OBLIGATION TO REIMBURSE AND TO PREPAY.
(a) If a disbursement by the Issuing Bank is made under any Letter of
Credit, except as otherwise provided in Subsection 2.09(d) below, the Borrower
shall pay to the Agent within two (2) Business Days after notice of any such
disbursement is received by the Borrower, the amount of each such disbursement
made by the Issuing Bank under the Letter of Credit (if such payment is not
sooner effected as may be required under this Section 2.10 or under other
provisions of the Letter of Credit), together with interest on the amount
disbursed from and including the date of disbursement until payment in full of
such disbursed amount at a varying rate per annum equal to (i) the then
applicable interest rate for Base Rate Loans through the second Business Day
after notice of such disbursement is received by the Borrower and (ii)
thereafter, the Post-Default Rate for Base Rate Loans (but in no event to exceed
the Highest Lawful Rate) for the period from and including the third Business
Day following the date of such disbursement to and including the date of
repayment in full of such disbursed amount. The obligations of the Borrower
under this Agreement with respect to each Letter of Credit shall be absolute,
unconditional and irrevocable and shall be paid or performed strictly in
accordance with the terms of this Agreement under all circumstances whatsoever,
including, without limitation, but only to the fullest extent permitted by
applicable law, the following circumstances: (i) any lack of validity or
enforceability of this Agreement, any Letter of Credit or any of the Security
Instruments; (ii) any amendment or waiver of (including any default), or any
consent to departure from this Agreement (except to the extent permitted by any
amendment or waiver), any Letter of Credit or any of the Security Instruments;
(iii) the existence of any claim, set-off, defense or other rights which the
Borrower may have at any time against the beneficiary of any Letter of Credit or
any transferee of any Letter of Credit (or any Persons for whom
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any such beneficiary or any such transferee may be acting), the Issuing Bank,
the Agent, any Lender or any other Person, whether in connection with this
Agreement, any Letter of Credit, the Security Instruments, the transactions
contemplated hereby or any unrelated transaction; (iv) any statement,
certificate, draft, notice or any other document presented under any Letter of
Credit proves to have been forged, fraudulent, insufficient or invalid in any
respect or any statement therein proves to have been untrue or inaccurate in any
respect whatsoever; (v) payment by the Issuing Bank under any Letter of Credit
against presentation of a draft or certificate which appears on its face to
comply, but does not comply, with the terms of such Letter of Credit; and (vi)
any other circumstance or happening whatsoever, whether or not similar to any of
the foregoing.
Notwithstanding anything in this Agreement to the contrary, the Borrower will
not be liable for payment or performance that results from the gross negligence
or willful misconduct of the Issuing Bank, except where the Borrower or any
Subsidiary actually recovers the proceeds for itself or the Issuing Bank of any
payment made by the Issuing Bank in connection with such gross negligence or
willful misconduct.
(b) In the event of the occurrence of any Event of Default, a payment or
prepayment pursuant to Section 2.07(b) or the maturity of the Notes, whether by
acceleration or otherwise, an amount equal to the LC Exposure (or the excess in
the case of Section 2.07(b)) shall be deemed to be forthwith due and owing by
the Borrower to the Issuing Bank, the Agent and the Lenders as of the date of
any such occurrence; and the Borrower's obligation to pay such amount shall be
absolute and unconditional, without regard to whether any beneficiary of any
such Letter of Credit has attempted to draw down all or a portion of such amount
under the terms of a Letter of Credit, and, to the fullest extent permitted by
applicable law, shall not be subject to any defense or be affected by a right of
set-off, counterclaim or recoupment which the Borrower may now or hereafter have
against any such beneficiary, the Issuing Bank, the Agent, the Lenders or any
other Person for any reason whatsoever. Such payments shall be held by the Agent
on behalf of the Lenders as cash collateral securing the LC Exposure in an
account or accounts at the Principal Office; and the Borrower hereby grants to
and by its deposit with the Agent grants to the Agent a security interest in
such cash collateral. In the event of any such payment by the Borrower of
amounts contingently owing under outstanding Letters of Credit and in the event
that thereafter drafts or other demands for payment complying with the terms of
such Letters of Credit are not made prior to the respective expiration dates
thereof, the Agent agrees, if no Event of Default has occurred and is continuing
or if no other amounts are outstanding under this Agreement, the Notes or the
Security Instruments, to remit to the Borrower amounts for which the contingent
obligations evidenced by the Letters of Credit have ceased.
(c) Each Lender severally and unconditionally agrees that it shall
promptly reimburse the Issuing Bank an amount equal to such Lender's Percentage
Share of any disbursement made by the Issuing Bank under any Letter of Credit
that is not reimbursed according to this Section 2.10.
(d) Notwithstanding anything to the contrary contained herein, if no
Event of Default has occurred and is continuing and subject to availability
under the Aggregate Revolving Credit Commitments (after reduction for LC
Exposure), to the extent the Borrower has not reimbursed the Issuing Bank for
any drawn upon Letter of Credit within two (2) Business Days after notice of
such
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disbursement has been received by the Borrower, the amount of such Letter of
Credit reimbursement obligation shall automatically be funded by the Lenders as
a Revolving Credit Loan hereunder and used by the Lenders to pay such Letter of
Credit reimbursement obligation. If an Event of Default has occurred and is
continuing, or if the funding of such Letter of Credit reimbursement obligation
as a Revolving Credit Loan would cause the aggregate amount of all Revolving
Credit Loans outstanding to exceed the Aggregate Revolving Credit Commitments
(after reduction for LC Exposure), such Letter of Credit reimbursement
obligation shall not be funded as a Revolving Credit Loan, but instead shall
accrue interest as provided in Section 2.10(a).
Section 2.10 LENDING OFFICES. The Loans of each Type made by each Lender
shall be made and maintained at such Lender's Applicable Lending Office for
Loans of such Type.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS.
(a) REVOLVING CREDIT LOANS. Commencing on the Quarterly Date immediately
following the Revolving Credit Termination Date, the aggregate principal amount
of the Revolving Credit Notes outstanding on the Revolving Credit Termination
Date shall be payable in eleven (11) equal consecutive quarterly installments,
each equal to 1/20th of the outstanding principal amount of the Revolving Credit
Notes as of the Revolving Credit Termination Date, with final payment of the
remaining principal balance on the Revolving Credit Notes due on the Final
Maturity Date.
(b) TERM LOANS. Commencing on March 15, 1998, and on each Quarterly Date
thereafter, the aggregate principal amount of the Term Notes shall be payable in
installments in the principal amounts set forth on SCHEDULE 3.01, with final
payment of any remaining principal balance on the Term Notes due on March 15,
2002.
(c) GENERALLY. The Borrower will pay to the Agent, for the account of
each Lender, the principal payments required by this Section 3.01.
Section 3.02 INTEREST.
(a) INTEREST RATES. The Borrower will pay to the Agent, for the account
of each Lender, interest on the unpaid principal amount of each Loan made by
such Lender for the period commencing on the date such Loan is made to, but
excluding, the date such Loan shall be paid in full, at the following rates per
annum:
(i) if such a Loan is a Base Rate Loan, the Base Rate (as in
effect from time to time) plus the Applicable Margin, but in no event to
exceed the Highest Lawful Rate; and
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(ii) if such a Loan is a Eurodollar Loan, for each Interest
Period relating thereto, the Eurodollar Rate for such Loan plus the
Applicable Margin (as in effect from time to time), but in no event to
exceed the Highest Lawful Rate.
(b) POST-DEFAULT RATE. Notwithstanding the foregoing, the Borrower will
pay to the Agent, for the account of each Lender interest at the applicable
Post-Default Rate on any principal of any Loan made by such Lender, and (to the
fullest extent permitted by law) on any other amount payable by the Borrower
hereunder, under any Loan Document or under any Note held by such Lender to or
for account of such Lender, for the period commencing on the date of an Event of
Default until the same is paid in full or all Events of Default are cured or
waived.
(c) DUE DATES. Accrued interest on Base Rate Loans shall be payable
quarterly commencing on December 15, 1997, and on each Quarterly Date thereafter
and accrued interest on each Eurodollar Loan shall be payable on the last day of
the Interest Period therefor and, if such Interest Period is longer than three
months at three-month intervals following the first day of such Interest Period,
except that interest payable at the Post-Default Rate shall be payable from time
to time on demand and interest on any Eurodollar Loan that is converted into a
Base Rate Loan (pursuant to Section 5.04) shall be payable on the date of
conversion (but only to the extent so converted).
(d) DETERMINATION OF RATES. Promptly after the determination of any
interest rate provided for herein or any change therein, the Agent shall notify
the Lenders to which such interest is payable and the Borrower thereof. Each
determination by the Agent of an interest rate or fee hereunder shall, except in
cases of manifest error, be final, conclusive and binding on the parties.
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS. Except to the extent otherwise provided herein,
all payments of principal, interest and other amounts to be made by the Borrower
under this Agreement, the Letter of Credit Agreements, and the Notes shall be
made in Dollars, in immediately available funds, to the Agent at such account as
the Agent shall specify by notice to the Borrower from time to time, not later
than 11:00 a.m. Houston time on the date on which such payments shall become due
(each such payment made after such time on such due date to be deemed to have
been made on the next succeeding Business Day). Such payments shall be made
without (to the fullest extent permitted by applicable law) defense, set-off or
counterclaim. Each payment received by the Agent under this Agreement or any
Note for account of a Lender shall be paid promptly to such Lender in
immediately available funds. Except as otherwise provided in the definition of
"Interest Period", if the due date of any payment under this Agreement or any
Note would otherwise fall on a day which is not a Business Day such date shall
be extended to the next succeeding Business Day and interest shall be payable
for any principal so extended for the period of such extension. At the time of
each payment to the Agent of any principal of or interest on any borrowing, the
Borrower shall notify the Agent of the Loans to which such payment shall apply.
In the absence of such notice the Agent may
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specify the Loans to which such payment shall apply, but to the extent possible
such payment or prepayment will be applied first to the Loans comprised of Base
Rate Loans.
Section 4.02 PRO RATA TREATMENT. Except to the extent otherwise provided
herein each Lender agrees that: (i) each borrowing from the Lenders under
Section 2.01 and each continuation and conversion under Section 2.02 shall be
made from the Lenders pro rata in accordance with their Percentage Share, each
payment of commitment fee or other fees under Section 2.04(a) and Section
2.04(b) shall be made for account of the Lenders pro rata in accordance with
their Percentage Share, and each termination or reduction of the amount of the
Aggregate Maximum Revolving Credit Amounts under Section 2.03(b) shall be
applied to the Revolving Credit Commitment of each Lender, pro rata according to
the amounts of its respective Revolving Credit Commitment; (ii) each payment of
principal of Loans by the Borrower shall be made for account of the Lenders pro
rata in accordance with the respective unpaid principal amount of the Loans held
by the Lenders; (iii) each payment of interest on Loans by the Borrower shall be
made for account of the Lenders pro rata in accordance with the amounts of
interest due and payable to the respective Lenders; and (iv) each reimbursement
by the Borrower of disbursements under Letters of Credit shall be made for
account of the Issuing Bank or, if funded by the Lenders, pro rata for the
account of the Lenders, in accordance with the amounts of reimbursement
obligations due and payable to each respective Lender.
Section 4.03 COMPUTATIONS. Interest on Eurodollar Loans shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which such
interest is payable, unless such calculation would exceed the Highest Lawful
Rate, in which case interest shall be calculated on the per annum basis of a
year of 365 or 366 days, as the case may be. Interest on Base Rate Loans and
fees shall be computed on the basis of a year of 365 or 366 days, as the case
may be, and actual days elapsed (including the first day but excluding the last
day) occurring in the period for which such interest is payable.
Section 4.04 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall
have been notified by a Lender or the Borrower prior to the date on which such
notifying party is scheduled to make payment to the Agent (in the case of a
Lender) of the proceeds of a Loan or a payment under a Letter of Credit to be
made by it hereunder or (in the case of the Borrower) a payment to the Agent for
account of one or more of the Lenders hereunder (such payment being herein
called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt,
that it does not intend to make the Required Payment to the Agent, the Agent may
assume that the Required Payment has been made and may, in reliance upon such
assumption (but shall not be required to), make the amount thereof available to
the intended recipient(s) on such date and, if such Lender or the Borrower (as
the case may be) has not in fact made the Required Payment to the Agent, the
recipient(s) of such payment shall, on demand, repay to the Agent the amount so
made available together with interest thereon in respect of each day during the
period commencing on the date such amount was so made available by the Agent
until, but excluding, the date the Agent recovers such amount at a rate per
annum which, for any Lender as recipient, will be equal to the Federal Funds
Rate, and for the Borrower as recipient, will be equal to the Base Rate plus the
Applicable Margin.
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Section 4.05 SET-OFF, SHARING OF PAYMENTS, ETC.
(a) Upon the occurrence and during the continuance of an Event of
Default, the Borrower agrees that, in addition to (and without limitation of)
any right of set-off, bankers' lien or counterclaim a Lender may otherwise have,
each Lender shall have the right and be entitled (after consultation with the
Agent), at its option, to offset balances held by it or by any of its Affiliates
for account of the Borrower or any Subsidiary at any of its offices, in Dollars
or in any other currency, against any principal of or interest on any of such
Lender's Loans, or any other amount payable to such Lender hereunder, which is
not paid when due (regardless of whether such balances are then due to the
Borrower), in which case it shall promptly notify the Borrower and the Agent
thereof, provided that such Lender's failure to give such notice shall not
affect the validity thereof.
(b) If any Lender shall obtain payment of any principal of or interest
on any Loan made by it to the Borrower under this Agreement (or reimbursement as
to any Letter of Credit) through the exercise of any right of set-off, banker's
lien or counterclaim or similar right or otherwise, and, as a result of such
payment, such Lender shall have received a greater percentage of the principal
or interest (or reimbursement) then due hereunder by the Borrower to such Lender
than the percentage received by any other Lenders, it shall promptly (i) notify
the Agent and each other Lender thereof and (ii) purchase from such other
Lenders participations in (or, if and to the extent specified by such Lender,
direct interests in) the Loans (or participations in Letters of Credit) made by
such other Lenders (or in interest due thereon, as the case may be) in such
amounts, and make such other adjustments from time to time as shall be
equitable, to the end that all the Lenders shall share the benefit of such
excess payment (net of any expenses which may be incurred by such Lender in
obtaining or preserving such excess payment) pro rata in accordance with the
unpaid principal and/or interest on the Loans held by each of the Lenders (or
reimbursements of Letters of Credit). To such end all the Lenders shall make
appropriate adjustments among themselves (by the resale of participations sold
or otherwise) if such payment is rescinded or must otherwise be restored. The
Borrower agrees that any Lender so purchasing a participation (or direct
interest) in the Loans made by other Lenders (or in interest due thereon, as the
case may be) may exercise all rights of set-off, banker's lien, counterclaim or
similar rights with respect to such participation as fully as if such Lender
were a direct holder of Loans (or Letters of Credit) in the amount of such
participation. Nothing contained herein shall require any Lender to exercise any
such right or shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of the Borrower. If under any applicable bankruptcy, insolvency or
other similar law, any Lender receives a secured claim in lieu of a set-off to
which this Section 4.05 applies, such Lender shall, to the extent practicable,
exercise its rights in respect of such secured claim in a manner consistent with
the rights of the Lenders entitled under this Section 4.05 to share the benefits
of any recovery on such secured claim.
Section 4.06 TAXES.
(a) PAYMENTS FREE AND CLEAR. Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 4.01, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
EXCLUDING, in the case of each Lender, the Issuing Bank and the Agent, taxes
imposed
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on its income, and franchise or similar taxes imposed on it, by (i) any
jurisdiction (or political subdivision thereof) of which the Agent, the Issuing
Bank or such Lender, as the case may be, is a citizen or resident or in which
such Lender has an Applicable Lending Office, (ii) the jurisdiction (or any
political subdivision thereof) in which the Agent, the Issuing Bank or such
Lender is organized, or (iii) any jurisdiction (or political subdivision
thereof) in which such Lender, the Issuing Bank or the Agent is presently doing
business which taxes are imposed solely as a result of doing business in such
jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "TAXES"). If the
Borrower shall be required by law to deduct any Taxes from or in respect of any
sum payable hereunder to the Lenders, the Issuing Bank or the Agent (i) the sum
payable shall be increased by the amount necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 4.06) such Lender, the Issuing Bank or the Agent (as the case
may be) shall receive an amount equal to the sum it would have received had no
such deductions been made, (ii) the Borrower shall make such deductions and
(iii) the Borrower shall pay the full amount deducted to the relevant taxing
authority or other Governmental Authority in accordance with applicable law and
provide the relevant Lender with a receipt thereof.
(b) OTHER TAXES. In addition, to the fullest extent permitted by
applicable law, the Borrower agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, any
Assignment or any Security Instrument (hereinafter referred to as "OTHER
TAXES").
(C) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
THE BORROWER WILL INDEMNIFY EACH LENDER AND THE ISSUING BANK AND THE AGENT FOR
THE FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, BUT NOT LIMITED TO, ANY
TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS PAYABLE
UNDER THIS SECTION 4.06) PAID BY SUCH LENDER, THE ISSUING BANK OR THE AGENT (ON
THEIR BEHALF OR ON BEHALF OF ANY LENDER), AS THE CASE MAY BE, AND ANY LIABILITY
(INCLUDING PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT
THERETO, WHETHER OR NOT SUCH TAXES OR OTHER TAXES WERE CORRECTLY OR LEGALLY
ASSERTED UNLESS THE PAYMENT OF SUCH TAXES WAS NOT CORRECTLY OR LEGALLY ASSERTED
AND SUCH LENDER'S PAYMENT OF SUCH TAXES OR OTHER TAXES WAS THE RESULT OF ITS
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ANY PAYMENT PURSUANT TO SUCH
INDEMNIFICATION SHALL BE MADE WITHIN THIRTY (30) DAYS AFTER THE DATE ANY LENDER,
THE ISSUING BANK OR THE AGENT, AS THE CASE MAY BE, MAKES WRITTEN DEMAND
THEREFOR. IF ANY LENDER, THE ISSUING BANK OR THE AGENT RECEIVES A REFUND OR
CREDIT IN RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH LENDER, ISSUING
BANK OR THE AGENT HAS RECEIVED PAYMENT FROM THE BORROWER IT SHALL PROMPTLY
NOTIFY THE BORROWER OF SUCH REFUND OR CREDIT AND SHALL, IF NO DEFAULT HAS
OCCURRED AND IS CONTINUING, WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A REQUEST
BY THE BORROWER (OR PROMPTLY UPON RECEIPT, IF THE BORROWER HAS REQUESTED
APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT HERETO), PAY AN AMOUNT EQUAL TO
SUCH REFUND OR CREDIT TO THE BORROWER WITHOUT INTEREST (BUT WITH ANY INTEREST SO
REFUNDED OR CREDITED), PROVIDED THAT THE BORROWER, UPON THE REQUEST OF SUCH
LENDER, THE ISSUING BANK OR THE AGENT, AGREES TO RETURN SUCH REFUND OR CREDIT
(PLUS
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PENALTIES, INTEREST OR OTHER CHARGES) TO SUCH LENDER, THE ISSUING BANK OR THE
AGENT IN THE EVENT SUCH LENDER, THE ISSUING BANK OR THE AGENT IS REQUIRED TO
REPAY SUCH REFUND OR CREDIT.
(d) LENDER REPRESENTATIONS.
(i) Each Lender represents that it is either (1) a banking
association or corporation organized under the laws of the United States
of America or any state thereof or (2) it is entitled to complete
exemption from United States withholding tax imposed on or with respect
to any payments, including fees, to be made to it pursuant to this
Agreement (A) under an applicable provision of a tax convention to which
the United States of America is a party or (B) because it is acting
through a branch, agency or office in the United States of America and
any payment to be received by it hereunder is effectively connected with
a trade or business in the United States of America. Each Lender that is
not a banking association or corporation organized under the laws of the
United States of America or any state thereof agrees to provide to the
Borrower and the Agent on the Closing Date, or on the date of its
delivery of the Assignment pursuant to which it becomes a Lender, and at
such other times as required by United States law or as the Borrower or
the Agent shall reasonably request, two accurate and complete original
signed copies of either (A) Internal Revenue Service Form 4224 (or
successor form) certifying that all payments to be made to it hereunder
will be effectively connected to a United States trade or business (the
"FORM 4224 CERTIFICATION") or (B) Internal Revenue Service Form 1001 (or
successor form) certifying that it is entitled to the benefit of a
provision of a tax convention to which the United States of America is a
party which completely exempts from United States withholding tax all
payments to be made to it hereunder (the "FORM 1001 CERTIFICATION"). In
addition, each Lender agrees that if it previously filed a Form 4224
Certification, it will deliver to the Borrower and the Agent a new Form
4224 Certification prior to the first payment date occurring in each of
its subsequent taxable years; and if it previously filed a Form 1001
Certification, it will deliver to the Borrower and the Agent a new
certification prior to the first payment date falling in the third year
following the previous filing of such certification. Each Lender also
agrees to deliver to the Borrower and the Agent such other or
supplemental forms as may at any time be required as a result of changes
in applicable law or regulation in order to confirm or maintain in
effect its entitlement to exemption from United States withholding tax
on any payments hereunder, PROVIDED that the circumstances of such
Lender at the relevant time and applicable laws permit it to do so. If a
Lender determines, as a result of any change in either (i) a
Governmental Requirement or (ii) its circumstances, that it is unable to
submit any form or certificate that it is obligated to submit pursuant
to this Section 4.06, or that it is required to withdraw or cancel any
such form or certificate previously submitted, it shall promptly notify
the Borrower and the Agent of such fact. If a Lender is organized under
the laws of a jurisdiction outside the United States of America, unless
the Borrower and the Agent have received a Form 1001 Certification or
Form 4224 Certification satisfactory to them indicating that all
payments to be made to such Lender hereunder are not subject to United
States withholding tax, the Borrower shall withhold taxes from such
payments at the applicable statutory rate. Each Lender agrees to
indemnify and hold harmless the Borrower or Agent, as applicable, from
any United States taxes, penalties,
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interest and other expenses, costs and losses incurred or payable by (i)
the Agent as a result of such Lender's failure to submit any form or
certificate that it is required to provide pursuant to this Section 4.06
or (ii) the Borrower or the Agent as a result of their reliance on any
such form or certificate which such Lender has provided to them pursuant
to this Section 4.06.
(ii) For any period with respect to which a Lender has failed to
provide the Borrower with the form required pursuant to this Section
4.06, if any, (other than if such failure is due to a change in a
Governmental Requirement occurring subsequent to the date on which a
form originally was required to be provided), such Lender shall not be
entitled to indemnification under Section 4.06 with respect to taxes
imposed by the United States which taxes would not have been imposed but
for such failure to provide such forms; PROVIDED, HOWEVER, that if a
Lender, which is otherwise exempt from or subject to a reduced rate of
withholding tax, becomes subject to taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as
such Lender shall reasonably request to assist such Lender to recover
such taxes.
(iii) Any Lender claiming any additional amounts payable pursuant
to this Section 4.06 shall use reasonable efforts (consistent with legal
and regulatory restrictions) to file any certificate or document
requested by the Borrower or the Agent or to change the jurisdiction of
its Applicable Lending Office or to contest any tax imposed if the
making of such a filing or change or contesting such tax would avoid the
need for or reduce the amount of any such additional amounts that may
thereafter accrue and would not, in the sole determination of such
Lender, be otherwise disadvantageous to such Lender.
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 CAPITAL ADEQUACY; ADDITIONAL COSTS.
(a) EURODOLLAR REGULATIONS, ETC. The Borrower shall pay directly to each
Lender from time to time such amounts as such Lender may determine to be
necessary to compensate such Lender for any costs which it determines are
attributable to its making or maintaining of any Eurodollar Loans or issuing or
participating in Letters of Credit hereunder or its obligation to make any
Eurodollar Loans or issue or participate in any Letters of Credit hereunder, or
any reduction in any amount receivable by such Lender hereunder in respect of
any of such Eurodollar Loans, Letters of Credit or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"ADDITIONAL COSTS"), resulting from any Regulatory Change which: (i) changes the
basis of taxation of any amounts payable to such Lender under this Agreement or
any Note in respect of any of such Eurodollar Loans or Letters of Credit (other
than taxes imposed on the overall net income of such Lender or of its Applicable
Lending Office for any of such Eurodollar Loans by the jurisdiction in which
such Lender has its principal office or Applicable Lending Office); or (ii)
imposes or modifies any reserve, special deposit, minimum capital, capital ratio
or similar requirements relating to any extensions of credit or other assets of,
or any deposits with or other
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liabilities of such Lender, or the Commitment or Loans of such Lender or the
Eurodollar interbank market; or (iii) imposes any other condition affecting this
Agreement or any Notes (or any of such extensions of credit or liabilities) or
such Lender's Commitment or Loans. Each Lender will notify the Agent and the
Borrower of any event occurring after the Closing Date which will entitle such
Lender to compensation pursuant to this Section 5.01(a) as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation, and will designate a different Applicable Lending Office for the
Loans of such Lender affected by such event if such designation will avoid the
need for, or reduce the amount of, such compensation and will not, in the
reasonable opinion of such Lender, be disadvantageous to such Lender, provided
that such Lender shall have no obligation to so designate an Applicable Lending
Office located in the United States. If any Lender requests compensation from
the Borrower under this Section 5.01(a), the Borrower may, by notice to such
Lender, suspend the obligation of such Lender to make additional Revolving
Credit Loans of the Type with respect to which such compensation is requested
until the Regulatory Change giving rise to such request ceases to be in effect
(in which case the provisions of Section 5.04 shall be applicable).
(b) REGULATORY CHANGE. Without limiting the effect of the provisions of
Section 5.01(a), in the event that at any time (by reason of any Regulatory
Change or any other circumstances arising after the Closing Date affecting (A)
any Lender, (B) the Eurodollar interbank market or (C) such Lender's position in
such market), the Eurodollar Rate, as determined in good faith by such Lender,
will not adequately and fairly reflect the cost to such Lender of funding its
Eurodollar Loans, then, if such Lender so elects, by notice to the Borrower and
the Agent, the obligation of such Lender to make additional Eurodollar Loans
shall be suspended until such Regulatory Change or other circumstances ceases to
be in effect (in which case the provisions of Section 5.04 shall be applicable).
(c) CAPITAL ADEQUACY. Without limiting the effect of the foregoing
provisions of this Section 5.01 (but without duplication), the Borrower shall
pay directly to any Lender from time to time on request such amounts as such
Lender may reasonably determine to be necessary to compensate such Lender or its
parent or holding company for any costs which it determines are attributable to
the maintenance by such Lender or its parent or holding company (or any
Applicable Lending Office), pursuant to any Governmental Requirement following
any Regulatory Change, of capital in respect of its Commitment, its Notes or its
Loans or any interest held by it in any Letter of Credit, such compensation to
include, without limitation, an amount equal to any reduction of the rate of
return on assets or equity of such Lender or its parent or holding company (or
any Applicable Lending Office) to a level below that which such Lender or its
parent or holding company (or any Applicable Lending Office) could have achieved
but for such Governmental Requirement. Such Lender will notify the Borrower that
it is entitled to compensation pursuant to this Section 5.01(c) as promptly as
practicable after it determines to request such compensation.
(d) COMPENSATION PROCEDURE. Any Lender notifying the Borrower of the
incurrence of additional costs under this Section 5.01 shall in such notice to
the Borrower and the Agent set forth in reasonable detail the basis and amount
of its request for compensation. Determinations and allocations by each Lender
for purposes of this Section 5.01 of the effect of any Regulatory Change
pursuant to Section 5.01(a) or (b), or of the effect of capital maintained
pursuant to Section 5.01(c),
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on its costs or rate of return of maintaining Loans or its obligation to make
Loans or issue Letters of Credit, or on amounts receivable by it in respect of
Loans or Letters of Credit, and of the amounts required to compensate such
Lender under this Section 5.01, shall be conclusive and binding for all
purposes, provided that such determinations and allocations are made on a
reasonable basis. Any request for additional compensation under this Section
5.01 shall be paid by the Borrower within thirty (30) days of the receipt by the
Borrower of the notice described in this Section 5.01(d).
Section 5.02 LIMITATION ON EURODOLLAR LOANS. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any Eurodollar
Rate for any Interest Period:
(i) the Agent determines (which determination shall be
conclusive, absent manifest error) that quotations of interest rates for
the relevant deposits referred to in the definition of "Eurodollar Rate"
in Section 1.02 are not being provided in the relevant amounts or for
the relevant maturities for purposes of determining rates of interest
for Eurodollar Loans as provided herein; or
(ii) the Agent determines (which determination shall be
conclusive, absent manifest error) that the relevant rates of interest
referred to in the definition of "Eurodollar Rate" in Section 1.02 upon
the basis of which the rate of interest for Eurodollar Loans for such
Interest Period is to be determined are not sufficient to adequately
cover the cost to the Lenders of making or maintaining Eurodollar Loans;
then the Agent shall give the Borrower prompt notice thereof, and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make additional Eurodollar Loans.
Section 5.03 ILLEGALITY. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to honor its obligation to make or maintain Eurodollar
Loans hereunder, then such Lender shall promptly notify the Borrower thereof and
such Lender's obligation to make Eurodollar Loans shall be suspended until such
time as such Lender may again make and maintain Eurodollar Loans (in which case
the provisions of Section 5.04 shall be applicable).
Section 5.04 BASE RATE LOANS PURSUANT TO SECTIONS 5.01, 5.02 AND 5.03.
If the obligation of any Lender to make Eurodollar Loans shall be suspended
pursuant to Sections 5.01, 5.02 or 5.03 ("AFFECTED LOANS"), all Affected Loans
which would otherwise be made by such Lender shall be made instead as Base Rate
Loans (and, if an event referred to in Section 5.01(b) or Section 5.03 has
occurred and such Lender so requests by notice to the Borrower, all Affected
Loans of such Lender then outstanding shall be automatically converted into Base
Rate Loans on the date specified by such Lender in such notice) and, to the
extent that Affected Loans are so made as (or converted into) Base Rate Loans,
all payments of principal which would otherwise be applied to such Lender's
Affected Loans shall be applied instead to its Base Rate Loans.
Section 5.05 COMPENSATION. The Borrower shall pay to each Lender within
thirty (30) days of receipt of written request of such Lender (which request
shall set forth, in reasonable detail, the basis for requesting such amounts and
which shall be conclusive and binding for all purposes
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provided that such determinations are made on a reasonable basis), such amount
or amounts as shall compensate it for any loss, cost, expense or liability which
such Lender determines are attributable to:
(i) any payment, prepayment or conversion of a Eurodollar Loan
properly made by such Lender or the Borrower for any reason (including,
without limitation, the acceleration of the Loans pursuant to Section
10.01) on a date other than the last day of the Interest Period for such
Loan; or
(ii) any failure by the Borrower for any reason (including but
not limited to, the failure of any of the conditions precedent specified
in Article VI to be satisfied) to borrow, continue or convert a
Eurodollar Loan from such Lender on the date for such borrowing,
continuation or conversion specified in the relevant notice given
pursuant to Section 2.02(c).
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which would have accrued on the principal amount so paid, prepaid or converted
or not borrowed for the period from the date of such payment, prepayment or
conversion or failure to borrow to the last day of the Interest Period for such
Loan (or, in the case of a failure to borrow, the Interest Period for such Loan
which would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Loan provided for herein over (ii) the
interest component of the amount such Lender would have bid in the London
interbank market for Dollar deposits of leading banks in amounts comparable to
such principal amount and with maturities comparable to such period (as
reasonably determined by such Lender).
Section 5.06 REPLACEMENT LENDERS.
(a) If any Lender has notified the Borrower and the Agent of its
incurring additional costs under Section 5.01 or has required the Borrower to
make payments for Taxes under Section 4.06, then the Borrower may, unless such
Lender has notified the Borrower and the Agent that the circumstances giving
rise to such notice no longer apply, terminate, in whole but not in part, the
Commitment of such Lender (other than the Agent) (the "TERMINATED LENDER") at
any time upon five (5) Business Days' prior written notice to the Terminated
Lender and the Agent (such notice referred to herein as a "NOTICE OF
TERMINATION").
(b) In order to effect the termination of the Commitment of the
Terminated Lender, the Borrower shall: (i) obtain an agreement with one or more
Lenders to increase their Commitment or Commitments and/or (ii) request any one
or more other banking institutions to become parties to this Agreement in place
and instead of such Terminated Lender and agree to accept a Commitment or
Commitments; PROVIDED, HOWEVER, that such one or more other banking institutions
are reasonably acceptable to the Agent and become parties by executing an
Assignment (the Lenders or other banking institutions that agree to accept in
whole or in part the Commitment of the Terminated Lender being referred to
herein as the "REPLACEMENT LENDERS"), such that the aggregate increased
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and/or accepted Commitments of the Replacement Lenders under clauses (i) and
(ii) above equal the Commitment of the Terminated Lender.
(c) The Notice of Termination shall include the name of the Terminated
Lender, the date the termination will occur (the "LENDER TERMINATION DATE"), and
the Replacement Lender or Replacement Lenders to which the Terminated Lender
will assign its Commitment and, if there will be more than one Replacement
Lender, the portion of the Terminated Lender's Commitment to be assigned to each
Replacement Lender.
(d) On the Lender Termination Date, (i) the Terminated Lender shall by
execution and delivery of an Assignment assign its Commitment to the Replacement
Lender or Replacement Lenders (pro rata, if there is more than one Replacement
Lender, in proportion to the portion of the Terminated Lender's Commitment to be
assigned to each Replacement Lender) indicated in the Notice of Termination and
shall assign to the Replacement Lender or Replacement Lenders each of its Loans
(if any) then outstanding and participation interests in Letters of Credit (if
any) then outstanding (pro rata as aforesaid), (ii) the Terminated Lender shall
endorse its Notes, payable without recourse, representation or warranty to the
order of the Replacement Lender or Replacement Lenders (pro rata as aforesaid),
(iii) the Replacement Lender or Replacement Lenders shall purchase the Notes
held by the Terminated Lender (pro rata as aforesaid) at a price equal to the
unpaid principal amount thereof plus interest, facility and other fees, and
other amounts owing under the Loan Documents accrued and unpaid to the Lender
Termination Date, and (iv) the Replacement Lender or Replacement Lenders will
thereupon (pro rata as aforesaid) succeed to and be substituted in all respects
for the Terminated Lender with like effect as if becoming a Lender pursuant to
the terms of Section 12.06(b), and the Terminated Lender will have the rights
and benefits of an assignor under Section 12.06(b). To the extent not in
conflict, the terms of Section 12.06(b) shall supplement the provisions of this
Section 5.06(d). For each assignment made under this Section 5.06, the
Replacement Lender shall pay to the Agent the processing fee provided for in
Section 12.06(b). The Borrower will be responsible for the payment of any
breakage costs, as set forth in Section 5.05, associated with termination of the
Terminated Lender and assignment of Loans and Commitments to Replacement
Lenders.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING.
The obligation of the Lenders to make the Initial Funding is subject to
the receipt by the Agent and the Lenders of all fees payable pursuant to Section
2.04 on or before the Closing Date and the receipt by the Agent of the following
documents and satisfaction of the other conditions provided in this Section
6.01, each of which shall be reasonably satisfactory to the Agent in form and
substance:
(a) A certificate of the Secretary or an Assistant Secretary of the
Borrower setting forth (i) resolutions of its board of directors with respect to
the authorization of the Borrower to execute
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and deliver the Loan Documents to which it is a party and to enter into the
transactions contemplated in those documents, (ii) the officers of the Borrower
(y) who are authorized to sign the Loan Documents to which Borrower is a party
and (z) who will, until replaced by another officer or officers duly authorized
for that purpose, act as its representative for the purposes of signing
documents and giving notices and other communications in connection with this
Agreement and the transactions contemplated hereby, (iii) specimen signatures of
the authorized officers, and (iv) the articles or certificate of incorporation
and bylaws of the Borrower, certified as being true and complete. The Agent and
the Lenders may conclusively rely on such certificate until the Agent receives
notice in writing from the Borrower to the contrary.
(b) A certificate of the Secretary or an Assistant Secretary of each
Guarantor setting forth (i) resolutions of its board of directors with respect
to the authorization of such Guarantor to execute and deliver the Loan Documents
to which it is a party and to enter into the transactions contemplated in those
documents, (ii) the officers of such Guarantor (y) who are authorized to sign
the Loan Documents to which such Guarantor is a party and (z) who will, until
replaced by another officer or officers duly authorized for that purpose, act as
its representative for the purposes of signing documents and giving notices and
other communications in connection with this Agreement and the transactions
contemplated hereby, (iii) specimen signatures of the authorized officers, and
(iv) the articles or certificate of incorporation and bylaws of such Guarantor,
certified as being true and complete. The Agent and the Lenders may conclusively
rely on such certificate until they receive notice in writing from such
Guarantor to the contrary.
(c) Certificates of the appropriate state agencies with respect to the
existence, qualification and good standing of the Borrower and Subsidiaries.
(d) A compliance certificate which shall be substantially in the form of
EXHIBIT C, duly and properly executed by a Responsible Officer and dated as of
the date of the Initial Funding.
(e) The Notes, duly completed and executed.
(f) The Security Instruments, including those described on EXHIBIT D,
duly completed and executed in sufficient number of counterparts for recording,
if necessary.
(g) An opinion of Bracewell & Patterson, L.L.P., counsel to the
Borrower, in form and substance satisfactory to the Agent, as to such matters
incident to the transactions herein contemplated as the Agent may reasonably
request.
(h) A certificate of insurance coverage of the Borrower evidencing that
the Borrower is carrying insurance in accordance with Section 7.19.
(i) Pro forma balance sheet as of September 30, 1997.
(j) Repayment of at least $5,400,000 of the currently outstanding debt
owed to NationsBank pursuant to that certain Amended and Restated Credit
Agreement dated as of May 31, 1996, by and between NationsBank and the Borrower.
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(k) Such other documents as the Agent or any Lender or special counsel
to the Agent may reasonably request.
Section 6.02 INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT.
(a) The obligation of the Lenders to make Loans to the Borrower upon the
occasion of each borrowing hereunder and to issue, renew, extend or reissue
Letters of Credit for the account of the Borrower (including the Initial
Funding) is subject to the further conditions precedent that, as of the date of
such Loans and after giving effect thereto:
(i) no Default shall have occurred and be continuing; and
(iii) the representations and warranties made by the Borrower in
Article VII and in the Security Instruments shall be true
on and as of the date of the making of such Loans or
issuance, renewal, extension or reissuance of a Letter of
Credit with the same force and effect as if made on and as
of such date and following such new borrowing, except to
the extent such representations and warranties are
expressly limited to an earlier date or the Majority
Lenders may expressly consent in writing to the contrary.
(b) If a Revolving Credit Loan is to be used by the Borrower in
connection with a New Acquisition, the obligation of the Lenders to make such
Revolving Credit Loan is subject to the further conditions precedent that, as of
the date of such Loans:
(i) Borrower or Subsidiary shall have entered into a
Management Services Agreement and an Accounts Receivable
Purchase Agreement with the new Acquired Entity in form
and substance satisfactory to Agent;
(ii) Borrower shall have submitted updated SCHEDULES 7.14,
7.19 and 7.22 to Agent;
(iii) Borrower shall have passed corporate resolutions approving
such New Acquisition;
(iv) The Agent shall have received copies of any legal opinions
received by the Borrower or any Subsidiary from the seller
in connection with any New Acquisition relating to due
incorporation of the seller; due authorization and
execution by the seller of the purchase documents;
enforceability of the purchase documents against the
seller; in the case of a stock acquisition, valid issuance
of the purchased shares; and no authorizations, approvals
or consents required other than those obtained;
(v) The Agent shall have received the Security Instruments
required by Section 9.03(g)(i) and an officer's
certificate, substantially in the form of EXHIBIT F
attached hereto, certifying the representations and
warranties made by the
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Borrower in Article VII and in the Security Instruments,
including those Security Instruments obtained in
connection with such New Acquisition, shall be true on and
as of the date of the Revolving Credit Loan except to the
extent such representations and warranties are expressly
limited to an earlier date or the Majority Lenders may
expressly consent in writing to the contrary; and
(vi) The Agent shall have received a borrowing base report in
the form of EXHIBIT E attached hereto;
and, if such New Acquisition relates to a dental practice in any
state in which neither the Borrower or any Subsidiary is
currently operating, or if such New Acquisition involves
consideration paid by the Borrower or any Subsidiary in an amount
of $5,000,000 or more:
(vii) The Agent shall have received legal opinions regarding any
New Acquisition in form and substance satisfactory to
Lenders; and
(viii) Relating to a dental practice in any state in which
neither the Borrower or any Subsidiary is currently
operating only, the Agent shall have received risk
analysis letters regarding any New Acquisition in form and
substance satisfactory to Lenders.
(c) Each request for a borrowing or issuance, renewal, extension or
reissuance of a Letter of Credit by the Borrower hereunder shall constitute a
certification by the Borrower to the effect set forth in Section 6.02(a)(iii)
(both as of the date of such notice and, unless the Borrower otherwise notifies
the Agent prior to the date of and immediately following such borrowing or
issuance, renewal, extension or reissuance of a Letter of Credit as of the date
thereof).
Section 6.03 CONDITIONS PRECEDENT FOR THE BENEFIT OF LENDERS. All
conditions precedent to the obligations of the Lenders to make any Loan are
imposed hereby solely for the benefit of the Lenders, and no other Person may
require satisfaction of any such condition precedent or be entitled to assume
that the Lenders will refuse to make any Loan in the absence of strict
compliance with such conditions precedent.
Section 6.04 NO WAIVER. No waiver of any condition precedent shall
preclude the Agent or the Lenders from requiring such condition to be met prior
to making any subsequent Loan or preclude the Lenders from thereafter declaring
that the failure of the Borrower to satisfy such condition precedent constitutes
a Default.
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and the Lenders that
(each representation and warranty herein is given as of the Closing Date and
shall be deemed repeated and reaffirmed on the dates of each borrowing and
issuance, renewal, extension or reissuance of a Letter of Credit as provided in
Section 6.02):
Section 7.01 CORPORATE EXISTENCE. Each of the Borrower and each
Subsidiary: (i) is a corporation duly organized, legally existing and in good
standing under the laws of the jurisdiction of its incorporation; (ii) has all
requisite corporate power, and has all material governmental licenses,
authorizations, consents and approvals necessary to own its assets and carry on
its business as now being or as proposed to be conducted; and (iii) is qualified
to do business in all jurisdictions in which the nature of the business
conducted by it makes such qualification necessary and where failure so to
qualify would have a Material Adverse Effect.
Section 7.02 FINANCIAL CONDITION. The audited consolidated balance sheet
of the Borrower and its Consolidated Subsidiaries as at December 31, 1996 and
the related consolidated statement of income, stockholders' equity and cash flow
of the Borrower and its Consolidated Subsidiaries for the fiscal year ended on
said date, with the opinion thereon of Coopers & Lybrand heretofore furnished to
the Agent and the unaudited consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as at June 30, 1997 and their related consolidated
statements of income, stockholders' equity and cash flow of the Borrower and its
Consolidated Subsidiaries for the six month period ended on such date heretofore
furnished to the Agent, are complete and correct and fairly present the
consolidated financial condition of the Borrower and its Consolidated
Subsidiaries as at said dates and the results of its operations for the fiscal
year and the six month period on said dates, all in accordance with GAAP, as
applied on a consistent basis (subject, in the case of the interim financial
statements, to normal year-end adjustments). Neither the Borrower nor any
Subsidiary has on the Closing Date any material Debt, contingent liabilities,
liabilities for taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments, except as referred to or
reflected or provided for in the Financial Statements or in SCHEDULE 7.02. Since
June 30, 1997, there has been no change or event having a Material Adverse
Effect. Since the date of the Financial Statements, neither the business nor the
Properties of the Borrower or any Subsidiary have been materially and adversely
affected as a result of any fire, explosion, earthquake, flood, drought,
windstorm, accident, strike or other labor disturbance, embargo, requisition or
taking of Property or cancellation of contracts, permits or concessions by any
Governmental Authority, riot, activities of armed forces or acts of God or of
any public enemy. The unaudited pro forma projected consolidated balance sheet
of the Borrower and its Consolidated Subsidiaries at the Closing Date, and the
unaudited pro forma projected consolidated statement of income of the Borrower
and its Consolidated Subsidiaries as of the Closing Date, heretofore furnished
to the Agent, fairly present the pro forma projected consolidated financial
condition of the Borrower and its Consolidated Subsidiaries as at the Closing
Date. Borrower repaid or caused to be repaid all Subordinated Debt outstanding
at the time of the initial public offering of the capital stock of the Borrower
that raised at least $25,000,000, including, without limitation, the Debt
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incurred pursuant to the Securities Purchase Agreement dated as of December 19,
1995, among the Borrower and each of the investors signatory thereto, as amended
by the Waiver and Amendment dated as of May 31, 1996 and by Amendment No. 1
dated as of June 16, 1997, the loan made to the Borrower in the principal amount
of $2,000,000 arranged by Pecks Management Partners, Ltd., and the balance of
the deferred compensation owed by the Borrower to Jack H. Castle, D.D.S.
pursuant to the Deferred Compensation Agreement dated as of December 19, 1995,
between the Borrower and Jack H. Castle, D.D.S., as amended, and such Deferred
Compensation Agreement has been terminated.
Section 7.03 LITIGATION. At the Closing Date there is no litigation,
legal, administrative or arbitral proceeding, investigation or other action of
any nature pending or, to the knowledge of the Borrower threatened against or
affecting the Borrower or any Subsidiary which could reasonably be expected to
have a Material Adverse Effect.
Section 7.04 NO BREACH. Neither the execution and delivery of the Loan
Documents, nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent which has not been
obtained as of the Closing Date under, the respective charter or by-laws of the
Borrower or any Subsidiary, or any Governmental Requirement or any material
agreement or instrument to which the Borrower or any Subsidiary is a party or by
which it is bound or to which it or its Properties are subject, or constitute a
default under any such material agreement or instrument, or result in the
creation or imposition of any Lien upon any of the revenues or assets of the
Borrower or any Subsidiary pursuant to the terms of any such material agreement
or instrument other than the Liens created by the Loan Documents.
Section 7.05 AUTHORITY. The Borrower and each Subsidiary have all
necessary corporate power and authority to execute, deliver and perform its
obligations under the Loan Documents to which it is a party; and the execution,
delivery and performance by the Borrower and each Subsidiary of the Loan
Documents to which it is a party, have been duly authorized by all necessary
corporate action on its part; and the Loan Documents constitute the legal, valid
and binding obligations of the Borrower and each Subsidiary, enforceable in
accordance with their terms.
Section 7.06 APPROVALS. No authorizations, approvals or consents of, and
no filings or registrations with, any Governmental Authority are necessary for
the execution, delivery or performance by the Borrower or any Subsidiary of the
Loan Documents to which it is a party or for the validity or enforceability
thereof, except for the recording and filing of the Security Instruments as
required by this Agreement.
Section 7.07 USE OF LOANS. The proceeds of the Revolving Credit Loans
shall be used to provide financing for New Acquisitions, for capital
expenditures and for general working capital purposes of the Borrower; PROVIDED,
HOWEVER, that not more than $5,000,000 of the Revolving Credit Loans (in the
aggregate) may be used by the Borrower for general working capital purposes. The
Term Loans shall be used to refinance existing Debt. The Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose, whether immediate, incidental or ultimate, of buying or
carrying margin stock (within the meaning of Regula tion G, T, U or X of the
Board of Governors of the Federal Reserve System) and no part of the proceeds of
any Loan hereunder will be used to buy or carry any margin stock.
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Section 7.08 ERISA.
(a) The Borrower, each Subsidiary and each ERISA Affiliate have complied
in all material respects with ERISA and, where applicable, the Code regarding
each Plan.
(b) Each Plan is, and has been, maintained in substantial compliance
with ERISA and, where applicable, the Code.
(c) No act, omission or transaction has occurred which could result in
imposition on the Borrower, any Subsidiary or any ERISA Affiliate (whether
directly or indirectly) of (i) either a civil penalty assessed pursuant to
section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under
section 409 of ERISA.
(d) No liability to the PBGC (other than for the payment of current
premiums which are not past due) by the Borrower, any Subsidiary or any ERISA
Affiliate has been or is expected by the Borrower, any Subsidiary or any ERISA
Affiliate to be incurred with respect to any Plan. No ERISA Event with respect
to any Plan has occurred.
(e) Full payment when due has been made of all amounts which the
Borrower, any Subsidiary or any ERISA Affiliate is required under the terms of
each Plan or applicable law to have paid as contributions to such Plan, and no
accumulated funding deficiency (as defined in section 302 of ERISA and section
412 of the Code), whether or not waived, exists with respect to any Plan.
(f) The actuarial present value of the benefit liabilities under each
Plan which is subject to Title IV of ERISA does not, as of the end of the
Borrower's most recently ended fiscal year, exceed the current value of the
assets (computed on a plan termination basis in accordance with Title IV of
ERISA) of such Plan allocable to such benefit liabilities. The term "actuarial
present value of the benefit liabilities" shall have the meaning specified in
section 4041 of ERISA.
(g) None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains, or contributes to an employee welfare benefit plan, as
defined in section 3(1) of ERISA, including, without limitation, any such plan
maintained to provide benefits to former employees of such entities, that may
not be terminated by the Borrower, a Subsidiary or any ERISA Affiliate in its
sole discretion at any time without any material liability.
(h) None of the Borrower, any Subsidiary or any ERISA Affiliate
sponsors, maintains or contributes to, or has at any time in the preceding six
calendar years, sponsored, maintained or contributed to, any Multiemployer Plan.
(i) None of the Borrower, any Subsidiary or any ERISA Affiliate is
required to provide security under section 401(a)(29) of the Code due to a Plan
amendment that results in an increase in current liability for the Plan.
Section 7.09 TAXES. Each of the Borrower and its Subsidiaries has filed
all United States Federal income tax returns and all other tax returns which are
required to be filed by them and have
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paid all material taxes due pursuant to such returns or pursuant to any
assessment received by the Borrower or any Subsidiary. The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of taxes
and other governmental charges are, in the opinion of the Borrower, adequate. No
tax lien has been filed and, to the knowledge of the Borrower, no claim is being
asserted with respect to any such tax, fee or other charge.
Section 7.10 TITLES, ETC.
(a) Each of the Borrower and its Subsidiaries and each Acquired Entity
has good and defensible title to its material (individually or in the aggregate)
Properties, free and clear of all Liens, except Liens permitted by Section 9.02.
(b) All leases and agreements necessary for the conduct of the business
of the Borrower and its Subsidiaries and each Acquired Entity are valid and
subsisting, in full force and effect and there exists no default or event or
circumstance which with the giving of notice or the passage of time or both
would give rise to a default under any such lease or leases, which would affect
in any material respect the conduct of the business of the Borrower and its
Subsidiaries.
(c) The licenses, rights, Properties and other assets presently owned,
leased or licensed by the Borrower and its Subsidiaries and each Acquired
Entity, include all rights, Properties and other assets necessary to permit the
Borrower and its Subsidiaries and each Acquired Entity to conduct their business
in all material respects in the same manner as its business has been conducted
prior to the Closing Date.
(d) All of the assets and Properties of the Borrower and its
Subsidiaries and each Acquired Entity which are reasonably necessary for the
operation of its business are in good working condition and are maintained in
accordance with prudent business standards.
Section 7.11 NO MATERIAL MISSTATEMENTS. No written information,
statement, exhibit, certificate, document or report furnished to the Agent and
the Lenders (or any of them) by the Borrower or any Subsidiary in connection
with the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make the
statement contained therein not materially misleading in the light of the
circumstances in which made and with respect to the Borrower and its
Subsidiaries taken as a whole.
Section 7.12 INVESTMENT COMPANY ACT. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower
nor any Subsidiary is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
Section 7.14 SUBSIDIARIES. Except as set forth on SCHEDULE 7.14, the
Borrower has no Sub sidiaries. In the event that a new Subsidiary is formed and
an advance is requested under this
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Agreement, and the Lenders approve such advance, Borrower will provide the Agent
with a new, updated SCHEDULE 7.14.
Section 7.15 LOCATION OF BUSINESS AND OFFICES. The Borrower's principal
place of business and chief executive offices are located at the address stated
on the signature page of this Agreement. The principal place of business and
chief executive office of each Subsidiary are located at the addresses stated on
SCHEDULE 7.14.
Section 7.16 DEFAULTS. Neither the Borrower nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default under any material agreement or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary
is bound which default would have a Material Adverse Effect. No Default
hereunder has occurred and is continuing.
Section 7.17 ENVIRONMENTAL MATTERS. Except as would not have a Material
Adverse Effect, neither any Property of the Borrower nor any Subsidiary nor the
operations conducted thereon violate any law, order or requirement of any court
or Governmental Authority or any Environmental Laws.
Section 7.18 COMPLIANCE WITH THE LAW. Neither the Borrower nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Section 7.19 INSURANCE. SCHEDULE 7.19 attached hereto contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by the
Borrower and each Subsidiary. All such policies are in full force and effect,
all premiums with respect thereto covering all periods up to and including the
date of the closing have been paid, and no notice of cancellation or termination
has been received with respect to any such policy. Such policies are sufficient
for compliance with all requirements of law and of all agreements to which the
Borrower or any Subsidiary is a party; are valid, outstanding and enforceable
policies; provide adequate insurance coverage in at least such amounts and
against at least such risks (but including in any event public liability) as are
usually insured against in the same general area by companies engaged in the
same or a similar business for the assets and operations of the Borrower and
each Subsidiary; will remain in full force and effect through the respective
dates set forth in SCHEDULE 7.19 without the payment of additional premiums; and
will not in any way be affected by, or terminate or lapse by reason of, the
transactions contemplated by this Agreement. SCHEDULE 7.19 identifies all
material risks, if any, which the Borrower and its Subsidiaries and their
respective Board of Directors or officers have designated as being self insured.
Neither the Borrower nor any Subsidiary has been refused any insurance with
respect to its assets or operations, nor has its coverage been limited below
usual and customary policy limits, by an insurance carrier to which it has
applied for any such insurance or with which it has carried insurance during the
last three years. In the event that a new Subsidiary is formed and an advance is
requested under the Revolving Credit Loans, and the Lenders approve such
advance, Borrower will provide the Agent with a new, updated SCHEDULE 7.19.
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Section 7.20 MANAGEMENT SERVICES AGREEMENTS AND ACCOUNTS RECEIVABLE
PURCHASE AGREEMENTS. The copies of (a) the Management Services Agreement between
the Borrower and JHC PC, dated effective December 19, 1995, the Management
Services Agreement between Castle Florida and Castle 1st Dental Care, P.A.,
effective May 19, 1996, the Management Services Agreement between Castle
Tennessee and Castle Mid-South Dental Centers, P.C., effective May 31, 1996, the
Management Services Agreement dated as of June 1, 1997, between Castle Texas and
SW Dental Associates, LC, and (b) the Accounts Receivable Purchase Agreement
dated as of December 19, 1995 between the Borrower and JHC PC, the Accounts
Receivable Purchase Agreement dated as of May 19, 1996, between Castle Florida
and Castle 1st Dental Care, P.A., the Accounts Receivable Purchase Agreement
dated as of May 31, 1996, between Castle Tennessee and Castle Mid-South Dental
Centers, P.C., the Accounts Receivable Purchase Agreement dated as of August 9,
1996, between Castle Texas and Horizon Dental Care, the Accounts Receivable
Purchase Agreement dated as of June 1, 1997, between Castle Texas and SW Dental
Associates, LC, previously delivered by the Borrower to the Agent are complete
and accurate and have not been amended or modified in any manner. The above
Management Services Agreements and the Accounts Receivable Purchase Agreements
are valid, binding and enforceable against the parties thereto and the Borrower
has the right to grant a Lien and has granted a Lien on the Borrower's right to
receive proceeds under the Management Services Agreements and the receivables
purchased under the Accounts Receivable Purchase Agreements pursuant to the
Security Instruments, and the Lenders may enforce their remedies contained in
the Security Instruments against such collateral. The Borrower has obtained all
consents from Governmental Authorities necessary to perform under the Management
Services Agreements, the failure of which to obtain could have a Material
Adverse Effect. In the event that a new Subsidiary is formed, any Management
Services Agreements and Accounts Receivable Purchase Agreements binding such
Subsidiary shall be included within the terms of this representation and
warranty.
Section 7.21 RESTRICTION ON LIENS. Neither the Borrower nor any of its
Subsidiaries is a party to any agreement or arrangement (other than this
Agreement and the Security Instruments), or subject to any order, judgment, writ
or decree, which either restricts or purports to restrict its ability to grant
Liens to other Persons on or in respect of their respective assets or
Properties, except for Property subject to Liens permitted under Section 9.02.
Section 7.22 MATERIAL AGREEMENTS. Set forth on SCHEDULE 7.22 hereto is a
complete and correct list of all material credit agreements, indentures,
purchase agreements, obligations in respect of letters of credit, guarantees,
joint venture agreements, and other instruments in effect or to be in effect as
of the Closing Date (other than Hedging Agreements) providing for, evidencing,
securing or otherwise relating to any Debt of the Borrower or any of its
Subsidiaries in excess of $250,000, and all obligations of the Borrower or any
of its Subsidiaries to issuers of surety or appeal bonds issued for account of
the Borrower or any such Subsidiary in excess of $250,000, and such list
correctly sets forth the names of the debtor or lessee and creditor or lessor
with respect to the Debt or lease obligations outstanding or to be outstanding
and the Property subject to any Lien securing such Debt or lease obligation. In
the event that a new Subsidiary is formed and an advance is requested under this
Agreement, if Lenders approve such advance, Borrower will provide the Agent with
a new, updated SCHEDULE 7.22.
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Section 7.23 HEDGING AGREEMENTS. SCHEDULE 7.23 sets forth, as of the
Closing Date, a true and complete list of all Hedging Agreements of the
Borrower, the material terms thereof (including the type, term, effective date,
termination date and notional amounts or volumes), the net mark to market value
thereof, all credit support agreements relating thereto (including any margin
required or supplied), and the counterparty to each such agreement.
ARTICLE VIII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, so long as any of the
Commitments are in effect and until payment in full of all Loans hereunder, all
interest thereon and all other amounts payable by the Borrower hereunder:
Section 8.01 REPORTING REQUIREMENTS. The Borrower shall deliver, or
shall cause to be delivered, to the Agent with sufficient copies of each for the
Lenders:
(a) ANNUAL FINANCIAL STATEMENTS. As soon as available and in any event
within 120 days after the end of each fiscal year of the Borrower, the audited
consolidated and unaudited consolidat ing statements of income, stockholders'
equity, changes in financial position and cash flow of the Borrower and its
Consolidated Subsidiaries for such fiscal year, and the related consolidated and
consolidating balance sheets of the Borrower and its Consolidated Subsidiaries
as at the end of such fiscal year, and setting forth in each case in comparative
form the corresponding figures for the preceding fiscal year, and accompanied by
the related opinion of independent public accountants of recognized national
standing acceptable to the Agent which opinion shall state that said financial
statements fairly present the consolidated and consolidating financial condition
and results of operations of the Borrower and its Consolidated Subsidiaries as
at the end of, and for, such fiscal year and that such financial statements have
been prepared in accordance with GAAP, except for such changes in such
principles with which the independent public accountants shall have concurred
and such opinion shall not contain a "going concern" or like qualification or
exception, and a certificate of such accountants stating that, in making the
examination necessary for their opinion, they obtained no knowledge, except as
specifically stated, of any Default.
(b) QUARTERLY FINANCIAL STATEMENTS. As soon as available and in any
event within 45 days after the end of each of the first three fiscal quarterly
periods of each fiscal year of the Borrower, consolidated and consolidating
statements of income, stockholders' equity, changes in financial position and
cash flow of the Borrower and its Consolidated Subsidiaries for such period and
for the period from the beginning of the respective fiscal year to the end of
such period, and the related consolidated and consolidating balance sheets as at
the end of such period, and setting forth in each case in comparative form the
corresponding figures for the corresponding period in the preceding fiscal year,
accompanied by the certificate of a Responsible Officer, which certificate shall
state that said financial statements fairly present the consolidated and
consolidating financial condition and results of operations of the Borrower and
its Consolidated Subsidiaries in accordance with GAAP, as at the end of, and
for, such period (subject to normal year-end audit adjustments).
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(c) BUDGET. As soon as practicable and in any event by the end of each
fiscal year of the Borrower, a budget for the Borrower and its Consolidated
Subsidiaries, as approved by the board of directors of the Borrower, for the
following fiscal year setting forth in comparative form corresponding figures
from the preceding fiscal year, in reasonable detail and certified as to its
good-faith preparation by a Responsible Officer.
(d) NOTICE OF DEFAULT, ETC. Promptly after the Borrower knows that any
Default or any Material Adverse Effect has occurred, a notice of such Default or
Material Adverse Effect, describing the same in reasonable detail and the action
the Borrower proposes to take with respect thereto.
(e) OTHER ACCOUNTING REPORTS. Promptly upon receipt thereof, a copy of
each other report or letter submitted to the Borrower or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Borrower and its Subsidiaries, and a copy of
any response by the Borrower or any Subsidiary of the Borrower, or the Board of
Directors of the Borrower or any Subsidiary of the Borrower, to such letter or
report.
(f) SEC FILINGS, ETC. Promptly upon its becoming available, each
financial statement, report, notice or proxy statement sent by the Borrower to
stockholders generally and each regular or periodic report and any registration
statement, prospectus or written communication (other than transmittal letters)
in respect thereof filed by the Borrower with or received by the Borrower in
connection therewith from any securities exchange or the SEC or any successor
agency.
(g) NOTICES UNDER OTHER LOAN AGREEMENTS. Promptly after the furnishing
thereof, copies of any material statement, report or notice furnished to or any
Person pursuant to the terms of any indenture, loan or credit or other similar
agreement, other than this Agreement and not otherwise required to be furnished
to the Agent pursuant to any other provision of this Section 8.01.
(h) BORROWING BASE REPORT. Promptly upon becoming available and in any
event within 45 days after the end of each of Borrower's fiscal quarters, a
borrowing base report, which shall contain supporting schedules and be in
substantially the form of EXHIBIT E attached hereto.
(i) ANNUAL REVENUE REPORTS. As soon as available and in any event within
120 days after the end of each fiscal year of the Borrower, a report prepared by
the Borrower for each dental center setting forth the revenues, expenses and
contributions to profit of such dental center in form and substance acceptable
to the Agent.
(j) QUARTERLY REVENUE REPORTS. Beginning December 31, 1997, as soon as
available and in any event within 45 days after the end of each of the first
three fiscal quarterly periods of each fiscal year of the Borrower, a report by
the Borrower for each dental center setting forth the revenues, expenses and
contributions to profit of such dental center in form and substance acceptable
to the Agent.
(k) PLAN REPORT. From time to time such other information regarding the
business, affairs or financial condition of the Borrower or any Subsidiary
(including, without limitation, any Plan or
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Multiemployer Plan and any reports or other information required to be filed
under ERISA) as the Agent may reasonably request.
(l) HEDGING AGREEMENT REPORT. As soon as available and in any event
within ten (10) Business Days after the last day of each calendar quarter, a
report, in form and substance satisfactory to the Agent, setting forth as of the
last Business Day of such calendar quarter a true and complete list of all
Hedging Agreements of the Borrower, the material terms thereof (including the
type, term, effective date, termination date and notional amounts or volumes),
the net mark to market value therefor, any new credit support agreements
relating thereto not listed on SCHEDULE 7.23, any margin required or supplied
under any credit support document, and the counterparty to each such agreement.
(m) CAPITAL EXPENDITURES BUDGET. Promptly upon becoming available and in
any event within 30 days after the end of each fiscal year of the Borrower, a
capital expenditure budget for the next fiscal year setting forth all proposed
capital expenditures to be incurred during such fiscal year.
(n) MODIFICATIONS OF MANAGEMENT SERVICES AGREEMENTS, ETC. Promptly upon
the execution thereof, executed copies of any modification or amendment of any
Management Services Agreement or Accounts Receivable Purchase Agreement.
The Borrower shall furnish to the Lenders, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate
substantially in the form of EXHIBIT C hereto executed by a Responsible Officer
(i) certifying as to the matters set forth therein and stating that no Default
has occurred and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail), and (ii) setting forth in
reasonable detail the computations necessary to determine the Borrower's Funded
Debt and EBITDA and whether the Borrower is in compliance with Sections 9.11,
9.12, 9.13, and 9.14 as of the end of the respective fiscal quarter or fiscal
year.
Section 8.02 LITIGATION. The Borrower shall promptly give to the Agent
notice of: (i) all legal or arbitral proceedings, and of all proceedings before
any Governmental Authority affecting the Borrower, any Acquired Entity or any
Subsidiary, except proceedings which, if adversely determined, would not have a
Material Adverse Effect, and (ii) of any litigation or proceeding against or
adversely affecting the Borrower, any Acquired Entity or any Subsidiary in which
the amount involved is not covered in full by insurance (subject to normal and
customary deductibles and for which the insurer has not assumed the defense), or
in which injunctive or similar relief is sought. The Borrower will, and will
cause each of its Subsidiaries to, promptly notify the Agent and each of the
Lenders of any claim, judgment, Lien or other encumbrance affecting any Property
of the Borrower, any Acquired Entity or any Subsidiary if the value of the
claim, judgment, Lien, or other encumbrance affecting such Property shall exceed
$250,000.
Section 8.03 MAINTENANCE, ETC.
(a) GENERALLY. The Borrower shall and shall cause each Subsidiary to:
preserve and maintain its corporate existence and all of its material rights,
privileges and franchises; keep books of record and account in which full, true
and correct entries will be made of all dealings or transactions in relation to
its business and activities; comply with all Governmental Requirements
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if failure to comply with such requirements will have a Material Adverse Effect;
pay and discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior to the
date on which penalties attach thereto, except for any such tax, assessment,
charge or levy the payment of which is being contested in good faith and by
proper proceedings and against which adequate reserves are being maintained;
upon reasonable notice, permit representatives of the Agent or any Lender,
during normal business hours, to examine, copy and make extracts from its books
and records, to inspect its Properties, and to discuss its business and affairs
with its officers, all to the extent reasonably requested by such Lender or the
Agent (as the case may be); and keep, or cause to be kept, insured by
financially sound and reputable insurers all Property of a character usually
insured by Persons engaged in the same or similar business similarly situated
against loss or damage of the kinds and in the amounts customarily insured
against by such Persons and carry such other insurance as is usually carried by
such Persons including, without limitation, environmental risk insurance to the
extent reasonably available.
(b) PROOF OF INSURANCE. Contemporaneously with the delivery of the
financial statements required by Section 8.01(a) to be delivered for each year,
the Borrower will furnish or cause to be furnished to the Agent a certificate of
insurance coverage from the insurer in form and substance satisfactory to the
Agent and, if requested, will furnish the Agent copies of the applicable
policies.
(c) OPERATION OF PROPERTIES. The Borrower will and will cause each
Subsidiary to operate its Properties or cause such Properties to be operated in
a careful and efficient manner in accordance with the practices of the industry
and in compliance with all applicable contracts and agreements and in compliance
in all material respects with all Governmental Requirements.
Section 8.04 ENVIRONMENTAL MATTERS.
(a) ESTABLISHMENT OF PROCEDURES. The Borrower will and will cause each
Subsidiary to establish and implement such procedures as may be reasonably
necessary to continuously determine and assure that (i) all Property of the
Borrower and its Subsidiaries and the operations conducted thereon and other
activities of the Borrower and its Subsidiaries are, in all material respects,
in compliance with and do not violate the requirements of any Environmental
Laws, and (ii) no oil, hazardous substances or solid wastes are disposed of or
otherwise released on or to any Property owned by any such party except in
compliance with Environmental Laws.
(b) NOTICE OF ACTION. The Borrower will promptly notify the Agent in
writing of any threatened action, investigation or inquiry by any Governmental
Authority of which the Borrower has knowledge in connection with any
Environmental Laws, excluding routine testing and corrective action.
Section 8.05 FURTHER ASSURANCES. The Borrower will and will cause each
Subsidiary to cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments and this
Agreement. The Borrower at its expense will and will cause each Subsidiary to
promptly execute and deliver to the Agent upon request all such other documents,
agreements and instruments to comply with or accomplish the covenants and
agreements of the Borrower or any Subsidiary, as the case may be, in the
Security Instruments and this Agreement, or to further evidence and more fully
describe the collateral intended as security for the Notes, or to
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correct any omissions in the Security Instruments, or to state more fully the
security obligations set out herein or in any of the Security Instruments, or to
perfect, protect or preserve any Liens created pursuant to any of the Security
Instruments, or to make any recordings, to file any notices or obtain any
consents, all as may be necessary or appropriate in connection therewith.
Section 8.06 PERFORMANCE OF OBLIGATIONS. The Borrower will pay the Notes
according to the reading, tenor and effect thereof; and the Borrower will and
will cause each Subsidiary to do and perform every act and discharge all of the
obligations to be performed and discharged by them under the Security
Instruments and this Agreement, at the time or times and in the manner
specified.
Section 8.07 ERISA INFORMATION AND COMPLIANCE. The Borrower will
promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to
promptly furnish to the Agent with sufficient copies to the Lenders (i) promptly
after the filing thereof with the United States Secretary of Labor, the Internal
Revenue Service or the PBGC, copies of each annual and other report with respect
to each Plan or any trust created thereunder, (ii) immediately upon becoming
aware of the occurrence of any ERISA Event or of any "prohibited transaction,"
as described in section 406 of ERISA or in section 4975 of the Code, in
connection with any Plan or any trust created thereunder, a written notice
signed by a Responsible Officer specifying the nature thereof, what action the
Borrower, the Subsidiary or the ERISA Affiliate is taking or proposes to take
with respect thereto, and, when known, any action taken or proposed by the
Internal Revenue Service, the Department of Labor or the PBGC with respect
thereto, and (iii) immediately upon receipt thereof, copies of any notice of the
PBGC's intention to terminate or to have a trustee appointed to administer any
Plan. With respect to each Plan (other than a Multiemployer Plan), the Borrower
will, and will cause each Subsidiary and ERISA Affiliate to, (i) satisfy in full
and in a timely manner, without incurring any late payment or underpayment
charge or penalty and without giving rise to any lien, all of the contribution
and funding requirements of section 412 of the Code (determined without regard
to subsections (d), (e), (f) and (k) thereof) and of section 302 of ERISA
(determined without regard to sections 303, 304 and 306 of ERISA), and (ii) pay,
or cause to be paid, to the PBGC in a timely manner, without incurring any late
payment or underpayment charge or penalty, all premiums required pursuant to
sections 4006 and 4007 of ERISA.
Section 8.08 MANAGEMENT SERVICES AGREEMENTS AND ACCOUNTS RECEIVABLE
PURCHASE AGREEMENTS. The Borrower will and will cause each Subsidiary to do all
things necessary to maintain and keep in full force and effect and to enforce
compliance with the Management Services Agreements and the Accounts Receivable
Purchase Agreements. In the event that a new Subsidiary is formed, any
Management Services Agreements and Accounts Receivable Purchase Agreements
binding such Subsidiary shall be included within the terms of this affirmative
covenant.
Section 8.09 GUARANTEE BY ACQUIRED ENTITIES. In connection with
Borrower's or any Subsidiary's purchase of all the outstanding stock of any
Acquired Entity pursuant to any Stock Purchase Agreement, upon the request of
the Agent at any time thereafter, the Borrower will cause such Acquired Entity
to guarantee the Indebtedness upon terms satisfactory to the Agent.
Section 8.10. DISSOLUTION OF JHCDDS, INC. Notwithstanding any provision
contained herein to the contrary, JHCDDS, Inc. may be dissolved without the
consent of the Agent or the Lenders. The Borrower shall provide the Agent with
notice of such dissolution upon its occurrence.
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ARTICLE IX
NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as any of the
Commitments are in effect and until payment in full of Loans hereunder, all
interest thereon and all other amounts payable by the Borrower hereunder,
without the prior written consent of the Majority Lenders:
Section 9.01 DEBT. Neither the Borrower nor any Subsidiary will incur,
create, assume or permit to exist any Debt, except:
(a) the Notes or other Indebtedness or any guaranty of or suretyship
arrangement for the Notes or other Indebtedness;
(b) accounts payable (for the deferred purchase price of Property or
services) from time to time incurred in the ordinary course of
business which, if greater than 90 days past the invoice or
billing date, are being contested in good faith by appropriate
proceedings if reserves adequate under GAAP shall have been
established therefor;
(c) Debt under capital leases (as required to be reported on the
financial statements of the Borrower pursuant to GAAP) not to
exceed $2,000,000 in the aggregate;
(d) Debt of the Borrower under Hedging Agreements with the Lender or
otherwise approved by the Agent;
(e) purchase money Debt not to exceed $2,000,000 in the aggregate;
(f) Debt described on SCHEDULE 9.01; and
(g) Subordinated Debt in connection with New Acquisitions.
Section 9.02 LIENS. Neither the Borrower nor any Subsidiary will create,
incur, assume or permit to exist any Lien on any of its Properties (now owned or
hereafter acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens disclosed on SCHEDULE 9.02.
(d) Liens securing capital leases allowed under Section 9.01(c), but
only on the Property leased with such capital Leases.
(e) Liens originally created to secure purchase money Debt permitted
under Section 9.01(e), which in each case shall not exceed 100% of the lesser of
the total purchase price and the
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fair market value of the Property acquired as determined at the time of
acquisition; PROVIDED, THAT, (i) the Property to be purchased with the proceeds
of such Debt shall be purchased not more than sixty (60) days prior to the date
of the creation of such Lien and (ii) such Lien encumbers only the Property so
acquired.
Section 9.03 INVESTMENTS, LOANS AND ADVANCES. Neither the Borrower nor
any Subsidiary will make or permit to remain outstanding any loans or advances
to or investments in any Person, except that the foregoing restriction shall not
apply to:
(a) investments, loans or advances reflected in the Financial
Statements or which are disclosed to the Agent in SCHEDULE 9.03;
(b) accounts receivable arising in the ordinary course of business;
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency
thereof, in each case maturing within one year from the date of
creation thereof;
(d) commercial paper maturing within one year from the date of
creation thereof rated in the highest grade by Standard & Poor's
Corporation or Moody's Investors Service, Inc.;
(e) deposits maturing within one year from the date of creation
thereof with, including certificates of deposit issued by, any
Lender or any office located in the United States of any other
bank or trust company which is organized under the laws of the
United States or any state thereof, has capital, surplus and
undivided profits aggregating at least $100,000,000.00 (as of the
date of such Lender's or bank or trust company's most recent
financial reports) and has a short term deposit rating of no
lower than A2 or P2, as such rating is set forth from time to
time, by Standard & Poor's Corporation or Moody's Investors
Service, Inc., respectively;
(f) deposits in money market funds investing exclusively in
investments described in Section 9.03(c), 9.03(d) or 9.03(e);
(g) investments in, or purchases of, dental practices, provided that:
(i) such purchase is an Asset Purchase or Stock Purchase and, if
such purchase is a Stock Purchase, such Acquired Entity shall be
merged with and into Borrower or a Subsidiary, and such
Subsidiary (if the surviving entity) shall have executed a
Guaranty Agreement pursuant to Section 9.18 hereof and executed
Security Instruments in favor of Agent in form and substance
satisfactory to Agent;
(ii) (A) any investment in excess of $5,000,000.00 in any one
dental practice, (B) any investment in any dental practice which
has incurred a net income loss calculated after adding back any
adjustments for any owner's compensation as though the dental
practice had been owned by the Borrower throughout the relevant
pre-purchase
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period, for any of its last three fiscal years, or (C) any
investment in any dental practice which has a total purchase
price in excess of eight (8) times the EBITDA of such dental
practice, shall require the prior written approval of the Agent
and the Borrower shall deliver to Agent at least ten (10)
Business Days prior to closing the purchase of any such dental
practice (1) pro forma financial statements demonstrating
continued compliance with all covenants in this Agreement
following the inclusion of the target in Borrower's consolidated
enterprise, (2) completed due diligence consisting of the
information listed on EXHIBIT G, as approved by the Agent, (3)
due diligence review conducted by Claymore Partners, Ltd. if such
dental practice is in a region in which neither the Borrower nor
any Subsidiary owns a dental practice as of the date hereof and
the investment in such practice exceeds $5,000,000, (4) audited
or reviewed financial statements of the dental practice to be
acquired for the last three (3) years and interim period or, in
lieu thereof, confirmation of profits, cash flows and accounts
receivable of such dental practice by a third party acceptable to
Agent, (5) an updated Borrowing Base Report in substantially the
form of EXHIBIT E attached hereto, and (6) any additional
information and/or documentation reasonably requested by the
Agent;
(iii) the Borrower shall deliver to Agent within ten (10)
Business Days after closing the purchase of any such dental
practice (1) pro forma financial statements demonstrating
continued compliance with all covenants in this Agreement
following the inclusion of the target in Borrower's consolidated
enterprise, (2) completed due diligence consisting of the
information listed on EXHIBIT G, as approved by the Agent, (3)
for any investment in excess of $2,000,000, but less than or
equal to $5,000,000, compiled financial statements of the dental
practice to be acquired for the last three (3) years and interim
period or, in lieu thereof, confirmation of profits, cash flows
and accounts receivable of such dental practice by a third party
acceptable to Agent, and for any investment less than $2,000,000,
tax returns for the last three (3) years (4) an updated Borrowing
Base Report in substantially the form of EXHIBIT E attached
hereto, and (5) any additional information and/or documentation
reasonably requested by the Agent.
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. The Borrower will
not declare or pay any dividend, purchase, redeem or otherwise acquire for value
any of its stock now or hereafter outstanding, return any capital to its
stockholders or make any distribution of its assets to its stockholders.
Section 9.05 SALES AND LEASEBACKS. Neither the Borrower nor any
Subsidiary will enter into any arrangement, directly or indirectly, with any
Person whereby the Borrower or any Subsidiary shall sell or transfer any of its
Property, whether now owned or hereafter acquired, and whereby the Borrower or
any Subsidiary shall then or thereafter rent or lease as lessee such Property or
any part thereof or other Property which the Borrower or any Subsidiary intends
to use for substantially the same purpose or purposes as the Property sold or
transferred.
Section 9.06 NATURE OF BUSINESS. Neither the Borrower nor any Subsidiary
will allow any material change to be made in the character of its business.
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Section 9.07 MERGERS, ETC. Neither the Borrower nor any Subsidiary will
merge into or with or consolidate with any other Person, or sell, lease or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its Property or assets to any other Person, another
Subsidiary or in connection with Section 9.03(g), except that any Subsidiary may
merge into the Borrower or into any Wholly-Owned Subsidiary so long as the
surviving Wholly- Owned Subsidiary is a Guarantor.
Section 9.08 PROCEEDS OF NOTES. The Borrower will not permit the
proceeds of the Revolving Credit Loans to be used for any purpose other than
those permitted by Section 7.07 and not more than $5,000,000 of the Revolving
Credit Loans in the aggregate will be used for general working capital purposes.
Neither the Borrower nor any Person acting on behalf of the Borrower has taken
or will take any action which might cause any of the Loan Documents to violate
Regulation G, T, U or X or any other regulation of the Board of Governors of the
Federal Reserve System or to violate Section 7 of the Securities Exchange Act of
1934 or any rule or regulation thereunder, in each case as now in effect or as
the same may hereinafter be in effect.
Section 9.09 ERISA COMPLIANCE. The Borrower will not at any time:
(a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in,
any transaction in connection with which the Borrower, any Subsidiary or any
ERISA Affiliate could be subjected to either a civil penalty assessed pursuant
to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of
Subtitle D of the Code;
(b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate,
any Plan in a manner, or take any other action with respect to any Plan, which
could result in any liability to the Borrower, any Subsidiary or any ERISA
Affiliate to the PBGC;
(c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to
make, full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary
or any ERISA Affiliate is required to pay as contributions thereto;
(d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to
permit to exist, any accumulated funding deficiency within the meaning of
Section 302 of ERISA or section 412 of the Code, whether or not waived, with
respect to any Plan;
(e) Permit, or allow any Subsidiary or ERISA Affiliate to permit, the
actuarial present value of the benefit liabilities under any Plan maintained by
the Borrower, any Subsidiary or any ERISA Affiliate which is regulated under
Title IV of ERISA to exceed the current value of the assets (computed on a plan
termination basis in accordance with Title IV of ERISA) of such Plan allocable
to such benefit liabilities. The term "actuarial present value of the benefit
liabilities" shall have the meaning specified in section 4041 of ERISA;
(f) Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any Multiemployer Plan;
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(g) Acquire, or permit any Subsidiary or ERISA Affiliate to acquire, an
interest in any Person that causes such Person to become an ERISA Affiliate with
respect to the Borrower, any Subsidiary or any ERISA Affiliate if such Person
sponsors, maintains or contributes to, or at any time in the six-year period
preceding such acquisition has sponsored, maintained, or contributed to, (1) any
Multiemployer Plan, or (2) any other Plan that is subject to Title IV of ERISA
under which the actuarial present value of the benefit liabilities under such
Plan exceeds the current value of the assets (computed on a plan termination
basis in accordance with Title IV of ERISA) of such Plan allocable to such
benefit liabilities;
(h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201
or 4204 of ERISA;
(i) Contribute to or assume an obligation to contribute to, or permit
any Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
such entities in their sole discretion at any time without any material
liability; or
(j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan
resulting in an increase in current liability such that the Borrower, any
Subsidiary or any ERISA Affiliate is required to provide security to such Plan
under section 401(a)(29) of the Code.
Section 9.10 SALE OR DISCOUNT OF RECEIVABLES. Neither the Borrower nor
any Subsidiary will discount or sell (with or without recourse) any of its notes
receivable or accounts receivable.
Section 9.11 RATIO OF FUNDED DEBT TO CAPITALIZATION. The Borrower will
not permit its ratio of Total Funded Debt to Capitalization as of the end of any
fiscal quarter to be greater than .5 to 1.0.
Section 9.12 NET WORTH. The Borrower will not permit its Net Worth to be
less than $22,500,000 at any time, with such minimum amount being permanently
increased by an amount equal to 75% of positive net income of the Borrower
during each fiscal quarter beginning with the fiscal quarter ended December 31,
1997, and 100% of equity capital raised by the Borrower after the Closing Date,
provided, such minimum amount shall not be decreased as a result of any losses
or negative earnings.
Section 9.13 LEVERAGE RATIO. The Borrower will not permit its Leverage
Ratio as of the end of any fiscal quarter (calculated on a rolling four quarter
basis; PROVIDED, HOWEVER, the first quarter test shall be for the quarter ended
March 31, 1997 and the following rolling cumulative tests will begin with such
quarter ending March 31, 1997 until a full four quarter test can be achieved) to
be greater than 3.0 to 1.0. For any calculation period which would include one
or more quarters prior to any Stock Purchase or any Asset Purchase or any other
future acquisition of an entity, the "rolling four quarters" shall include the
"pro forma" EBITDA of the applicable Acquired Entity for such prior periods
adjusted to reflect costs and expenses which such Acquired Entity would have
included had the Management Services Agreements between Borrower and/or any
Subsidiary and such Acquired Entity been in effect (adding back appropriate
executive salaries and non-cash charge offs relating
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to this transaction). As used in this Section 9.15, "LEVERAGE RATIO" shall mean
the ratio of (i) Funded Debt to (ii) EBITDA.
Section 9.14 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit
its Fixed Charge Coverage Ratio as of the end of any fiscal quarter (calculated
on a rolling four quarter basis; PROVIDED, HOWEVER, the first quarter test shall
be for the quarter ended March 31, 1997 and the following rolling cumulative
tests will begin with such quarter ending March 31, 1997 until a full four
quarter test can be achieved) to be less than 1.25 to 1.0. For purposes of this
Section 9.16, "FIXED CHARGE COVERAGE RATIO" shall mean the ratio for the
relevant period of (i) EBITDA, LESS taxes payable in cash, PLUS lease and rental
expense to (ii) lease and rental expense, PLUS interest, PLUS, during the
Revolving Credit Period, one-fifth (1/5) of the then-outstanding principal
balance of the Revolving Credit Loans, PLUS, without duplication, current
maturities of long-term debt, PLUS capital leases. For any calculation period
which would include one or more quarters prior to any Stock Purchase or any
Asset Purchase or any other future acquisition of an entity, the "rolling four
quarters" shall include the "pro forma" EBITDA of the applicable Acquired Entity
for such prior periods adjusted to reflect costs and expenses which such
Acquired Entity would have included had the Management Services Agreements
between Borrower and/or any Subsidiary and such Acquired Entity been in effect
(adding back appropriate executive salaries and non-cash charge offs relating to
this transaction).
Section 9.15 CAPITAL EXPENDITURES. Without the prior written consent of
the Agent, the Borrower will not make any expenditures for fixed or capital
assets if, after giving effect thereto, the aggregate of all such expenditures
would exceed $6,000,000 during any consecutive 12 month period.
Section 9.16 ENVIRONMENTAL MATTERS. Neither the Borrower nor any
Subsidiary will cause or permit any of its Property to be in violation of, or do
anything or permit anything to be done which will subject any such Property to
any remedial obligations under any Environmental Laws, assuming disclosure to
the applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such Property where such violations or
remedial obligations would have a Material Adverse Effect.
Section 9.17 TRANSACTIONS WITH AFFILIATES. Except pursuant to Management
Services Agreements and the Accounts Receivable Purchase Agreements, neither the
Borrower nor any Subsidiary will enter into any transaction, including, without
limitation, any purchase, sale, lease or exchange of Property or the rendering
of any service, with any Affiliate unless such transactions are otherwise
permitted under this Agreement, are in the ordinary course of its business and
are upon fair and reasonable terms no less favorable to it than it would obtain
in a comparable arm's length transaction with a Person not an Affiliate.
Section 9.18 SUBSIDIARIES. The Borrower shall not create any additional
Subsidiaries or permit any Subsidiary to do so without prior written approval of
the Agent. In every such case, each new Subsidiary shall forthwith execute and
deliver a Guaranty Agreement in favor of the Agent. The Borrower shall not and
shall not permit any Subsidiary to sell or to issue any stock of a Subsidiary or
any interest in a Special Entity. The Borrower shall not permit any Subsidiary
to issue any stock except to the Borrower or any Guarantors and except in
compliance with Section 9.03.
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Section 9.19 NEGATIVE PLEDGE AGREEMENTS. Neither the Borrower nor any
Subsidiary will create, incur, assume or suffer to exist any contract, agreement
or understanding (other than this Agreement and the Security Instruments) which
in any way prohibits or restricts the granting, conveying, creation or
imposition of any Lien on any of its Property or restricts any Subsidiary from
paying dividends to the Borrower, or which requires the consent of or notice to
other Persons in connection therewith.
Section 9.20 OTHER AGREEMENTS. Neither the Borrower nor any Subsidiary
shall make or permit any material amendment or modification of the Management
Services Agreements or the Accounts Receivables Purchase Agreements, except for
those modifications required to comply with Government Requirements.
Section 9.21 ACQUIRED ENTITIES. Notwithstanding anything to the contrary
contained herein, the Borrower will not permit any Acquired Entity to create,
incur, assume or permit to exist any Debt (other than the Indebtedness) or Lien
(other than the Lien securing the payment of the Indebtedness), make any loans,
advances or investments in any persons, or sell or transfer any of its property,
whether now owned or hereafter acquired except for Debt and Liens in favor of
the Borrower and Liens permitted by Section 9.02.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT. One or more of the following events
shall constitute an "EVENT OF DEFAULT":
(a) the Borrower shall default in the payment or prepayment when due of
any principal of or interest on any Loan, or any fees or other amount payable by
it hereunder or under any Security Instrument; PROVIDED, HOWEVER, if such
default is a default on a payment of fees (other than fees under Section 2.04),
and such default shall continue unremedied for a period of 30 days; or
(b) the Borrower or any Subsidiary shall default in the payment when due
of any principal of or interest on any of its other Debt aggregating $250,000 or
more, or any event specified in any note, agreement, indenture or other document
evidencing or relating to any such Debt shall occur if the effect of such event
is to cause, or (with the giving of any notice or the lapse of time or both) to
permit the holder or holders of such Debt (or a trustee or agent on behalf of
such holder or holders) to cause, such Debt to become due prior to its stated
maturity; or
(c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by the Borrower or any Subsidiary, or any
certificate furnished to any Lender pursuant to the provisions hereof or any
Security Instrument, shall prove to have been materially false or misleading as
of the time made or furnished in any material respect; or
(d) the Borrower shall default in the performance of any of its
obligations under Article IX or any other Article of this Agreement other than
under Article VIII; or the Borrower shall default
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in the performance of any of its obligations under Article VIII or any Security
Instrument (other than the payment of amounts due which shall be governed by
Section 10.01(a)) and such default shall continue unremedied for a period of
thirty (30) days after the earlier to occur of (i) notice thereof to the
Borrower by any Lender or (ii) the Borrower otherwise becoming aware of such
default; or
(e) the Borrower shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or
(f) the Borrower shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, liquidation or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or
(g) a proceeding or case shall be commenced, without the application or
consent of the Borrower, in any court of competent jurisdiction, seeking (i) its
liquidation, reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of the Borrower of all or any substantial part
of its assets, or (iii) similar relief in respect of the Borrower under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case shall continue undismissed,
or an order, judgment or decree approving or ordering any of the foregoing shall
be entered and continue unstayed and in effect, for a period of 60 days; or (iv)
an order for relief against the Borrower shall be entered in an involuntary case
under the Federal Bankruptcy Code; or
(h) a judgment or judgments for the payment of money in excess of
$250,000 in the aggregate shall be rendered by a court against the Borrower or
any Subsidiary and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be (i) fully
covered by insurance owned or held by the Borrower or such Subsidiary, as
applicable, under a policy or policies which are in full force and effect, or
(ii) procured, within thirty (30) days from the date of entry thereof and the
Borrower or such Subsidiary shall not, within said period of 30 days, or such
longer period during which execution of the same shall have been stayed, appeal
therefrom and cause the execution thereof to be stayed during such appeal; or
(i) the Security Instruments after delivery thereof shall for any
reason, except to the extent permitted by the terms thereof, cease to be in full
force and effect and valid, binding and enforceable in accordance with their
terms, or cease to create a valid and perfected Lien of the priority required
thereby on any of the collateral purported to be covered thereby, except to the
extent permitted by the terms of this Agreement, or the Borrower shall so state
in writing; or
(j) the Borrower discontinues its usual business; or
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(k) Guarantors takes, suffers or permits to exist any of the events or
conditions referred to in paragraphs (e), (f), (g) or (h) hereof or if any
provision of any guaranty agreement related thereto shall for any reason cease
to be valid and binding on Guarantors or if Guarantors shall so state in
writing; or
(l) Any Acquired Entity or any Subsidiary takes, suffers or permits to
exist any of the events or conditions referred to in paragraphs (e), (f), (g) or
(h) hereof; or
(m) Any Management Services Agreement or any Accounts Receivable
Purchase Agreement terminates or a default by the Borrower occurs thereunder; or
(n) any modification or amendment of any Management Services Agreement
or any Accounts Receivable Purchase Agreement is made that could result in a
monetary impact to the Borrower without the prior written consent of the Agent;
or
(o) A Change of Control occurs.
Section 10.02 REMEDIES.
(a) In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01 or in clauses (k) and (l) to the extent
they relates to clauses (e), (f) or (g), the Agent, upon request of the Majority
Lenders, shall, by notice to the Borrower, cancel the Commitments and/or declare
the principal amount then outstanding of, and the accrued interest on, the Loans
and all other amounts payable by the Borrower hereunder and under the Notes
(including without limitation the payment of cash collateral to secure the LC
Exposure as provided in Section 2.10(b)) to be forthwith due and payable,
whereupon such amounts shall be immediately due and payable without presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower.
(b) In the case of the occurrence of an Event of Default referred to in
clauses (e), (f) or (g) of Section 10.01 or in clauses (k) and (l) to the extent
they relate to clauses (e), (f) or (g), the Commitments shall be automatically
canceled and the principal amount then outstanding of, and the accrued interest
on, the Loans and all other amounts payable by the Borrower hereunder and under
the Notes (including without limitation the payment of cash collateral to secure
the LC Exposure as provided in Section 2.10(b)) shall become automatically
immediately due and payable without presentment, demand, protest, notice of
intent to accelerate, notice of acceleration or other formalities of any kind,
all of which are hereby expressly waived by the Borrower.
(c) All proceeds received after maturity of the Notes, whether by
acceleration or otherwise shall be applied first to reimbursement of expenses
and indemnities provided for in this Agreement and the Security Instruments;
second to accrued interest on the Notes; third to fees; fourth pro rata to
principal outstanding on the Notes and other Indebtedness; fifth to serve as
cash collateral to be held by the Agent to secure the LC Exposure; and any
excess shall be paid to the Borrower or as otherwise required by any
Governmental Requirement.
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ARTICLE XI
THE AGENT
Section 11.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder and
under the Security Instruments with such powers as are specifically delegated to
the Agent by the terms of this Agreement and the Security Instruments, together
with such other powers as are reasonably incidental thereto. The Agent (which
term as used in this sentence and in Section 11.05 and the first sentence of
Section 11.06 shall include reference to its Affiliates and its and its
Affiliates' officers, directors, employees, attorneys, accountants, experts and
agents): (i) shall have no duties or responsibilities except those expressly set
forth in the Loan Documents, and shall not by reason of the Loan Documents be a
trustee or fiduciary for any Lender; (ii) makes no representation or warranty to
any Lender and shall not be responsible to the Lenders for any recitals,
statements, representations or warranties contained in this Agreement, or in any
certificate or other document referred to or provided for in, or received by any
of them under, this Agreement, or for the value, validity, effectiveness,
genuineness, execution, effectiveness, legality, enforceability or sufficiency
of this Agreement, any Note or any other document referred to or provided for
herein or for any failure by the Borrower or any other Person (other than the
Agent) to perform any of its obligations hereunder or thereunder or for the
existence, value, perfection or priority of any collateral security or the
financial or other condition of the Borrower, its Subsidiaries or any other
obligor or guarantor; (iii) except pursuant to Section 11.07 shall not be
required to initiate or conduct any litigation or collection proceedings
hereunder; and (iv) shall not be responsible for any action taken or omitted to
be taken by it hereunder or under any other document or instrument referred to
or provided for herein or in connection herewith including its own ordinary
negligence, except for its own gross negligence or willful misconduct. The Agent
may employ agents, accountants, attorneys and experts and shall not be
responsible for the negligence or misconduct of any such agents, accountants,
attorneys or experts selected by it in good faith or any action taken or omitted
to be taken in good faith by it in accordance with the advice of such agents,
accountants, attorneys or experts. The Agent may deem and treat the payee of any
Note as the holder thereof for all purposes hereof unless and until a written
notice of the assignment or transfer thereof permitted hereunder shall have been
filed with the Agent. The Agent is authorized to release any collateral that is
permitted to be sold or released pursuant to the terms of the Loan Documents.
Section 11.02 RELIANCE BY AGENT. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any thereof by
telephone, telex, telecopier, telegram or cable) reasonably believed by it to be
genuine and correct and to have been signed or sent by or on behalf of the
proper Person or Persons, and upon advice and statements of legal counsel,
independent accountants and other experts selected by the Agent.
Section 11.03 DEFAULTS. The Agent shall not be deemed to have knowledge
of the occurrence of a Default (other than the non-payment of principal of or
interest on Loans or of fees or failure to reimburse for Letter of Credit
drawings) unless the Agent has received notice from a Lender or the Borrower
specifying such Default and stating that such notice is a "Notice of Default."
In the event that the Agent receives such a notice of the occurrence of a
Default, the Agent shall give
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prompt notice thereof to the Lenders. In the event of a payment Default, the
Agent shall give each Lender prompt notice of each such payment Default.
Section 11.04 RIGHTS AS A LENDER. With respect to its Commitments and
the Loans made by it and its participation in the issuance of Letters of Credit,
NationsBank (and any successor acting as Agent) in its capacity as a Lender
hereunder shall have the same rights and powers hereunder as any other Lender
and may exercise the same as though it were not acting as the Agent, and the
term "Lender" or "Lenders" shall, unless the context otherwise indicates,
include the Agent in its individual capacity. NationsBank (and any successor
acting as Agent) and its Affiliates may (without having to account therefor to
any Lender) accept deposits from, lend money to and generally engage in any kind
of banking, trust or other business with the Borrower (and any of its
Affiliates) as if it were not acting as the Agent, and NationsBank and its
Affiliates may accept fees and other consideration from the Borrower for
services in connection with this Agreement or otherwise without having to
account for the same to the Lenders.
Section 11.05 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY THE AGENT
AND THE ISSUING BANK RATABLY IN ACCORDANCE WITH THEIR PERCENTAGE SHARES FOR THE
INDEMNITY MATTERS AS DESCRIBED IN SECTION 12.03 TO THE EXTENT NOT INDEMNIFIED OR
REIMBURSED BY THE BORROWER UNDER SECTION 12.03, BUT WITHOUT LIMITING THE
OBLIGATIONS OF THE BORROWER UNDER SAID SECTION 12.03 AND FOR ANY AND ALL OTHER
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS,
COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WHICH MAY BE
IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR THE ISSUING BANK IN ANY
WAY RELATING TO OR ARISING OUT OF: (I) THIS AGREEMENT, THE SECURITY INSTRUMENTS
OR ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY, BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS
CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE
OF ITS AGENCY DUTIES HEREUNDER OR (II) THE ENFORCEMENT OF ANY OF THE TERMS OF
THIS AGREEMENT, ANY SECURITY INSTRUMENT OR OF ANY SUCH OTHER DOCUMENTS; WHETHER
OR NOT ANY OF THE FOREGOING SPECIFIED IN THIS SECTION 11.05 ARISES FROM THE SOLE
OR CONCURRENT NEGLIGENCE OF THE AGENT OR THE ISSUING BANK, PROVIDED THAT NO
LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT OR THE ISSUING BANK.
Section 11.06 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender
acknowledges and agrees that it has, independently and without reliance on the
Agent or any other Lender, and based on such documents and information as it has
deemed appropriate, made its own credit analysis of the Borrower and its
decision to enter into this Agreement, and that it will, independently and
without reliance upon the 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 analysis and decisions in taking or not taking action under this Agreement.
The Agent shall not be required to keep itself informed as to the performance or
observance by the Borrower of this Agreement, the Notes, the Security
Instruments or any other document referred to or provided for herein or to
inspect the properties or books of the Borrower. Except for notices, reports and
other documents and information expressly required to be furnished to the
Lenders by the Agent hereunder and copies of the documents required
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to be provided to the Agent under Article VI, the Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the affairs, financial condition or business of the Borrower (or any
of its Affiliates) which may come into the possession of the Agent or any of its
Affiliates. In this regard, each Lender acknowledges that Vinson & Elkins L.L.P.
is acting in this transaction as special counsel to the Agent only, except to
the extent otherwise expressly stated in any legal opinion or any Loan Document.
Each Lender will consult with its own legal counsel to the extent that it deems
necessary in connection with the Loan Documents and the matters contemplated
therein.
Section 11.07 ACTION BY AGENT. Except for action or other matters
expressly required of the Agent hereunder, the Agent shall in all cases be fully
justified in failing or refusing to act hereunder unless it shall (i) receive
written instructions from the Majority Lenders (or all of the Lenders as
expressly required by Section 12.04) specifying the action to be taken, and (ii)
be indemnified to its satisfaction by the Lenders against any and all liability
and expenses which may be incurred by it by reason of taking or continuing to
take any such action. The instructions of the Majority Lenders (or all of the
Lenders as expressly required by Section 12.04) and any action taken or failure
to act pursuant thereto by the Agent shall be binding on all of the Lenders. If
a Default has occurred and is continuing, the Agent shall take such action with
respect to such Default as shall be directed by the Majority Lenders (or all of
the Lenders as required by Section 12.04) in the written instructions (with
indemnities) described in this Section 11.07, provided that, unless and until
the Agent shall have received such directions, the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interests of the Lenders.
In no event, however, shall the Agent be required to take any action which
exposes the Agent to personal liability or which is contrary to this Agreement
and the Security Instruments or applicable law.
Section 11.08 RESIGNATION OR REMOVAL OF AGENT. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent may
resign at any time by giving notice thereof to the Lenders and the Borrower, and
the Agent may be removed at any time with or without cause by the Majority
Lenders. Upon any such resignation or removal, the Majority Lenders shall have
the right to appoint a successor Agent. If no successor Agent shall have been so
appointed by the Majority Lenders and shall have accepted such appointment
within thirty (30) days after the retiring Agent's giving of notice of
resignation or the Majority Lenders' removal of the retiring Agent, then the
retiring Agent may, on behalf of the Lenders, appoint a successor Agent. Upon
the acceptance of such appointment hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this Article XI and Section 12.03 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Agent.
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ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER. No failure on the part of the Agent or any Lender
to exercise and no delay in exercising, and no course of dealing with respect
to, any right, power or privilege under any of the Loan Documents shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege under any of the Loan Documents preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Section 12.02 NOTICES. All notices and other communications provided for
herein and in the other Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in
writing and telexed, telecopied, mailed or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof or in the Loan Documents, except that for notices and other
communications to the Agent other than payment of money, the Borrower need only
send such notices and communications to the Agent care of the Houston address of
NationsBank; or, as to any party, at such other address as shall be desig nated
by such party in a notice to each other party. Except as otherwise provided in
this Agreement or in the other Loan Documents, all such communications shall be
deemed to have been duly given when transmitted, if transmitted before 1:00 p.m.
local time on a Business Day (otherwise on the next succeeding Business Day) by
telex or telecopier and evidence or confirmation of receipt is obtained, or
personally delivered or, in the case of a mailed notice, three (3) Business Days
after the date deposited in the mails, postage prepaid, in each case given or
addressed as aforesaid.
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC.
(a) The Borrower agrees:
(i) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of the Agent in the
administration (both before and after the execution hereof and including
advice of counsel as to the rights and duties of the Agent and the
Lenders with respect thereto) of, and in connection with the
negotiation, syndication, investigation, preparation, execution and
delivery of, recording or filing of, preservation of rights under,
enforcement of, and refinancing, renegotiation or restructuring of, the
Loan Documents and any amendment, waiver or consent relating thereto
(including, without limitation, travel, photocopy, mailing, courier,
telephone and other similar expenses of the Agent, the cost of
environmental audits, surveys and appraisals at reasonable intervals,
the reasonable fees and disbursements of counsel and other outside
consultants for the Agent and, in the case of enforcement (including,
without limitation, bankruptcy and workout matters), the reasonable fees
and disbursements of counsel for the Agent, the Issuing Bank, and any of
the Lenders); and promptly reimburse the Agent for all amounts expended,
advanced or incurred by the Agent or the Lenders to satisfy any
obligation of the Borrower
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under this Agreement or any Security Instrument, including without
limitation, all costs and expenses of foreclosure;
(II) TO INDEMNIFY THE AGENT, THE ISSUING BANK, AND EACH LENDER
AND EACH OF THEIR AFFILIATES AND EACH OF THEIR OFFICERS, DIRECTORS,
EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS, ACCOUNTANTS AND EXPERTS
("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM HARMLESS AGAINST AND
PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, THE INDEMNITY
MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF
THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A
RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY ACTUAL OR
PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY OF THE LOANS OR
LETTERS OF CREDIT, (II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE
LOAN DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE BORROWER AND
ITS SUBSIDIARIES, (IV) THE FAILURE OF THE BORROWER OR ANY SUBSIDIARY TO
COMPLY WITH THE TERMS OF ANY SECURITY INSTRUMENT OR THIS AGREEMENT, OR
WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF ANY
REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF THE BORROWER OR ANY
GUARANTOR SET FORTH IN ANY OF THE LOAN DOCUMENTS, (VI) THE ISSUANCE,
EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER
ANY LETTER OF CREDIT, OR (VII) THE PAYMENT OF A DRAWING UNDER ANY LETTER
OF CREDIT NOTWITHSTANDING THE NON-COMPLIANCE, NON-DELIVERY OR OTHER
IMPROPER PRESENTATION OF THE MANUALLY EXECUTED DRAFT(S) AND
CERTIFICATION(S), (VIII) ANY ASSERTION THAT THE LENDERS WERE NOT
ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY
INSTRUMENTS OR (IX) ANY OTHER ASPECT OF THE LOAN DOCUMENTS, INCLUDING,
WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND
ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING
OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL
INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY
INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY
REASON OF CLAIMS BETWEEN THE LENDERS OR ANY LENDER AND THE AGENT OR A
LENDER'S SHAREHOLDERS AGAINST THE AGENT OR LENDER OR BY REASON OF THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE INDEMNIFIED
PARTY; AND
(III) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE
INDEMNIFIED PARTIES FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST
RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND
LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY
ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY OR ANY OF
THEIR PROPERTIES, INCLUDING WITHOUT LIMITATION, THE TREATMENT OR
DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES, (II) AS A
RESULT OF THE BREACH OR NON-COMPLIANCE BY THE BORROWER OR ANY SUBSIDIARY
WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY,
(III) DUE TO PAST OWNERSHIP BY THE BORROWER OR ANY SUBSIDIARY OF ANY OF
THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF THEIR PROPERTIES WHICH,
THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD
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RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE,
TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE
PROPERTIES OWNED OR OPERATED BY THE BORROWER OR ANY SUBSIDIARY, OR (V)
ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH
THE LOAN DOCUMENTS; PROVIDED, HOWEVER, NO INDEMNITY SHALL BE AFFORDED
UNDER THIS SECTION 12.03(A)(III) IN RESPECT OF ANY PROPERTY FOR ANY
OCCURRENCE ARISING FROM THE ACTS OR OMISSIONS OF THE AGENT OR ANY LENDER
DURING THE PERIOD AFTER WHICH SUCH PERSON, ITS SUCCESSORS OR ASSIGNS
SHALL HAVE OBTAINED POSSESSION OF SUCH PROPERTY (WHETHER BY FORECLOSURE
OR DEED IN LIEU OF FORECLOSURE, AS MORTGAGEE-IN-POSSESSION OR
OTHERWISE).
(b) No Indemnified Party may settle any claim to be indemnified without
the consent of the indemnitor, such consent not to be unreasonably withheld;
provided, that the indemnitor may not reasonably withhold consent to any
settlement that an Indemnified Party proposes, if the indemnitor does not have
the financial ability to pay all its obligations outstanding and asserted
against the indemnitor at that time, including the maximum potential claims
against the Indemnified Party to be indemnified pursuant to this Section 12.03.
(c) In the case of any indemnification hereunder, the Agent, the Issuing
Bank or Lender, as appropriate shall give notice to the Borrower of any such
claim or demand being made against the Indemnified Party and the Borrower shall
have the non-exclusive right to join in the defense against any such claim or
demand provided that if the Borrower provides a defense, the Indemnified Party
shall bear its own cost of defense unless there is a conflict between the
Borrower and such Indemnified Party.
(D) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR CHARACTER
WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT OR AN
OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT CONDUCT
IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF THE
INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT FAULT ON
ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN INDEMNIFIED
PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL CONTINUE BUT
SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED TO HAVE OCCURRED BY
REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE
INDEMNIFIED PARTY.
(e) The Borrower's obligations under this Section 12.03 shall survive
any termination of this Agreement and the payment of the Notes and shall
continue thereafter in full force and effect.
(f) The Borrower shall pay any amounts due under this Section 12.03
within thirty (30) days of the receipt by the Borrower of notice of the amount
due.
Section 12.04 AMENDMENTS, ETC. Any provision of this Agreement or any
Security Instrument may be amended, modified or waived with the Borrower's and
the Majority Lenders'
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prior written consent; provided that (i) no amendment, modification or waiver
which extends the final maturity of the Loans, postpones the scheduled payment
date of any amount owing under any Loan Document, increases the Aggregate
Maximum Revolving Credit Amounts, modifies the Borrowing Base, forgives the
principal amount of any Indebtedness outstanding under this Agreement, releases
any guarantor of the Indebtedness or releases all or substantially all of the
collateral, reduces the interest rate applicable to the Loans or the fees
payable to the Lenders generally, affects Section 2.03(a), this Section 12.04 or
Section 12.06(a) or modifies the definition of "Majority Lenders" or "Revolving
Credit Termination Date" shall be effective without consent of all Lenders; (ii)
no amendment, modification or waiver which increases the Maximum Revolving
Credit Amount or the Term Commitment of any Lender shall be effective without
the consent of such Lender; and (iii) no amendment, modification or waiver which
modifies the rights, duties or obligations of the Agent shall be effective
without the consent of the Agent.
Section 12.05 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 12.06 ASSIGNMENTS AND PARTICIPATIONS.
(a) The Borrower may not assign its rights or obligations hereunder or
under the Notes or any Letters of Credit without the prior consent of all of the
Lenders and the Agent.
(b) Any Lender may, upon the written consent of the Agent and, if no
Event of Default has occurred and is continuing, the Borrower (which consent
will not be unreasonably withheld), assign to one or more assignees all or a
portion of its rights and obligations under this Agreement; PROVIDED, HOWEVER,
that (i) any such assignment shall be in the amount of at least $5,000,000 or
such lesser amount to which the Borrower has consented and (ii) the assignee or
assignor shall pay to the Agent a processing and recordation fee of $3,000 for
each assignment. Any such assignment will become effective upon the execution
and delivery to the Agent of the assignment and the consent of the Agent and the
Borrower, if applicable. Promptly after receipt of an executed Assignment, the
Agent shall send to the Borrower a copy of such executed Assignment. Upon
receipt of such executed Assignment, the Borrower, will, at its own expense,
execute and deliver new Notes to the assignor and/or assignee, as appropriate,
in accordance with their respective interests as they appear. Upon the
effectiveness of any assignment pursuant to this Section 12.06(b), the assignee
will become a "Lender," if not already a "Lender," for all purposes of this
Agreement and the Security Instruments. The assignor shall be relieved of its
obligations hereunder to the extent of such assignment (and if the assigning
Lender no longer holds any rights or obligations under this Agreement, such
assigning Lender shall cease to be a "Lender" hereunder except that its rights
under Sections 4.06, 5.01, 5.05 and 12.03 shall not be affected). The Agent will
prepare on the last Business Day of each month during which an assignment has
become effective pursuant to this Section 12.06(b), a new ANNEX I giving effect
to all such assignments effected during such month, and will promptly provide
the same to the Borrower and each of the Lenders.
(c) Each Lender may transfer, grant or assign participations in all or
any part of such Lender's interests hereunder pursuant to this Section 12.06(c)
to any Person, PROVIDED that: (i) such Lender shall remain a "Lender" for all
purposes of this Agreement and the transferee of such
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participation shall not constitute a "Lender" hereunder; and (ii) no participant
under any such participation shall have rights to approve any amendment to or
waiver of any of the Loan Documents except to the extent such amendment or
waiver would (x) forgive any principal owing on any Indebtedness or extend the
final maturity of the Loans, (y) reduce the interest rate (other than as a
result of waiving the applicability of any post-default increases in interest
rates) or fees applicable to any of the Commitments or Loans or Letters of
Credit in which such participant is participating, or postpone the payment of
any thereof, or (z) release any guarantor of the Indebtedness or release all or
substantially all of the collateral (except as provided in the Loan Documents)
supporting any of the Commitments or Loans or Letters of Credit in which such
participant is participating. In the case of any such participation, the
participant shall not have any rights under this Agreement or any of the
Security Instruments (the participant's rights against the granting Lender in
respect of such participation to be those set forth in the agreement with such
Lender creating such participation), and all amounts payable by the Borrower
hereunder shall be determined as if such Lender had not sold such participation,
PROVIDED that such participant shall be entitled to receive additional amounts
under Article V on the same basis as if it were a Lender and be indemnified
under Section 12.03 as if it were a Lender. In addition, each agreement creating
any participation must include an agreement by the participant to be bound by
the provisions of Section 12.15.
(d) The Lenders may furnish any information concerning the Borrower in
the possession of the Lenders from time to time to assignees and participants
(including prospective assignees and participants); provided that, such Persons
agree to be bound by the provisions of Section 12.15.
(e) Notwithstanding anything in this Section 12.06 to the contrary, any
Lender may assign and pledge its Notes to any Federal Reserve Bank as collateral
security pursuant to Regulation A of the Board of Governors of the Federal
Reserve System and any operating circular issued by such Federal Reserve System
and/or such Federal Reserve Bank. No such assignment and/or pledge shall release
the assigning and/or pledging Lender from its obligations hereunder.
(f) Notwithstanding any other provisions of this Section 12.06, no
transfer or assignment of the interests or obligations of any Lender or any
grant of participations therein shall be permitted if such transfer, assignment
or grant would require the Borrower to file a registration statement with the
SEC or to qualify the Loans under the "Blue Sky" laws of any state.
Section 12.07 INVALIDITY. In the event that any one or more of the
provisions contained in any of the Loan Documents, the Letter of Credit
Agreements, or the Letters of Credit shall, for any reason, be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of the Notes, this
Agreement or any Security Instrument.
Section 12.08 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
Section 12.09 REFERENCES. The words "herein," "hereof," "hereunder" and
other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any
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particular article, section or subsection. Any reference herein to a Section
shall be deemed to refer to the applicable Section of this Agreement unless
otherwise stated herein. Any reference herein to an exhibit or schedule shall be
deemed to refer to the applicable exhibit or schedule attached hereto unless
otherwise stated herein.
Section 12.10 SURVIVAL. The obligations of the parties under Section
4.06, Article V, and Sections 11.05 and 12.03 shall survive the repayment of the
Loans and the termination of the Commitments. To the extent that any payments on
the Indebtedness or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Indebtedness so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent's and the Lenders' Liens, security interests,
rights, powers and remedies under this Agreement and each Security Instrument
shall continue in full force and effect. In such event, each Security Instrument
shall be automatically reinstated and the Borrower shall take such action as may
be reasonably requested by the Agent and the Lenders to effect such
reinstatement.
Section 12.11 CAPTIONS. Captions and section headings appearing herein
are included solely for convenience of reference and are not intended to affect
the interpretation of any provision of this Agreement.
Section 12.12 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF. THE 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.
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(A) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT THAT UNITED
STATES FEDERAL LAW PERMITS ANY LENDER TO CHARGE INTEREST AT THE RATE ALLOWED BY
THE LAWS OF THE STATE WHERE SUCH LENDER IS LOCATED. TEX. REV. CIV. STAT. ANN.
ART. 5069, CH. 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.
(B) SUBJECT TO SECTION 12.17, ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT TO THE LOAN DOCUMENTS SHALL BE BROUGHT IN THE COURTS OF THE STATE OF
TEXAS OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS,
AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWER, THE
AGENT AND THE LENDERS HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY
LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. EACH OF THE BORROWER, THE AGENT AND THE LENDERS HEREBY
IRREVOCABLY WAIVES ANY
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OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.
(C) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR ANY LENDER OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
(D) THE BORROWER, THE AGENT AND EACH LENDER HEREBY (I) IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY SECURITY
INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY
THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY
HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (IV)
ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY
INSTRUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 12.13.
Section 12.14 INTEREST. It is the intention of the parties hereto that
each Lender shall conform strictly to usury laws applicable to it. Accordingly,
if the transactions contemplated hereby would be usurious as to any Lender under
laws applicable to it (including the laws of the United States of America and
the State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to such Lender notwithstanding the other provisions of this
Agreement), then, in that event, notwithstanding anything to the contrary in any
of the Loan Documents or any agreement entered into in connection with or as
security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan Documents or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be canceled automatically and if
theretofore paid shall be credited by such Lender on the principal amount of the
Indebtedness (or, to the extent that the principal amount of the Indebtedness
shall have been or would thereby be paid in full, refunded by such Lender to the
Borrower); and (ii) in the event that the maturity of the Notes is accelerated
by reason of an election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to any Lender may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically by such Lender as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by such Lender on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the Indebtedness shall have been or would
thereby be paid in full, refunded by such Lender to the Borrower). All sums paid
or agreed to be paid to any Lender for the use, forbearance or detention of sums
due hereunder shall, to the extent permitted by law applicable to such Lender,
be amortized,
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prorated, allocated and spread throughout the full term of the Loans evidenced
by the Notes until payment in full so that the rate or amount of interest on
account of any Loans hereunder does not exceed the maximum amount allowed by
such applicable law. If at any time and from time to time (i) the amount of
interest payable to any Lender on any date shall be computed at the Highest
Lawful Rate applicable to such Lender pursuant to this Section 12.14 and (ii) in
respect of any subsequent interest computation period the amount of interest
otherwise payable to such Lender would be less than the amount of interest
payable to such Lender computed at the Highest Lawful Rate applicable to such
Lender, then the amount of interest payable to such Lender in respect of such
subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to such Lender until the total amount of interest
payable to such Lender shall equal the total amount of interest which would have
been payable to such Lender if the total amount of interest had been computed
without giving effect to this Section 12.14. To the extent that Article
5069-1.04 of the Texas Revised Civil Statutes is relevant for the purpose of
determining the Highest Lawful Rate, such Lender elects to determine the
applicable rate ceiling under such Article by the indicated weekly rate ceiling
from time to time in effect.
Section 12.15 CONFIDENTIALITY. In the event that the Borrower provides
to the Agent or the Lenders written confidential information belonging to the
Borrower, if the Borrower shall denominate such information in writing as
"confidential", the Agent and the Lenders shall thereafter maintain such
information in confidence in accordance with the standards of care and diligence
that each utilizes in maintaining its own confidential information. This
obligation of confidence shall not apply to such portions of the information
which (i) are in the public domain, (ii) hereafter become part of the public
domain without the Agent or the Lenders breaching their obligation of confidence
to the Borrower, (iii) are previously known by the Agent or the Lenders from
some source other than the Borrower, (iv) are hereafter developed by the Agent
or the Lenders without using the Borrower's information, (v) are hereafter
obtained by or available to the Agent or the Lenders from a third party who owes
no obligation of confidence to the Borrower with respect to such information or
through any other means other than through disclosure by the Borrower, (vi) are
disclosed with the Borrower's consent, (vii) must be disclosed either pursuant
to any Governmental Requirement or to Persons regulating the activities of the
Agent or the Lenders, or (viii) as may be required by law or regulation or order
of any Governmental Authority in any judicial, arbitration or governmental
proceeding. Further, the Agent or a Lender may disclose any such information to
any other Lender, any independent consultants, any independent certified public
accountants, any legal counsel employed by such Person in connection with this
Agreement or any Security Instrument, including without limitation, the
enforcement or exercise of all rights and remedies thereunder, or any assignee
or participant (including prospective assignees and participants) in the Loans;
PROVIDED, HOWEVER, that the Agent or the Lenders shall receive a confidentiality
agreement from the Person to whom such information is disclosed such that said
Person shall have the same obligation to maintain the confidentiality of such
information as is imposed upon the Agent or the Lenders hereunder.
Notwithstanding anything to the contrary provided herein, this obligation of
confidence shall cease three (3) years from the date the information was
furnished, unless the Borrower requests in writing at least thirty (30) days
prior to the expiration of such three year period, to maintain the
confidentiality of such information for an additional three year period. The
Borrower waives any and all other rights it may have to confidentiality as
against the Agent and the Lenders arising by contract, agreement, statute or law
except as expressly stated in this Section 12.15.
- 67 -
<PAGE>
Section 12.16 EFFECTIVENESS. This Agreement shall be effective on the
Closing Date.
Section 12.17 BINDING ARBITRATION.
(A) ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO,
INCLUDING BUT NOT LIMITED TO, THOSE ARISING OUT OF OR RELATING TO THIS
AGREEMENT, THE NOTES OR THE SECURITY INSTRUMENTS, INCLUDING ANY CLAIM OR
CONTROVERSY OF ANY KIND BASED ON OR ARISING IN TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT
APPLICABLE, APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE
ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION
SERVICES, INC. ("J.A.M.S."), AND THE RULES SET FORTH IN SECTION 12.17(B) BELOW.
IN THE EVENT OF ANY INCONSISTENCY, THE RULES SET FORTH IN SECTION 12.17(B) BELOW
SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THE NOTES OR ANY OTHER SECURITY INSTRUMENT MAY
BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OR ANY CONTROVERSY OR CLAIM TO WHICH EITHER THE NOTES, THIS
AGREEMENT OR ANY OTHER SECURITY INSTRUMENT APPLIES IN ANY COURT HAVING
JURISDICTION OVER SUCH ACTION.
(B) THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF HOUSTON, TEXAS AND
ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR. IF J.A.M.S. IS UNABLE
OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN
ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED
WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION, AND THE ARBITRATOR SHALL, ONLY
UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH
HEARINGS FOR AN ADDITIONAL 60 DAYS.
(C) NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO (I) LIMIT THE
APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE OR
ANY WAIVERS CONTAINED IN THIS AGREEMENT, THE NOTES, THE GUARANTY AGREEMENT OR
THE OTHER SECURITY INSTRUMENTS; (II) BE A WAIVER BY ANY LENDER OF THE PROTECTION
AFFORDED TO IT BY 12 U.S.C. SS.91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR
(III) LIMIT THE RIGHT OF ANY LENDER TO (A) EXERCISE SELF HELP REMEDIES SUCH AS,
BUT NOT LIMITED TO, SETOFF, (B) FORECLOSE AGAINST ANY COLLATERAL, WHETHER REAL
OR PERSONAL PROPERTY, OR (C) OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY
REMEDIES SUCH AS, BUT NOT LIMITED, INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE
APPOINTMENT OF A RECEIVER. ANY LENDER MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON COLLATERAL, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THE NOTES, THIS AGREEMENT OR THE OTHER SECURITY INSTRUMENTS. NEITHER
THE EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN
ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A
WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING THE RESORT TO SUCH
REMEDIES.
- 68 -
<PAGE>
(D) THE PROVISIONS OF THIS SECTION 12.17 SHALL SURVIVE ANY TERMINATION,
AMENDMENT, OR EXPIRATION OF THE SECURITY INSTRUMENTS. EACH PARTY AGREES TO KEEP
ALL DISPUTES AND ARBITRATION PROCEEDINGS STRICTLY CONFIDENTIAL, EXCEPT FOR
DISCLOSURES OF INFORMATION REQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS OR BY
APPLICABLE LAW OR REGULATION.
(E) NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO LIMIT THE RIGHT OF THE
BORROWER TO OBTAIN INJUNCTIVE RELIEF AGAINST ANY LENDER PRIOR TO OR DURING THE
PENDENCY OF ANY ARBITRATION PROCEEDING BASED ON VIOLATIONS BY ANY LENDER OF ANY
LENDER'S AGREEMENTS WITH THE BORROWER, SO LONG AS THE INJUNCTIVE RELIEF IS
LIMITED TO RESTRAINING ANY LENDER FROM EXERCISING ITS RIGHTS AND REMEDIES UNTIL
THE ARBITRATION PROCEEDING (IN PROCESS OR INITIATED BY THE BORROWER OR ANY
LENDER IN CONJUNCTION WITH THE REQUEST FOR SUCH INJUNCTIVE RELIEF) HAS BEEN
COMPLETED AND ARBITRATION AWARD HAS BEEN MADE.
Section 12.18 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE SECURITY
INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY
INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE SECURITY
INSTRUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS
RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD
NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
"CONSPICUOUS."
[SIGNATURES BEGIN ON NEXT PAGE]
- 69 -
<PAGE>
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
BORROWER: CASTLE DENTAL CENTERS, INC.
By:____________________________
Name: Jack H. Castle, Jr.
Title: Chairman and Chief Executive Officer
Address for Notices:
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Telecopier No. (713) 513-1401
Telephone No.: (713) 513-1400
Attention: Jack H. Castle, Jr.
Signature Page - 1
<PAGE>
AGENT: NATIONSBANK OF TEXAS, N.A.
By:____________________________________
Margaret H. Barradas
Senior Vice President
Lending Office for Base Rate Loans and
Eurodollar Loans:
700 Louisiana Street
7th Floor
Houston, Texas 77002
Address for Notices:
700 Louisiana Street 7th
Floor Houston, Texas 77002
Telecopier No. (713) 247-7175
Telephone No.: (713) 247-6056
Attention: Margaret H. Barradas
Signature Page - 2
<PAGE>
LENDERS: THE SUMITOMO BANK, LIMITED
By:_____________________________
Richard Menchaca
Vice President
By:_____________________________
Bruce Portillo
Vice President & Manager
Lending Office for Base Rate Loans and
Eurodollar Loans:
233 S. Wacker Drive
Suite 5400
Chicago, Illinois 60606
Address for Notices:
909 Fannin Street
Suite 3750
Houston, Texas 77010-1086
Telecopier No.: 713/759-1419
Telephone No.: 713/759-0770
Attention: Denise Rodriguez
Signature Page - 3
<PAGE>
<TABLE>
<CAPTION>
ANNEX I
LIST OF MAXIMUM REVOLVING CREDIT AMOUNTS AND TERM LOANS
MAXIMUM REVOLVING
NAME OF LENDER PERCENTAGE SHARE CREDIT AMOUNT TERM LOAN
---------------- ------------------ ------------------- ------------
<S> <C> <C> <C>
NationsBank of Texas, N.A. 60.00% $15,000,000 $1,800,000
The Sumitomo Bank, Limited 40.00% $10,000,000 $1,200,000
TOTAL 100% $25,000,000 $3,000,000
</TABLE>
Annex-1
<PAGE>
EXHIBIT A-1
FORM OF REVOLVING CREDIT NOTE
$_____________________________ ___________________, 1997
FOR VALUE RECEIVED, CASTLE DENTAL CENTERS, INC., a Delaware corporation
(the "BORROWER") hereby promises to pay to the order of
______________________________ (the "LENDER"), at the Principal Office of
NationsBank of Texas, N.A., as Agent (the "AGENT"), at 700 Louisiana, Houston,
Texas 77002, the principal sum of _____________ Dollars ($____________) (or such
lesser amount as shall equal the aggregate unpaid principal amount of the Loans
made by the Lender to the Borrower under the Credit Agreement, as hereinafter
defined), in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of each
such Loan, at such office, in like money and funds, for the period commencing on
the date of such Loan until such Loan shall be paid in full, at the rates per
annum and on the dates provided in the Credit Agreement.
The date, amount, Type, interest rate, Interest Period and maturity of
each Loan made by the Lender to the Borrower, and each payment made on account
of the principal thereof, shall be recorded by the Lender on its books and,
prior to any transfer of this Revolving Credit Note, endorsed by the Lender on
the scheduleS attached hereto or any continuation thereof.
This Revolving Credit Note is one of the Notes referred to in the Credit
Agreement dated as of November 7, 1997 among the Borrower, the Lenders which are
or become parties thereto (including the Lender) and the Agent, and evidences
Revolving Credit Loans made by the Lender thereunder (such Credit Agreement as
the same may be amended or supplemented from time to time, the "CREDIT
AGREEMENT"). Capitalized terms used in this Revolving Credit Note have the
respective meanings assigned to them in the Credit Agreement.
This Revolving Credit Note is issued pursuant to the Credit Agreement
and is entitled to the benefits provided for in the Credit Agreement and the
Security Instruments. The Credit Agreement provides for the acceleration of the
maturity of this Revolving Credit Note upon the occurrence of certain events,
for prepayments of Loans upon the terms and conditions specified therein and
other provisions relevant to this Revolving Credit Note.
A-1-1
<PAGE>
THIS REVOLVING CREDIT NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
CASTLE DENTAL CENTERS, INC.
By:_____________________________
Name:
Title:
A-1-2
<PAGE>
EXHIBIT A-2
FORM OF TERM NOTE
$_____________________________ ___________________, 1997
FOR VALUE RECEIVED, CASTLE DENTAL CENTERS, INC., a Delaware corporation
(the "BORROWER") hereby promises to pay to the order of
______________________________ (the "LENDER"), at the Principal Office of
NationsBank of Texas, N.A., as Agent (the "AGENT"), at 700 Louisiana, Houston,
Texas 77002, the principal sum of _____________ Dollars ($____________) in
lawful money of the United States of America and in immediately available funds,
on the dates and in the principal amounts provided in the Credit Agreement, and
to pay interest, at such office, in like money and funds, at the rates per annum
and on the dates provided in the Credit Agreement.
Each payment made on account of the principal and interest hereof shall
be recorded by the Lender on its books.
This Term Note is one of the Notes referred to in the Credit Agreement
dated as of November 7, 1997 among the Borrower, the Lenders which are or become
parties thereto (including the Lender) and the Agent, and evidences the Term
Loan made by the Lender thereunder (such Credit Agreement as the same may be
amended or supplemented from time to time, the "CREDIT AGREEMENT"). Capitalized
terms used in this Term Note have the respective meanings assigned to them in
the Credit Agreement.
This Term Note is issued pursuant to the Credit Agreement and is
entitled to the benefits provided for in the Credit Agreement and the Security
Instruments. The Credit Agreement provides for the acceleration of the maturity
of this Term Note upon the occurrence of certain events, for prepayments of
Loans upon the terms and conditions specified therein and other provisions
relevant to the Term Note.
THIS TERM NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF TEXAS.
CASTLE DENTAL CENTERS, INC.
By:_____________________________
Name:
Title:
A-2-1
<PAGE>
EXHIBIT B
FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST
_____________________, 199__
CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "BORROWER"),
pursuant to the Credit Agreement dated as of November 7, 1997, among the
Borrower, each of the lenders that is a signatory thereto or which becomes a
signatory thereto as provided in Section 12.06 (individually, together with its
successors and assigns, a "LENDER" and, collectively, the "LENDERS"), and
NationsBank of Texas, N.A., as Agent (in such capacity, the "AGENT") for itself
and each of the Lenders (the "CREDIT AGREEMENT") hereby makes the requests
indicated below (unless otherwise defined herein, capitalized terms are defined
in the Credit Agreement):
1. Revolving Credit Loans:
(a) Aggregate amount of new Revolving Credit Loans to be
$________________________;
(b) Requested funding date is _________________, 199__ (which date
is prior to the Revolving Credit Termination Date;
(c) $_____________________ of such borrowings are to be Eurodollar
Loans; $_____________________ of such borrowings are to be Base
Rate Loans;
(d) Length of Interest Period for Eurodollar Loans (if applicable)
is: _________________________; and
(e) $_____________________ of the requested Revolving Credit Loans is
for general working capital purposes.
2. Eurodollar Loan Continuation for Eurodollar Loans maturing on
__________________________:
(a) Aggregate amount to be continued as Eurodollar Loans is
$____________________;
(b) Aggregate amount to be converted to Base Rate Loans is
$____________________;
(c) Length of Interest Period for continued Eurodollar Loans is
_____________________.
B-1
<PAGE>
3. Conversion of Outstanding Base Rate Loans to Eurodollar Loans:
Convert $__________________ of the outstanding Base Rate Loans to
Eurodollar Loans on ____________________ with an Interest Period
of _________________________.
Requested funding date:_________________________.
4. Term Loans (applicable for Initial Funding only):
(a) Aggregate amount of Term Loans to be $3,000,000;
(b) Requested funding date is the Closing Date.
(c) $________________ of such borrowings are to be Eurodollar Loans.
$________________ of such borrowings are to be Base Rate Loans;
and
(d) Length of Interest Period for Eurodollar Loans (if applicable)
is ______________.
The undersigned certifies that he is the _____________________ of the
Borrower, and that as such he is authorized to execute this certificate on
behalf of the Borrower. The undersigned further certifies, represents and
warrants on behalf of the Borrower that the Borrower is entitled to receive the
requested borrowing, continuation or conversion under the terms and conditions
of the Credit Agreement.
CASTLE DENTAL CENTERS, INC.
By:_________________________________
Name:
Title:
B-2
<PAGE>
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ________________ of
CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "BORROWER"), and that
as such he is authorized to execute this certificate on behalf of the Borrower.
With reference to the Credit Agreement dated as of November 7, 1997 (together
with all amendments or supplements thereto being the "AGREEMENT") among the
Borrower, each of the lenders that is a signatory thereto or which becomes a
signatory thereto as provided in Section 12.06 (individually, together with its
successors and assigns, a "LENDER" and, collectively, the "LENDERS"), and
NationsBank of Texas, N.A., as Agent (in such capacity, the "AGENT") for itself
and each of the Lenders, the undersigned represents and warrants as follows
(each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) The representations and warranties of the Borrower contained
in Article VII of the Agreement and in the Security Instruments and
otherwise made in writing by or on behalf of the Borrower pursuant to the
Agreement and the Security Instruments were true and correct when made,
and are repeated at and as of the time of delivery hereof and are true
and correct at and as of the time of delivery hereof, except as such
representations and warranties are modified to give effect to the
transactions expressly permitted by the Agreement.
(b) The Borrower has performed and complied with all agreements
and conditions contained in the Agreement and in the Security Instruments
required to be performed or complied with by it prior to or at the time
of delivery hereof.
(c) Neither the Borrower nor any Subsidiary has incurred any
material liabilities, direct or contingent, since December 31, 1996,
except those set forth in SCHEDULE 7.02 to the Agreement and except those
allowed by the terms of the Agreement or consented to by the Agent in
writing.
(d) Since December 31, 1996, no change has occurred, either in
any case or in the aggregate, in the condition, financial or otherwise,
of the Borrower or any Subsidiary which would have a Material Adverse
Effect.
(e) There exists, and, after giving effect to the Loans with
respect to which this certificate is being delivered, will exist, no
Default under the Agreement or any event or circumstance which
constitutes, or with notice or lapse of time (or both) would constitute,
an event of default under any loan or credit agreement, indenture, deed
of trust, security agreement or other agreement or instrument evidencing
or pertaining to any Debt of the Borrower or any Subsidiary, or under any
material agreement or instrument to which the Borrower or any Subsidiary
is a party or by which the Borrower or any Subsidiary is bound.
C-1
<PAGE>
(f) The following computations reflect compliance with the
following Sections of the Agreement:
Section 9.11 Ratio of Total Funded Debt to Capitalization
Section 9.12 Net Worth
Section 9.13 Leverage Ratio
Section 9.14 Fixed Charge Coverage Ratio
C-2
<PAGE>
EXECUTED AND DELIVERED this ____ day of ______________.
CASTLE DENTAL CENTERS, INC.
By:________________________
Name:
Title:
C-3
<PAGE>
EXHIBIT D
LIST OF SECURITY INSTRUMENTS
1. Security Agreement from Borrower
2. Financing Statement relating to Document No.1
3. Security Agreement from JHCDDS, Inc., formerly known as Jack H. Castle
D.D.S., Inc. ("JHC")
4. Financing Statement relating to Document No.3
5. Security Agreement from Castle Dental Centers of Tennessee, Inc.
("Castle Tennessee")
6. Financing Statement relating to Document No. 5
7. Security Agreement from Castle Dental Centers of Florida, Inc. ("Castle
Florida")
8. Financing Statement relating to Document No. 7
9. Security Agreement from Castle Dental Centers of Texas, Inc. ("Castle
Texas")
10. Financing Statement relating to Document No. 9
11. Security Agreement (Stock Pledge) from Borrower
12. Financing Statement relating to Document No. 11
13. Assignment Separate from Stock Certificate (a) Castle Tennessee (b)
Castle Florida (c) Castle Texas
14. Accounts Receivable Purchase Agreements (a) Castle Tennessee (b) Castle
Florida (c) Castle Texas
15. Financing Statement relating to Document No. 14, naming Agent as
Assignee. (a) Castle Tennessee (b) Castle Florida (c) Castle Texas
D-1
<PAGE>
16. Guaranty Agreement
(a) JHC
(b) Castle Tennessee
(c) Castle Florida
(d) Castle Texas
D-2
<PAGE>
EXHIBIT E
FORM OF BORROWING BASE REPORT
The undersigned hereby certifies that he is the ______________________ of CASTLE
DENTAL CENTERS, INC., a Delaware corporation (the "BORROWER"), and that as such
he is authorized to execute this certificate on behalf of the Borrower. With
reference to the Credit Agreement dated as of November 7, 1997 (together with
all amendments or supplements thereto being the "AGREEMENT") among the Borrower,
each of the lenders that is a signatory thereto or which becomes a signatory
thereto as provided in Section 12.06 (individually, together with its successors
and assigns, a "LENDER" and, collectively, the "LENDERS"), and NationsBank of
Texas, N.A., as Agent (in such capacity, the "AGENT") for itself and each of the
Lenders, the undersigned represents and warrants as follows (each capitalized
term used herein having the same meaning given to it in the Agreement unless
otherwise specified):
Borrower Consolidated Net Income ______________
Plus Interest +_____________
Depreciation, Depletion & Amortization +_____________
Taxes +_____________
Consolidated EBITDA ______________
Plus acquisition EBITDA* +_____________
Available EBITDA ______________
X 3.0
Total Availability ______________
Available to Borrow ______________
(up to $25,000,000** less Revolving Credit Loans and Term Loans to date)
*FOR ANY CALCULATION PERIOD WHICH WOULD INCLUDE ONE OR MORE QUARTERS PRIOR TO
THE STOCK PURCHASE OR ASSET PURCHASE OR FUTURE ACQUISITION OF AN ENTITY, THE
ROLLING FOUR QUARTERS SHALL INCLUDE THE "PRO- FORMA" EBITDA OF ANY APPLICABLE
ACQUIRED ENTITY FOR SUCH PRIOR PERIODS ADJUSTED TO REFLECT COSTS AND EXPENSES
WHICH SUCH APPLICABLE ACQUIRED ENTITY WOULD HAVE INCLUDED HAD THE MANAGEMENT
SERVICES AGREEMENT BETWEEN BORROWER AND/OR ANY SUBSIDIARY AND SUCH ACQUIRED
ENTITY BEEN IN EFFECT (ADDING BACK APPROPRIATE EXECUTIVE SALARIES AND NON-CASH
CHARGE-OFFS RELATING TO SUCH TRANSACTION).
E-1
<PAGE>
**UPON OCCURRENCE OF THE EVENTS CONTEMPLATED IN SECTION 2.03(D), $25,000,000
SHALL BE REPLACED WITH THE AMOUNT $30,000,000.
Executed and delivered on this the ____ day of _______________.
CASTLE DENTAL CENTERS, INC.
By:________________________________
Name:
Title:
E-2
<PAGE>
EXHIBIT F
FORM OF OFFICER'S CERTIFICATE
The undersigned hereby certifies that he is the ________________ of
CASTLE DENTAL CENTERS, INC., a Delaware corporation (the "BORROWER"), and that
as such he is authorized to execute this certificate on behalf of the Borrower.
With reference to the Credit Agreement dated as of November 7, 1997 (together
with all amendments or supplements thereto being the "AGREEMENT") among the
Borrower, each of the lenders that is a signatory thereto or which becomes a
signatory thereto as provided in Section 12.06 (individually, together with its
successors and assigns, a "LENDER" and, collectively, the "LENDERS"), and
NationsBank of Texas, N.A., as Agent (in such capacity, the "AGENT") for itself
and each of the Lenders, the undersigned represents and warrants as follows
(each capitalized term used herein having the same meaning given to it in the
Agreement unless otherwise specified):
(a) The representations and warranties of the Borrower contained
in Article VII of the Agreement and in the Security Instruments and
otherwise made in writing by or on behalf of the Borrower pursuant to the
Agreement and the Security Instruments were true and correct when made,
and are repeated at and as of the time of delivery hereof and are true
and correct at and as of the time of delivery hereof, except as such
representations and warranties are modified to give effect to the
transactions expressly permitted by the Agreement.
(b) The Borrower has performed and complied with all agreements
and conditions contained in the Agreement and in the Security Instruments
required to be performed or complied with by it prior to or at the time
of delivery hereof.
(c) Neither the Borrower nor any Subsidiary has incurred any
material liabilities, direct or contingent, since December 31, 1996,
except those set forth in SCHEDULE 7.02 to the Agreement and except those
allowed by the terms of the Agreement or consented to by the Agent in
writing.
(d) Since December 31, 1996, no change has occurred, either in
any case or in the aggregate, in the condition, financial or otherwise,
of the Borrower or any Subsidiary which would have a Material Adverse
Effect.
(e) There exists, and, after giving effect to the Loans with
respect to which this certificate is being delivered, will exist, no
Default under the Agreement or any event or circumstance which
constitutes, or with notice or lapse of time (or both) would constitute,
an event of default under any loan or credit agreement, indenture, deed
of trust, security agreement or other agreement or instrument evidencing
or pertaining to any Debt of the Borrower or any Subsidiary, or under any
material agreement or instrument to which the Borrower or any Subsidiary
is a party or by which the Borrower or any Subsidiary is bound.
F-1
<PAGE>
(f) Following a New Acquisition, all representations and
warranties of the Borrower contained in Article VII of the Agreement and
in the Security Instruments and otherwise made in writing by or on behalf
of the Borrower pursuant to the Agreement and the Security Instruments
will be true and correct considering the [new Subsidiary and Acquired
Entity] as a party referred to in such representations and warranties.
EXECUTED AND DELIVERED this ____ day of ______________.
CASTLE DENTAL CENTERS, INC.
By:_____________________________
Name:
Title:
F-2
<PAGE>
EXHIBIT G
DUE DILIGENCE ITEMS
A. OPERATIONS AND MATERIAL AGREEMENTS
A-1 List of all surviving subsidiaries and affiliated entities,
including jurisdiction of incorporation.
B. FACILITIES
B-1 Most recent appraisals and environmental site assessments for
all properties.
B-2 Agreements providing for options or other rights to purchase,
lease or sell facilities.
B-3 Listing by offices of size, number of chairs, etc.
B-4 Projection of required capital expenditures to get facilities to
status needed for expected orthodontic and dental volume.
C. MANAGEMENT
C-1 Agreements with offices regarding employment, compensation,
indemnification, severance or any other matter.
C-2 Resumes or background information on key officers/managers.
D. EMPLOYEES AND INDEPENDENT CONTRACTORS
D-1 Listing of licenses held by all dentists and other licensed
professionals and number of years in practice.
D-2 Dentist/Provider turnover in last 3 years.
E. INSURANCE
E-1 Description of insurance covering facilities (including name of
carrier, plan and/or policy number, type of coverage, amounts of
coverage (per occurrence and total), amounts of deductibles (per
occurrence and aggregate), annual premium, status of premium
payment for current year, expiration date, etc.
E-2 Listing of all pending insurance claims or series of claims in
excess of $10,000.
G-1
<PAGE>
E-3 Documents showing medical/dental malpractice insurance coverages
held by parent, subsidiaries and dentists.
E-4 Listing of all pending and historical malpractice claims for
last 3 years.
F. LEGAL PROCEEDINGS AND AUDITOR'S REPORTS
F-1 Description of existing and unsatisfied judgments, consent
decrees, other decrees or orders, settlement agreements or other
agreements requiring or prohibiting any future activities
(including title of proceeding, names of parties, nature of
dispute, details of judgment, and any other relevant
information).
F-2 Description of historical and pending lawsuits, other legal
proceedings, arbitration proceedings or administrative
proceedings or governmental investigations or inquiries
(including title of proceedings, names of parties, amount in
controversy, nature of dispute, status of proceeding, and name,
address and telephone number of counsel) in last 3 years.
F-3 Description of threatened or anticipated lawsuits, other legal
proceedings, arbitration proceedings or administrative
proceedings or governmental investigations or inquiries
(including names of parties, amount in controversy, nature of
dispute, and any other relevant information).
F-4 Attorneys' letters to auditors describing legal proceedings for
the last three years and any opinions or other assessments of
attorneys as to any pending or threatened legal proceedings,
lawsuits, arbitration proceedings, administrative proceedings or
governmental investigations or inquiries.
F-5 All letters from independent public accountants regarding
control systems, methods of accounting, etc. and any management
responses thereto.
F-6 State dental board investigations on parent, subsidiaries and
individual providers.
G. INDEBTEDNESS
G-1 Listing of all indebtedness and liens identified as to be paid
off or to be assumed.
H. FINANCIAL MATTERS
H-1 Consolidated and consolidating Financial statements (with any
reports thereon) for the last five fiscal years, showing
individual performance of labs, each office and subsidiaries.
H-2 Most recent balance sheet, consolidated and consolidating.
G-2
<PAGE>
H-3 Consolidated and consolidating Income statement for current
year-to-date and most recent quarterly period with comparable
prior year, quarterly and year-to-date periods.
H-4 Accountants' management letters for the last three fiscal years.
Copy of accountants' Peer Review.
H-5 Aging of accounts payable as of latest practicable date with
explanation of aging, reserving and chart-off methodologies.
H-6 List of trade accounts payable as of latest practicable date.
H-7 Advertising expenditures by locales for latest fiscal year.
H-8 Breakdown of revenues by dental, orthodontics, etc. for past
three years, consolidated and consolidating.
H-9 Analysis of net receipts to gross patent charges. Breakdown of
revenues between fee for services, managed case.
H-10 List of amounts owed to/due from shareholder and executive
officers and other employees.
H-11 Description of all compensation, direct or indirect, including
fringe benefits prerequisites, leases, lease overrides paid to
Dr. Bilyeu.
H-12 Provide documentation related to accounting and dental software
systems presently in use. Provide access to procedures manuals.
I. MISCELLANEOUS
I-1 Banking references, DMO references, managed care references.
I-2 Market demographics:
o Other multi-location providers/competitors
o major employers
o DMO penetration
G-3
<PAGE>
EXHIBIT H
FORM OF
SUBORDINATION AGREEMENT
This Subordination Agreement dated as of _____________ ("AGREEMENT"), is
made by ____________________________ ("SUBORDINATED CREDITOR"), and CASTLE
DENTAL CENTERS, INC., a Delaware corporation ("DEBTOR"), in favor of NATIONSBANK
OF TEXAS, N.A., THE SUMITOMO BANK, LIMITED as agent for the senior creditors
defined below ("AGENT").
INTRODUCTION
Reference is made to the Credit Agreement dated as of November 7, 1997
(as modified from time to time, the "CREDIT AGREEMENT"), among the Debtor, the
Agent and the banks party thereto ("SENIOR CREDITORS"). It is a condition
precedent to the Senior Creditors' permitting the Debtor to incur the
indebtedness represented by the Subordinated Note that the Subordinated Creditor
enter into this Agreement. In consideration of the foregoing and for other good
and valuable consideration, the Subordinated Creditor, the Debtor, and the
Senior Creditors hereby agree as follows:
Section 1. DEFINITIONS. The following terms shall have the following meanings:
"EVENT OF DEFAULT" means any "Default" or "Event of Default" as defined
in, and which may occur under, the Credit Agreement.
"LOAN DOCUMENTS" shall have the meaning specified by the Credit
Agreement.
"SENIOR DEBT" means (a) all principal, interest, fees, reimbursements,
indemnifications, and other amounts now or hereafter owed by the Debtor to
Senior Creditors under the Credit Agreement, the Loan Documents, and any other
instrument or agreement related thereto and (b) any increases, extensions, and
rearrangements of the foregoing obligations under any amendments, supplements,
and other modifications of the documents and agreements creating the foregoing
obligations.
"SUBORDINATED DEBT" means all present and future indebtedness,
liabilities, and obligations of any kind owed by the Debtor to the Subordinated
Creditor, including debt obligations, equity obligations, and other contractual
obligations requiring payments of any kind to be made to the Subordinated
Creditor, whether such indebtedness, liabilities, and obligations are absolute
or contingent, joint, several, or independent, arising by operation of law or
contract, created directly with the Subordinated Creditor or acquired by
assignment, participation, or otherwise, or direct or indirect (including
indebtedness, liabilities, and obligations of the Debtor to the Subordinated
Creditor as a result of either's membership in any partnership, syndicate,
association, or other group, and whether incurred by the Debtor as principal,
guarantor, surety, endorser, accommodation party, or otherwise). Subordinated
Debt specifically includes the Subordinated Note.
"SUBORDINATED NOTE" means the $___________ Note dated as of
_______________, made by the Debtor and payable to the order of the Subordinated
Creditor, as the same may be increased,
H-1
<PAGE>
extended, rearranged, amended, supplemented, and otherwise modified from time to
time in accordance with this Agreement.
Section 2. TERMS OF SUBORDINATION. Unless and until the Senior Debt shall have
been irrevocably paid in full and the Senior Creditors shall have no commitment
to extend further Senior Debt, the payment and performance of the Subordinated
Debt is hereby made expressly subordinate and junior in right of payment and
performance to the prior payment and performance of all obligations and
liabilities under the Senior Debt to the extent and in the manner set forth in
this Section 2:
2.1 LIMITATION ON PAYMENTS.
(a) No payment or prepayment of any sum on the Subordinated Debt,
whether by acceleration or otherwise, shall be made, if at the time of such
payment, prepayment, or immediately after giving effect thereto there shall
exist a default in the payment or prepayment with respect to any of the Senior
Debt, or immediately after giving effect thereto (i) there shall exist a default
in the payment or prepayment of the principal or interest with respect to any of
the Senior Debt or (ii) there shall have occurred, or after giving effect to
such payment there shall occur, an Event of Default (other than an Event of
Default in the payment of prepayment of principal or interest with respect to
any of the Senior Debt) permitting the Senior Creditors to accelerate the
maturity thereof (with notice, lapse of time, or both) and such Event of Default
shall not have been cured or waived to the satisfaction of the Senior Creditors.
(b) If at any time there shall occur an Event of Default, the
Subordinated Creditor shall not be entitled to receive any payment on the
Subordinated Debt before the earlier of (i) cure of the Event of Default to the
satisfaction of the Senior Creditors or (ii) the irrevocable payment in full of
the Senior Debt and the termination of all commitments to extend Senior Debt.
(c) In the event that any Subordinated Debt is declared due and
payable before their expressed maturity because of the occurrence of an event of
default (under circumstances when the provisions of the foregoing paragraphs (a)
or (b) are not applicable), the Senior Creditors shall be entitled to receive
payment in full of all principal, interest, and other sums outstanding in
connection with the Senior Debt before the Subordinated Creditor is entitled to
receive any payment on account of such Subordinated Debt.
(d) Any payments received by the Subordinated Creditor in
violation of this Agreement shall be held by the Subordinated Creditor in trust
for the benefit of the Senior Creditors and shall be immediately turned over to
the Agent in the form received (together with any necessary endorsements) for
application to the Senior Debt until all outstanding Senior Debt has been
irrevocably paid in full.
2.2 SUBORDINATION ON LIQUIDATION. Upon any receivership, insolvency
proceeding, bankruptcy proceeding, assignment for the benefit of creditors,
reorganization, arrangement with creditors, sale of assets for creditors,
dissolution, liquidation, or marshalling of the assets of the Debtor (each, a
"BANKRUPTCY EVENT"), all amounts due with respect to the Senior Debt shall be
irrevocably paid in full before the Subordinated Creditor shall be entitled to
collect or receive any payment with respect to the Subordinated Debt. Any
payments received by the Subordinated Creditor in such proceedings shall be held
by the Subordinated Creditor in trust for the benefit of the
H-2
<PAGE>
Senior Creditors and shall be immediately turned over to the Agent in the form
received (together with any necessary endorsements) for application to the
Senior Debt until all outstanding Senior Debt has been irrevocably paid in full.
2.3 SUBORDINATION OF LIENS. The Subordinated Creditor will not create,
assume, or suffer to exist any lien, security interest, or assignment of
collateral securing the repayment of the Subordinated Debt. Any such judgment
lien, and any other lien, security interest, or assignment existing in violation
of the foregoing shall be fully subordinate to any lien, security interest, or
assignment in favor of the Senior Creditors which secures any of the Senior
Debt. At the request of the Senior Creditors, the Subordinated Creditor and the
Debtor will take any and all steps necessary to fully effect the release of any
such lien, security interest, assignment, or collateral.
2.4 FURTHER ASSURANCES. The Subordinated Creditor and the Debtor agree to
execute any and all other instruments requested by the Senior Creditors to
further evidence the subordination of the Subordinated Debt to the Senior Debt
as herein provided.
Section 3. SUBORDINATION ABSOLUTE. This is an irrevocable agreement of
subordination and the Senior Creditors may, without notice to any of the parties
hereto and without impairing or releasing the obligations of the Debtor and the
Subordinated Creditor hereunder, (a) create Senior Debt by extending credit
under the Credit Agreement; (b) change the terms of or increase the amount of
the Senior Debt by increasing, extending, rearranging, amending, supplementing,
or otherwise modifying any of the Loan Documents or other instruments or
agreements creating Senior Debt; (c) sell, exchange, release, or otherwise deal
with any collateral securing any Senior Debt; (d) release anyone, including the
Debtor or any guarantor, liable in any manner for the payment or collection of
any Senior Debt; (e) exercise or refrain from exercising any rights against the
Debtor or any other Person; and (f) apply any sums received by any of the Senior
Creditors, from whatever source, to the payment of the Senior Debt.
Section 4. PROVISIONS REGARDING SUBORDINATED DEBT.
4.1 There may be no increases, extensions, rearrangements, amendments,
supplements, or other modifications to the Subordinated Note which increase the
principal amount of, increase the interest rate payable on, or accelerate the
scheduled principal and interest payments on the Subordinated Note without the
prior written permission of the Senior Creditors.
4.2 The Subordinated Creditor will cause all Subordinated Debt to be
evidenced by a note, debenture, instrument, or other writing evidencing the
Subordinated Debt and will inscribe a statement or legend thereon to the effect
that such note, debenture, instrument, or other writing is subordinated to the
Senior Debt in favor of the Senior Creditors in the manner and to the extent set
forth in this Agreement.
4.3 The Subordinated Creditor shall mark the books of Subordinated
Creditor to show that the Subordinated Debt is subordinated to the Senior Debt
in the manner and to the extent set forth in this Agreement and cause all
financial statements of the Subordinated Creditor hereafter prepared for
delivery to any person to make specific reference to the provisions of this
Agreement.
H-3
<PAGE>
4.4 The Subordinated Creditor shall not assign or otherwise transfer to
any other person any interest in the Subordinated Debt unless the Subordinated
Creditor causes the assignee or other transferee to execute and deliver to the
Senior Creditors a subordination agreement in substantially the form of this
Agreement or otherwise acknowledges to the reasonable satisfaction of the Senior
Creditors the subordination of the Subordinated Debt in accordance with this
Agreement.
Section 5. MISCELLANEOUS.
5.1 To the extent not paid by the Debtor, the Subordinated Creditor shall
reimburse the Senior Creditors for all reasonable expenses of the Senior
Creditors, including reasonable charges and disbursements of legal counsel for
the Senior Creditors, in connection with the execution, amendment, modification,
waiver, and interpretation of this Agreement, and the administration,
preservation, and enforcement of any rights of the Senior Creditors under this
Agreement. To the extent not paid by the Debtor, the Subordinated Creditor shall
indemnify the Senior Creditors against all claims, liabilities, damages, and
expenses in connection with any litigation or proceeding relating to this
Agreement, INCLUDING CLAIMS CAUSED BY THE SENIOR CREDITORS' OWN NEGLIGENCE,
EXCEPT AS A RESULT OF THE SENIOR CREDITORS' GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. The Senior Creditors are hereby authorized to setoff and apply any
obligations owed by the Senior Creditors to the Debtor against any obligations
of the Debtor under this Agreement. The provisions of this paragraph shall
survive termination of this Agreement.
5.2 This Agreement shall be governed by the laws of the State of Texas.
If any provision in this Agreement is held to be unenforceable, such provision
shall be severed and the remaining provisions shall remain in full force and
effect. The Senior Creditors' remedies under this Agreement shall be cumulative,
and no delay in enforcing this Agreement shall act as a waiver of the Senior
Creditors' rights hereunder. The provisions of this Agreement may be waived or
amended only in a writing signed by all of the parties hereto. This Agreement
shall bind the Subordinated Creditor and the Debtor and their successors and
assigns and shall inure to the benefit of the Senior Creditors and their
successors and assigns. This Agreement may be executed in multiple counterparts
which together shall constitute one and the same agreement. Unless otherwise
specified, all notices provided for in this Agreement shall be in writing,
delivered to the following addresses:
If to the Subordinated Creditor:
_____________________________
_____________________________
Telephone:___________________
Telecopier:__________________
H-4
<PAGE>
If to the Debtor:
Castle Dental Centers, Inc.
Attn: Jack H. Castle, Jr.
1360 Post Oak Boulevard
Houston, Texas 77056
Telephone: (713) 513-1401
Telecopier: (713) 513-1400
If to the Senior Creditors:
NationsBank of Texas, N.A.
Attn: Margaret H. Barradas
700 Louisiana, 7th Floor
Houston, Texas 77002
Telephone: 713-247-6056
Telecopier: 713-247-7175
or to such other address as shall be designated by one party in writing to the
other parties. Notice sent by telecopy shall be deemed to be given and received
when receipt of such transmission is acknowledged, and delivered notice shall be
deemed to be given and received when receipted for by, or actually received by,
an authorized officer of the receiving party.
THIS WRITTEN AGREEMENT AND THE RELATED CREDIT DOCUMENTS REPRESENT THE FINAL
AGREEMENT AMONG 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.
EXECUTED as of the date first above written.
NATIONSBANK OF TEXAS, N.A.
By:________________________
Name:
Title:
H-5
<PAGE>
THE SUMITOMO BANK, LIMITED
By:________________________
Name:
Title:
By:________________________
Name:
Title:
CASTLE DENTAL CENTERS, INC.
By:________________________
Name:
Title:
____________________________
[Subordinated Creditor]
H-6
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 3.01
TERM LOAN AMORTIZATION SCHEDULE
PAYMENT DATE PAYMENT AMOUNT ($) PRINCIPAL BALANCE ($)
------------ ------------------ ---------------------
<S> <C> <C> <C>
Closing Date ---- 3,000,000
3/15/98 150,000.00 2,850,000.00
6/15/98 150,000.00 2,700,000.00
9/15/98 150,000.00 2,550,000.00
12/15/98 150,000.00 2,400,000.00
3/15/99 187,500.00 2,212,500.00
6/15/99 187,500.00 2,025,000.00
9/15/99 187,500.00 1,837,500.00
12/15/99 187,500.00 1,650,000.00
3/15/00 187,500.00 1,462,500.00
6/15/00 187,500.00 1,275,000.00
9/15/00 187,500.00 1,087,500.00
12/15/00 187,500.00 900,000.00
3/15/01 187,500.00 712,500.00
6/15/01 187,500.00 525,000.00
9/15/01 187,500.00 337,500.00
12/15/01 187,500.00 150,000.00
3/15/02 150,000.00 0
</TABLE>
3.01-1
<PAGE>
SCHEDULE 7.02
LIABILITIES
None
7.02-1
<PAGE>
SCHEDULE 7.14
SUBSIDIARIES
None
7.14-1
<PAGE>
SCHEDULE 7.19
INSURANCE
SEE ATTACHED CERTIFICATES
7.19-1
<PAGE>
SCHEDULE 7.22
MATERIAL AGREEMENTS
1. Letter of Intent dated October 13, 1997, to acquire the dental practice
of Dr. Steve W. Lebo, located in Fort Worth, Texas. Total purchase
consideration consists of $1,062,500 cash and $2,125,000 common stock.
Estimated acquired EBITDA is $750,000.
2. Term sheet, dated November 1, 1997, to acquire 80% of Dental Consulting
Services, L.L.C., a Los Angeles based dental practice management
company. Total purchase consideration is estimated at $14,014,000 cash
and $14,586,000 common stock. Estimated acquired EBITDA is $4.4 million.
7.22-1
<PAGE>
SCHEDULE 7.23
HEDGING AGREEMENTS
None
7.23-1
<PAGE>
SCHEDULE 9.01
DEBT
Balance @
MATURITY DATE 09/30/97
PURCHASE MONEY DEBT
1. MetLife Capital Corporation 12/28/98 $ 27,404
2. MetLife Capital Corporation 05/20/99 $ 70,678
3. Citizen's National Bank Various $ 104,656
--------------
Subtotal $ 202,647
=========
CAPITAL LEASES
1. Americorp Financial Leasing 11/30/01 $ 249,752
2. Colonial Pacific Leasing 05/31/02 $ 66,971
3. First American National Bank 05/01/00 $ 36,555
4. First American National Bank 12/01/00 $ 112,649
5. Rockford Industries 04/01/00 $ 20,301
---------
Subtotal $ 486,228
=========
Total $ 688,875
=========
9.01-1
<PAGE>
SCHEDULE 9.02
LIENS
None
9.02-1
<PAGE>
SCHEDULE 9.03
INVESTMENTS, LOANS AND ADVANCES
1. Loan in the amount of $130,000 to G. Daniel Siewert, President. Loan to
be repaid over 5 years.
9.03-1
EXHIBIT 10.65
FIRST AMENDMENT TO
CREDIT AGREEMENT
BY AND AMONG
CASTLE DENTAL CENTERS, INC.,
as Borrower,
CASTLE DENTAL CENTERS OF FLORIDA, INC.,
CASTLE DENTAL CENTERS OF TENNESSEE, INC.,
CASTLE DENTAL CENTERS OF TEXAS, INC.,
and
JHCDDS, INC.
as Guarantors,
NATIONSBANK OF TEXAS, N.A.,
as Agent,
and
THE LENDERS SIGNATORY HERETO
Effective as of February 11, 1998
i
<PAGE>
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
Section 1.01 TERMS DEFINED ABOVE.........................................................1
Section 1.02 TERMS DEFINED IN CREDIT AGREEMENT...........................................1
Section 1.03 OTHER DEFINITIONAL PROVISIONS...............................................2
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 AMENDMENTS AND SUPPLEMENTS TO DEFINITIONS...................................2
Section 2.02 AMENDMENTS AND SUPPLEMENTS TO ARTICLE VIII .................................3
Section 2.03 AMENDMENTS AND SUPPLEMENTS TO ARTICLE IX....................................3
Section 2.04 AMENDMENTS AND SUPPLEMENTS TO ATTACHMENTS...................................3
ARTICLE III. CONDITIONS
Section 3.01 LOAN DOCUMENTS..............................................................4
Section 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIES.......................................4
Section 3.03 REPRESENTATIONS AND WARRANTIES..............................................4
Section 3.04 NO DEFAULT..................................................................4
Section 3.05 NO CHANGE...................................................................5
Section 3.06 SECURITY INSTRUMENTS........................................................5
Section 3.07 OTHER INSTRUMENTS OR DOCUMENTS..............................................5
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT AGREEMENT.................5
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY....................................5
Section 4.03 SUCCESSORS AND ASSIGNS......................................................5
Section 4.04 COUNTERPARTS................................................................5
Section 4.05 NUMBER AND GENDER........................... ...............................5
Section 4.06 ENTIRE AGREEMENT............................................................6
Section 4.07 INVALIDITY..................................................................6
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS................................6
Section 4.09 NOTICE INFORMATION..........................................................6
Section 4.10 GOVERNING LAW...............................................................6
</TABLE>
ii
<PAGE>
FIRST AMENDMENT TO
CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "FIRST AMENDMENT")
executed effective as of the 11th day of February, 1998 (the "EFFECTIVE DATE"),
is by and among CASTLE DENTAL CENTERS, INC., a Delaware corporation
("BORROWER"), CASTLE DENTAL CENTERS OF FLORIDA, INC., a Florida corporation,
CASTLE DENTAL CENTERS OF TENNESSEE, INC., a Tennessee corporation, CASTLE DENTAL
CENTERS OF TEXAS, INC., a Texas corporation, and JHCDDS, INC., a Texas
corporation (individually, "GUARANTOR", and collectively, "GUARANTORS");
NATIONSBANK OF TEXAS, N.A., a national banking association (in its individual
capacity, "NATIONSBANK"), as agent (in such capacity, "AGENT") for each of the
lenders that is a signatory hereto or which becomes a signatory hereto and to
the hereinafter described Credit Agreement as provided in Section 12.06 of the
Credit Agreement (individually, together with its successors and assigns,
"LENDER" and collectively, "LENDERS").
W I T N E S S E T H:
WHEREAS, the Borrower, Agent and Lenders are parties to that certain
Credit Agreement dated as of November 7, 1997 (the "CREDIT AGREEMENT"), pursuant
to which the Lenders agreed to make loans to and extensions of credit on behalf
of Borrower;
WHEREAS, Borrower, among other things, has requested that the Lenders
increase the Revolving Credit Commitment to $42,500,000 and the Lenders have
agreed to such request upon the terms and conditions set forth herein; and
WHEREAS, the Borrower and Lenders desire to amend the Credit Agreement
in the particulars hereinafter provided.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01 TERMS DEFINED ABOVE. As used in this First Amendment, each
of the terms "BORROWER", "CREDIT AGREEMENT", "EFFECTIVE DATE", "FIRST
AMENDMENT", "GUARANTORS", "NATIONSBANK", and "LENDERS" shall have the meaning
assigned to such term hereinabove.
Section 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in
the Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
Section 1.03 OTHER DEFINITIONAL PROVISIONS.
<PAGE>
(a) The words "hereby", "herein", "hereinafter", "hereof",
"hereto" and "hereunder" when used in this First Amendment shall refer
to this First Amendment as a whole and not to any particular Article,
Section, subsection or provision of this First Amendment.
(b) Section, subsection and Exhibit references herein are to
such Sections, subsections and Exhibits to this First Amendment unless
otherwise specified.
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Borrower, Guarantors, Agent and Lenders agree that the Credit Agreement
is hereby amended, effective as of the Effective Date, in the following
particulars.
Section 2.01 AMENDMENTS AND SUPPLEMENTS TO DEFINITIONS.
(a) The following terms, which are defined in Section 1.02 of
the Credit Agreement, are hereby amended in their entirety to read as
follows:
"AGREEMENT" shall mean this Credit Agreement, as amended and
supplemented by the First Amendment and as the same may from time to
time be further amended or supplemented.
"AGGREGATE MAXIMUM REVOLVING CREDIT AMOUNTS" at any time shall
equal the sum of the Maximum Revolving Credit Amounts of the Lenders
($42,500,000), as the same may be reduced pursuant to Section 2.03(b)
or increased pursuant to Section 2.03(d).
(b) Section 1.02 of the Credit Agreement is hereby further
amended and supplemented by adding the following new definition where
alphabetically appropriate, which reads in its entirety as follows:
"FIRST AMENDMENT" shall mean that certain First Amendment to
Credit Agreement dated as of February 11, 1998, by and among the
Borrower, Guarantors, Agent and Lenders.
-2-
<PAGE>
Section 2.02 AMENDMENTS AND SUPPLEMENTS TO ARTICLE VIII .
(a) Article VIII is hereby supplemented by adding the
following new Section 8.11:
"Section 8.11 COVENANT TO SWAP INTEREST RATES. The
Borrower hereby covenants and agrees that if, at any time,
Total Funded Debt exceeds $25,000,000, the Borrower shall,
within twenty Business Days after such occurrence, enter into
a Hedging Agreement with one of the Lenders, or with another
party reasonably acceptable to the Majority Lenders, whereby
the Borrower will swap the floating interest rate relating to
the amount of Total Funded Debt exceeding $25,000,000 for a
fixed interest rate on such amount."
Section 2.03 AMENDMENTS AND SUPPLEMENTS TO ARTICLE IX.
(a) Section 9.03(g)(ii) of the Credit Agreement is hereby
amended by deleting the phrase "prior written approval of the Agent" in
the 7th line thereof, and inserting the phrase "prior written approval
of the Majority Lenders" in lieu thereof.
(b) Section 9.15 of the Credit Agreement is hereby amended by
deleting the phrase "Agent" and inserting the phrase "Majority Lenders"
in lieu thereof.
(c) Article IX is hereby supplemented by adding the following
new Section 9.22:
"Section 9.22 RATIO OF TOTAL FUNDED DEBT TO EBITDA.
The Borrower will not permit its ratio of Total Funded Debt to
EBITDA as of the end of any fiscal quarter to be greater than
4.0 to 1.0."
Section 2.04 AMENDMENTS AND SUPPLEMENTS TO ATTACHMENTS.
(a) ANNEX I to the Credit Agreement is hereby replaced with
ANNEX I attached hereto. Accordingly, all references in the Credit
Agreement to ANNEX I shall be deemed to be references to ANNEX I
attached to this First Amendment.
(b) SCHEDULE 7.14 to the Credit Agreement is hereby replaced
with SCHEDULE 7.14 attached hereto. Accordingly, all references in the
Credit Agreement to SCHEDULE 7.14 shall be deemed to be references to
SCHEDULE 7.14 attached to this First Amendment.
ARTICLE III. CONDITIONS
-3-
<PAGE>
The enforceability of this First Amendment against the Agent and the
Lenders is subject to the satisfaction of the following conditions precedent:
Section 3.01 LOAN DOCUMENTS. The Agent shall have received the
following:
(a) multiple original counterparts, as requested by the Agent,
of this First Amendment, executed and delivered by a duly authorized
officer of the Borrower, Guarantors, Agent, and each Lender, as
applicable;
(b) replacement Notes, duly completed and executed by the
Borrower; and
(c) a favorable written opinion of Bracewell & Patterson,
L.L.P., counsel to the Borrower and the Guarantors, in form and
substance satisfactory to the Agent, as to such matters incident to the
transactions herein contemplated as the Agent may reasonably request.
Section 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIES. The Agent shall
have received multiple copies, as requested by the Agent, of the resolutions, in
form and substance reasonably satisfactory to the Agent, of the Boards of
Directors of the Borrower and the Guarantors, authorizing the execution,
delivery and performance of this First Amendment and the replacement Notes, each
such copy being attached to an original certificate of the Secretary or an
Assistant Secretary of the Borrower or the Guarantors, as applicable, dated as
of the Effective Date, certifying (i) that the resolutions attached thereto are
true, correct and complete copies of resolutions duly adopted by written
consents or at meetings of the Boards of Directors, (ii) that such resolutions
constitute all resolutions adopted with respect to the transactions contemplated
hereby, (iii) that such resolutions have not been amended, modified, revoked or
rescinded as of the Effective Date, (iv) that the respective articles of
incorporation and bylaws of the Borrower and the Guarantors have not been
amended or otherwise modified since the effective date of the Credit Agreement,
except pursuant to any amendments attached thereto, and (v) as to the incumbency
and signature of the officers of the Borrower or the Guarantors, as applicable,
executing this First Amendment and the replacement Notes.
Section 3.03 REPRESENTATIONS AND WARRANTIES. Except as affected by the
transactions contemplated in the Credit Agreement and this First Amendment, each
of the representations and warranties made by the Borrower and the Guarantors in
or pursuant to the Credit Agreement and the Security Instruments shall be true
and correct in all material respects as of the Effective Date, as if made on and
as of such date (except to the extent such representations and warranties are
expressly limited to an earlier date).
Section 3.04 NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
Section 3.05 NO CHANGE. No event shall have occurred since June 30,
1997, which, in the reasonable opinion of the Lenders, could have a Material
Adverse Effect.
-4-
<PAGE>
Section 3.06 SECURITY INSTRUMENTS. All of the Security Instruments
shall be in full force and effect and provide to the Agent the security intended
thereby to secure the Indebtedness, as amended and supplemented hereby.
Section 3.07 OTHER INSTRUMENTS OR DOCUMENTS. The Agent or any Lender or
counsel to the Agent shall receive such other instruments or documents as they
may reasonably request.
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT
AGREEMENT. Each of the Borrower, the Guarantors, the Agent, and the Lenders does
hereby adopt, ratify and confirm the Credit Agreement, as amended hereby, and
acknowledges and agrees that the Credit Agreement, as amended hereby, is and
remains in full force and effect.
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY. Each of the
Guarantors hereby expressly (i) acknowledges the terms of this First Amendment,
including the increase in the amount of Aggregate Maximum Revolving Credit
Amounts to $42,500,000, (ii) ratifies and affirms its obligations under its
Guaranty Agreement dated as of November 7, 1997, in favor of the Agent and the
Lenders, as amended, supplemented or otherwise modified, (iii) acknowledges,
renews and extends its continued liability under its Guaranty Agreement and
agrees that said Guaranty Agreement remains in full force and effect; and (iv)
guarantees to the Agent and each Lender to promptly pay when due all amounts
owing or to be owing by it under its Guaranty Agreement pursuant to the terms
and conditions thereof.
Section 4.03 SUCCESSORS AND ASSIGNS. This First Amendment shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
Section 4.04 COUNTERPARTS. This First Amendment may be executed by one
or more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Borrower, the Guarantors, the Agent
and the Lenders. In this regard, each of the parties hereto acknowledges that a
counterpart of this First Amendment containing a set of counterpart execution
pages reflecting the execution of each party hereto shall be sufficient to
reflect the execution of this First Amendment by each necessary party hereto and
shall constitute one instrument.
Section 4.05 NUMBER AND GENDER. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural; and likewise, the plural shall be understood to include the singular.
Words denoting sex shall be construed to include the masculine, feminine and
neuter, when such construction is appropriate; and specific enumeration shall
not exclude the general but shall be construed as cumulative. Definitions of
terms defined in the singular
-5-
<PAGE>
or plural shall be equally applicable to the plural or singular, as the case may
be, unless otherwise indicated.
Section 4.06 ENTIRE AGREEMENT. This First Amendment constitutes the
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and agreements, whether written or oral,
relating to the subject hereof are superseded by this First Amendment.
Section 4.07 INVALIDITY. In the event that any one or more of the
provisions contained in this First Amendment shall for any reason be held
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this First Amendment.
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All
titles or headings to Articles, Sections, subsections or other divisions of this
First Amendment or the exhibits hereto, if any, are only for the convenience of
the parties and shall not be construed to have any effect or meaning with
respect to the other content of such Articles, Sections, subsections, other
divisions or exhibits, such other content being controlling as the agreement
among the parties hereto.
Section 4.09 NOTICE INFORMATION. The information for notices and other
communications pursuant to Section 12.02 of the Credit Agreement for each of
Bank Boston, N.A. and AmSouth Bank is specified below its name on the signature
pages hereof.
Section 4.10 GOVERNING LAW. This First Amendment shall be deemed to be
a contract made under and shall be governed by and construed in accordance with
the internal laws of the State of Texas.
THIS FIRST AMENDMENT, THE CREDIT AGREEMENT, AS SUPPLEMENTED AND AMENDED
HEREBY, THE NOTES, AND THE OTHER SECURITY INSTRUMENTS 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.
[SIGNATURES BEGIN ON NEXT PAGE]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the Effective Date.
BORROWER: CASTLE DENTAL CENTERS, INC.
By:
Name:
Title:
GUARANTORS: CASTLE DENTAL CENTERS OF FLORIDA, INC.
By:
Name:
Title:
CASTLE DENTAL CENTERS OF TENNESSEE, INC.
By:
Name:
Title:
CASTLE DENTAL CENTERS OF TEXAS, INC.
By:
Name:
Title:
JHCDDS, INC.
By:
Name:
Title:
S-1
<PAGE>
LENDER AND AGENT: NATIONSBANK OF TEXAS, N.A.
By:
Margaret H. Barradas
Senior Vice President
LENDERS: THE SUMITOMO BANK, LIMITED
By:
Richard Menchaca
Vice President
By:
Bruce Portillo
Vice President & Manager
S-2
<PAGE>
BANKBOSTON, N.A.
By:
Walter J. Marullo
Vice President
Lending Office for Base Rate Loans and Eurodollar Loans:
100 Federal Street
Boston, Massachusetts 02110
Address for Notices:
100 Federal Street
Boston, Massachusetts 02110
Telecopier No.: (617) 434-0819
Telephone No.: (617) 434-2308
Attention: Walter Marullo
S-3
<PAGE>
AMSOUTH BANK
By:
Shannon O. Clark
Assistant Vice President
Lending Office for Base Rate Loans and Eurodollar Loans:
1900 Fifth Avenue North, SONAT -7th Floor
Birmingham, Alabama 35288
Address for Notices:
P.O. Box 11007
1900 Fifth Avenue North, SONAT -7th Floor
Birmingham, Alabama 35288
Telecopier No.: (205) 326-4790
Telephone No.: (205) 581-7450
Attention: Shannon O. Clark
S-4
<PAGE>
ANNEX I
MAXIMUM REVOLVING CREDIT AMOUNTS AND TERM LOANS
<TABLE>
<CAPTION>
MAXIMUM REVOLVING
NAME OF LENDER PERCENTAGE SHARE CREDIT AMOUNT TERM LOAN
- ---------------------------------- ---------------- ----------------- -----------
<S> <C> <C> <C>
NationsBank of Texas, N.A ........ 35.29% $ 15,000,000 $ 1,058,700
The Sumitomo Bank, Limited ....... 23.53% $ 10,000,000 $ 705,900
BankBoston, N.A .................. 23.53% $ 10,000,000 $ 705,900
AmSouth Bank ..................... 17.65% $ 7,500,000 $ 529,500
================ ================= ===========
Total ................ 100.00% $ 42,500,000 $ 3,000,000
</TABLE>
Annex I-1
<PAGE>
SCHEDULE 7.14
Subsidiaries and their principal place of business
and chief executive office
Castle Dental Centers of Florida, Inc.
c/o/ Castle Dental Centers, Inc.
1360 Post Oak Boulevard, Suite 1300
Houston, Texas 77056
Castle Dental Centers of Tennessee, Inc.
c/o/ Castle Dental Centers, Inc.
1360 Post Oak Boulevard, Suite 1300
Houston, Texas 77056
Castle Dental Centers of Texas, Inc.
c/o/ Castle Dental Centers, Inc.
1360 Post Oak Boulevard, Suite 1300
Houston, Texas 77056
JHCDDS, Inc.
c/o/ Castle Dental Centers, Inc.
1360 Post Oak Boulevard, Suite 1300
Houston, Texas 77056
Annex I-2
EXHIBIT 21
Castle Dental Centers, Inc.
Subsidaries
STATE OR OTHER
JURISDICTION OF NAME DOING,
NAME INCORPORATION BUSINESS AS
- ---- ------------- -----------
Castle Dental Centers of Texas, Inc. Texas Castle Dental Centers
Castle Dental Centers of Florida, Inc. Florida Castle Dental Centers
Castle Dental Centers of Tennesse, Inc. Tennesse Castle Dental Centers
Castle Dental Centers of Austin, Inc. Texas Castle Dental Centers
Castle Dental Centers of California, Inc. Delaware Castle Dental Centers
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE DECEMBER 31, 1997 CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS,
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,908
<SECURITIES> 0
<RECEIVABLES> 12,809
<ALLOWANCES> 4,447
<INVENTORY> 0
<CURRENT-ASSETS> 12,108
<PP&E> 8,797
<DEPRECIATION> 3,608
<TOTAL-ASSETS> 44,513
<CURRENT-LIABILITIES> 8,191
<BONDS> 3,659
1,550
0
<COMMON> 6
<OTHER-SE> 31,107
<TOTAL-LIABILITY-AND-EQUITY> 44,513
<SALES> 46,225
<TOTAL-REVENUES> 46,225
<CGS> 0
<TOTAL-COSTS> 14,813
<OTHER-EXPENSES> 28,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,792
<INCOME-PRETAX> 611
<INCOME-TAX> 200
<INCOME-CONTINUING> 411
<DISCONTINUED> 0
<EXTRAORDINARY> (3,195)
<CHANGES> 0
<NET-INCOME> (2,784)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 119
<SECURITIES> 0
<RECEIVABLES> 8,072
<ALLOWANCES> 2,786
<INVENTORY> 0
<CURRENT-ASSETS> 5,906
<PP&E> 6,351
<DEPRECIATION> 2,469
<TOTAL-ASSETS> 29,098
<CURRENT-LIABILITIES> 9,150
<BONDS> 20,529
2,928
0
<COMMON> 2
<OTHER-SE> (3,511)
<TOTAL-LIABILITY-AND-EQUITY> 29,098
<SALES> 29,601
<TOTAL-REVENUES> 29,601
<CGS> 0
<TOTAL-COSTS> 9,981
<OTHER-EXPENSES> 18,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,596
<INCOME-PRETAX> (1,647)
<INCOME-TAX> (561)
<INCOME-CONTINUING> (1,086)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,086)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997
AND THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,845
<SECURITIES> 0
<RECEIVABLES> 11,150
<ALLOWANCES> 3,861
<INVENTORY> 0
<CURRENT-ASSETS> 11,806
<PP&E> 8,140
<DEPRECIATION> 3,309
<TOTAL-ASSETS> 40,219
<CURRENT-LIABILITIES> 9,264
<BONDS> 3,144
1,550
0
<COMMON> 6
<OTHER-SE> 25,071
<TOTAL-LIABILITY-AND-EQUITY> 40,219
<SALES> 22,426
<TOTAL-REVENUES> 22,426
<CGS> 0
<TOTAL-COSTS> 10,628
<OTHER-EXPENSES> 20,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,589
<INCOME-PRETAX> (179)
<INCOME-TAX> (68)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (3,195)
<CHANGES> 0
<NET-INCOME> (3,263)
<EPS-PRIMARY> (0.8)
<EPS-DILUTED> (0.91)
</TABLE>
