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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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: 1-13263
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 ( 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. [X]
As of May 16, 2000, there were 6,417,206 shares of Castle Dental Centers,
Inc. Common Stock, $.001 par value, issued and outstanding, of which 3,293,363,
having an aggregate market value of approximately $8.2 million, were held by
non-affiliates of the registrant.
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TABLE OF CONTENTS
PAGE
Item 1. Business.................................................... 1
The Company ................................................ 1
The Dental Industry......................................... 2
Business Strategy .......................................... 3
Dental Network Development.................................. 3
Management Services Agreement............................... 5
Dentist Employment Agreements............................... 5
Services.................................................... 6
Operations.................................................. 6
Sales and Marketing ........................................ 7
Managed Care Contracts...................................... 8
Competition................................................. 8
Management Information Systems.............................. 9
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
Recent Sales of Unregistered Securities..................... 13
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
Introduction................................................ 16
Components of Revenues and Expenses......................... 17
Results of Operations....................................... 17
Liquidity and Capital Resources............................. 21
Year 2000................................................... 23
Inflation................................................... 23
Item 7A.Quantitative And Qualitative Disclosures About Market Risk.. 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..................................... 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................... 29
Item 13. Certain Relationships and Related Transactions............. 31
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 33
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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, Tennessee and 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, 1999, the Company provided management services to 102 dental
centers with approximately 250 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 payers and intends
to continue to pursue managed care contracts. The Company negotiates capitated
managed care contracts on behalf of its affiliated dental practices, which
maintained an aggregate of 70 capitated managed care contracts covering
approximately 110,000 members at December 31, 1999. 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 establish a consistent national identity for its
business by implementing common practice management policies and procedures in
all of its dental centers and affiliated dental practices nationwide. 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 utilized as a basis for its national expansion.
Since the end of 1996, the Company has expanded to a total of 25 dental
centers in Houston through the development of nine DE NOVO dental centers and
the March 1998 acquisition of six dental centers owned by Dental World, Inc. 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, Texas metropolitan area.
In December 1997, the Company acquired substantially all the assets of two
individual practices in Ft. Worth, Texas and Nashville,
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Tennessee. In March 1998, the Company expanded into the southern California
market through the acquisition of an 80% interest in ("Castle West") a company
formed to acquire Dental Consulting Services LLC, a dental management company
affiliated with five dental centers in the Los Angeles area. Subsequent to March
1998, Castle West acquired three additional dental practices with four dental
offices in the Los Angeles area increasing the number of dental centers managed
by the Company to nine in that market. In July 1998, the Company acquired a
dental management company and five related dental practices in Florida. In
December 1998, the Company completed the acquisition of the assets of Dental
Centers of America and its affiliated dental practices. Dental Centers of
America operated 16 dental centers in San Antonio, Austin, Waco and the
Dallas/Fort Worth metroplex. (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 1996 Survey of
Dental Practice ("ADA Survey"), there were approximately 152,000 actively
practicing dental professionals in the U.S., of which approximately 8,900 were
practicing orthodontists. Nearly 88% 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 4700 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 (1999) to be
approximately $53.8 billion for 1998, representing approximately 4.7% of total
health care expenditures in the United States, and is projected to reach $93.1
billion by 2008. 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 8.0% from
1980 to 1998, and is projected to grow at a compound annual growth rate of
approximately 6.0% through the year 2008. 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 1998, consumer
out-of-pocket expenditures accounted for 48% of the payment for dental services,
compared to 16% for other medical services.
Management 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 payer) assuming responsibility
for ensuring that health care is provided in a high quality, cost-effective
manner. According to industry sources, approximately 18% of the estimated 147
million people covered by dental benefits in 1997 were enrolled in managed care
programs. 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 and billing systems to meet the increasing demands of payers; and
(iii) the increasingly more complicated, competitive and regulated business
environment for
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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 and development
of DE NOVO dental centers 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 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 seeks to
establish or, where appropriate, relocate each Castle Dental Center in a
convenient location in or near a high-profile neighborhood retail area and
utilizes innovative sales and marketing programs designed to create 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.
DENTAL NETWORK DEVELOPMENT
The Company seeks to build its dental networks through the DE NOVO
development of dental practices in retail environments. Prior to 1999, the
Company has expanded into new markets through the acquisition of multi-location
group dental practices. Once the market entry acquisition has been made, the
Company has expanded within its target markets primarily through the DE NOVO
development of new dental centers. In 1999, the Company entered the Corpus
Christi, Texas market by opening two DE NOVO centers. During 1999, the Company
expanded solely through the development of DE NOVO centers and did not complete
any acquisitions of dental practices.
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DE NOVO DEVELOPMENT
The Company opened 20 newly developed dental centers in 1999; three in
Houston, two in Austin, three in Dallas/Fort Worth, four in San Antonio, two in
Corpus Christi, Texas and four in Nashville, Tennessee. All of the new centers
were located in leased facilities in neighborhood retail shopping centers areas.
The two DE NOVO centers opened in Corpus Christi, Texas represent the Company's
first venture into a new market other than by acquisition of existing dental
centers. Development of each DE NOVO dental center costs approximately $300,000
in leasehold improvements, signage, and dental and office equipment, depending
primarily on the size of the dental facility. All new dental centers in the
Company's existing markets utilize the Castle Dental Centers name and logo.
At December 31, 1999, the Company had four DE NOVO dental centers under
various stages of development in Dallas, Nashville and Florida. The Company also
had two centers under development for the purpose of relocating existing centers
in the Houston area. The Company is expanding its development of DE novo dental
centers in existing markets because management believes that opening of new
dental centers that conform to the Company's operating model is more effective
in creating brand awareness and increasing market share in existing markets than
acquiring dental practices that have different operating characteristics.
ACQUISITION CRITERIA
The Company's acquisition strategy has been to identify successful dental
management companies and 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. 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.
The contractual arrangements pursuant to which the Completed Acquisitions
were made include representations and warranties from the sellers regarding the
assets or stock being acquired, and management services agreements with the
affiliated practices containing non-competition provisions with the former
owners of such practices. Additionally, the Company typically has entered into
option agreements with the owners of its affiliated dental practices that
entitles the Company to select successor owners of the affiliated dental
practice. In some acquisitions, the Company has acquired the assets or stock of
the practice management company and either entered into new management services
agreements with the affiliated dental practices or assigned the dentist
employment agreements and other contractual obligations to an affiliated dental
practice with which the Company has an existing management services agreement.
AFFILIATION AND INTEGRATION OF DENTAL CENTERS
In acquiring dental practice management companies and 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,
the Company initiates the process of converting the affiliated practice into a
Castle Dental Center. 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 practice, implementation
of retail business concepts applied by the Company, and the implementation of
operating procedures employed by the Company, including standardization of
dental practice management, accounting and financial software. During 1999, the
Company
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completed the integration of all acquired dental practices and each of the
Company's dental centers operate under the Castle Dental Centers name, utilize
the same practice management software and follow the Company's standard
operating procedures.
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 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 20.0% 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. In California, the Company is paid a monthly management fee comprised
of two components: (i) the costs incurred by it on behalf of the affiliated
practice and (ii) a management fee in an amount ranging from 15.0% to 30.0% of
net patient revenues. With respect to the three California professional
corporations that own dental practices formerly managed by DCS, the Company is
paid a bonus equal to 30% of patient revenues in excess average monthly patient
revenues over the prior two-year period. 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 its management services agreements
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. As part of the management services agreement, the Company requires that
the majority shareholder of the affiliated dental practice execute an option
agreement that grants the Company's designee the right to acquire all the
shareholder's interest in the practice at a nominal cost. The Company can
exercise the option at any time on 10 days written notice. The Company may
nominate without restriction any licensed dentist as its designee and may
transfer the option at any time to any qualified person, subject to applicable
state regulations governing the practice of dentistry. The management services
agreement does not limit the number of times that the option may be exercised.
At December 31, 1999, all of the Company's affiliated dental practices were
wholly-owned by an individual dentist. Additionally, the management services
agreement may be terminated by the Company or the affiliated dental practice
only in the event of the bankruptcy or default in the performance of the
material duties of the non-terminating party.
DENTIST EMPLOYMENT AGREEMENTS
Each affiliated dental practice has entered into employment agreements with
substantially all of its full-time dentists, orthodontists and other dental
specialists. Although the form of contract varies somewhat among 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
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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 some of 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 those locations.
The majority of services provided by the Company's affiliated dental centers
are classified as general dentistry. 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 networks, the Company
provides a wide range of specialty dental 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 Company's dental centers are generally located in retail environments.
Many of the dental centers include semi-private general dentistry treatment
rooms, private treatment rooms and orthodontic bays. Currently, the Company's
dental centers include from four to 22 treatment rooms and range in size from
approximately 1,000 square feet to approximately 6,000 square feet. New dental
centers, developed by the Company, range in size from 1,600 square feet to 4,000
square feet, and have from five to fourteen operatories.
Since its formation, the Company has adapted its locations to accommodate the
full range of dental specialties. The Company believes the application of its
method of designing and locating dental centers will facilitate the expansion of
services offered by the acquired practices. Where a dental center 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 dental center to
a more desirable retail location as soon as practicable.
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
dental centers 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 and Sundays. The dental centers are staffed
with dentists and dental assistants every day they are open, with orthodontists
and other specialists rotating among several centers in order to
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utilize their time optimally. Each patient typically is assigned to and sees the
same dentist or specialist on all visits to the center. Each dental center is
also regularly staffed with an office manager, front office staff and other
support staff.
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 $88
to $98 per month, with an average contract period of approximately 24 months.
After consultation with the orthodontic staff 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. During 1999 the Company adopted a payment policy
requiring that new orthodontic patients arrange for an automatic monthly bank
draft. Previously existing 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 payer relationships, strategic 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 establish a consistent national identity for its
business and to utilize the "Castle Dental Centers" name and logo at all its
dental centers. As of December 31, 1999, the Castle Dental Centers name had been
implemented at all affiliated locations. 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 uses both print advertising and professionally produced broadcast
advertising to market its dental services to potential patients its existing
markets and intends to use the same marketing techniques in newly acquired
markets.
The Company has also established a national telemarketing system in Houston,
Texas to field calls generated by advertising, to confirm upcoming scheduled
patient visits and to encourage patients to return for
7
<PAGE>
follow-up visits and regularly scheduled six-month periodic exams. The national
telemarketing system is based on a national 800 number (1-800-TO SMILE) and
utilizes state-of-the-art software to identify patients and direct them to the
nearest Company operated dental center. This system is presently utilized in all
of the Company's 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.
MANAGED CARE CONTRACTS
The Company negotiates, on behalf of its affiliated dental practices,
contracts with dental healthcare maintenance organizations, insurance companies,
self insurance plans and other third-party payers pursuant to which services are
provided on some type of discounted fee-for-service or capitated basis. Under
capitated contracts the affiliated dental practice receives a predetermined
amount per patient per month in exchange for providing certain necessary covered
services to members of the plan. Usually, the capitated plans also provide for
supplemental payments and/or co-payments by members for certain higher cost
procedures such as crowns, root canal therapy and dentures. These contracts
typically result in lower average fees for services than the usual and customary
fees charges by the Company's affiliated dental practices and may, in certain
instances, expose the Company to losses on contracts where the total revenues
received are less than the costs of providing such dental care. The Company
generally bears the risk of such loss because it consolidates the financial
results of its affiliated dental practices. However, most of these contracts are
cancelable by either party on 30 to 90 days written notice thereby reducing the
risk of long-term adverse impact on the Company.
At December 31, 1999, the Company and its affiliated dental practices
maintained an aggregate of 70 capitated managed care contracts covering
approximately 110,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled $7.4 million, or approximately 7.4% of total
patient revenues in 1999. No single contract amounted to a significant portion
of the Company's revenues, as each of the Company's regional operations
contracts separately with managed care providers. The Company periodically
evaluates its capitated managed care contracts by comparing the average
reimbursement per procedure plus the total capitation fees per contract to the
usual and customary fees charged by the affiliated dental practice. If the
aggregate reimbursement percentage for the capitated contract exceeds 55% of the
usual and customary fees, the Company believes that the incremental costs of
providing covered services are being recovered. Management believes that
capitated managed care contracts, in the aggregate, are profitable and will
continue to increase as a percentage of total patient revenues in the future.
A component of the Company's strategy is to seek long-term relationships with
insurance companies on a regional and national basis. The development of new
dental centers and expanded networks of dentists and dental specialists in the
Company's markets makes the Company's dental networks attractive to insurance
companies and other third-party payers. Management believes that negotiating
with major dental healthcare providers on a national basis will result in better
coordination and improved financial results from its managed care contracts.
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, American Dental Partners, Inc., Interdent,
Inc., 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
8
<PAGE>
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
During the first quarter of 1999, the Company completed the integration of
the dental practice management systems in all its offices into a single practice
management system that is centralized in Houston. This system monitors and
controls patient treatment, scheduling, invoicing of patients and insurance
companies, productivity of clinical staffs and other practice related
activities. During the third quarter of 1999 the Company implemented a web-based
purchase order system to enable management to monitor and control dental and
office supplies purchasing.
The Company also utilizes centralized financial information and accounting
systems. These systems are linked to the practice management systems allowing
for automatic transfer of data between the practice management and financial
information systems.
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 enforcement 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
9
<PAGE>
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 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, payer contracts and, in certain states, dental
equipment), 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
10
<PAGE>
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 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, 1999, the Company and its affiliated dental practices
employed approximately 980 administrative and dental office personnel on a
full-time or part-time basis, and the affiliated dental practices employed
approximately 215 general dentists and 35 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. Significant increases in 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 coverage 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, which expired in May 2000, has been extended
at the Company's option for an additional 12 months.
All of the Company's existing centers are leased. Four of the centers are
owned by affiliates of the companies from whom the Company acquired affiliated
dental practices and one dental center is owned by an
11
<PAGE>
officer of the Company.
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 2000 and 2009 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 August 1998, the former owner of certain dental practices acquired by the
Company in August 1996, filed a lawsuit against the Company in the 190th
District Court of Harris Count, Texas. The lawsuit alleged that the Company
committed various acts of fraud, securities fraud, conspiracy, breach of
contract and misrepresentation concerning the value of the Company's common
stock issued in the acquisition of the dental practices. In August 1999, the
Company settled the lawsuit and recorded a one-time charge of $1.4 million.
In December 1998, a dentist with whom the Company had entered into an
agreement to acquire his dental practice filed a demand for arbitration alleging
that the Company is liable for damages resulting from the failure to complete
the transaction. The transaction was not completed because at least one of the
contingencies required for closing was not met. The dentist is claiming damages
equal to the difference between the purchase price provided for in the agreement
of $8.1 million and the fair market value of the practice. The Company believes
that the asserted claims are without merit and that it is not liable for damages
resulting from these allegations. At May 10, 2000, the arbitration proceeding
was underway.
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 coverage 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
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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 for the quarters indicated. These quotations reflect the
inter-dealer prices, without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
HIGH LOW
---- ---
1998:
First Quarter.......................... 12.13 6.63
Second Quarter......................... 13.44 9.25
Third Quarter.......................... 11.50 4.00
Fourth Quarter......................... 9.25 4.00
1999:
First Quarter.......................... 7.00 5.31
Second Quarter......................... 8.25 6.25
Third Quarter.......................... 6.56 2.50
Fourth Quarter......................... 4.09 2.13
As of May 16, 2000, there were 6,417,206 shares of the Company's Common Stock
outstanding held by approximately 42 stockholders of record. The Company
believes there are approximately 1,200 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 bank 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, 1999 was
approximately $37.2 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.
RECENT SALES OF UNREGISTERED SECURITIES
On March 24, 1998, in connection with the acquisition by the Company of all
of the outstanding capital stock of Dental World, Inc. ("Dental World"), the
Company issued 23,342 shares of common stock to Reality, Ltd., the sole
shareholder of Dental World.
On March 30, 1998, the Company, through its wholly owned subsidiary CDC of
California, Inc. ("CDC"), formed Castle Dental Centers of California, L.L.C.
("Castle West") for the purpose of acquiring the business of Dental Consulting
Services, LLC ("DCS"). In connection with this acquisition, the Company issued
an aggregate of $2,689,151 in its 8% subordinated promissory notes due March 30,
2001 to the five members of DCS ("DCS Members"). Following Castle West's
formation: (i) CDC owned the Class A Membership Interest and the Class D
Membership Interest in Castle West; (ii) sole-purpose corporations owned by the
DCS Members ("Corporate B Members") collectively owned 100% of DCS, which owned
the Class B Membership Interest in Castle West; and (iii) sole-purpose
corporations (the "Corporate C Members") owned by the DCS Members plus one
additional person collectively owned 100% of Castle West Holdings, L.L.C.
("Holdings"), which owned the Class C Membership Interest in Castle West. The
Corporate B Members as a group were granted the one-time right (the "B Merger
Option"), beginning March 30, 1999, to merge all of the Corporate B Members into
CDC in exchange for the issuance of shares of the Company's common stock. The
number of shares of common stock issuable upon exercise of the B Merger Option
("B Merger Consideration") was
13
<PAGE>
initially set at 407,452 shares of common stock, subject to an adjustment based
upon the purchase price of practices acquired by Castle West between the closing
of such transaction and the one-year anniversary thereof. Each Corporate C
Member was granted the one-time right (the "C Merger Option"), beginning March
30, 2000, to merge into CDC in exchange for cash, notes and common stock. The
consideration to be received upon the exercise of the C Merger Option ("C Merger
Consideration") is based upon the economic performance of Castle West following
the closing date of the DCS acquisition. At least 50% of the C Merger
Consideration was payable by CDC in common stock (based upon its trading price)
and, if a Corporate C Member elects to receive more than 25% of the C Merger
Consideration in cash, CDC would have the option of delivering a promissory note
of Castle for the amount by which such cash payment would otherwise exceed 25%
of the C Merger Consideration. On January 28, 2000, CDC acquired the Class B
Membership Interest and the Class C Membership Interest in Castle West from DCS
and Holdings, respectively, and the B Merger Option and the C Merger Option were
cancelled. CDC now owns all of the outstanding membership interests in Castle
West.
On July 9, 1998, in connection with the Company's acquisition of the assets
of Jared Woolf, D.D.S. & Associates of Palmetto, P.A., Jared Woolf, D.D.S. &
Associates of Venice, P.A. and Woolf Dentistry, P.A. ("Woolf Dentistry"), the
Company issued 15,424 shares of common stock to Woolf Dentistry. In connection
with this acquisition, the Company issued an aggregate of $370,000 in its 9%
subordinated promissory notes due July 9, 2001 to Woolf Dentistry. On that same
date, in connection with the Company's acquisition of the stock of Dentcor,
Inc., the Company issued an aggregate of 20,566 shares to the two shareholders
of Dentcor, Inc.
On August 1, 1998, in connection with the acquisition by the Company of all
of the outstanding capital stock of NA Dental Management, Inc., the Company
issued 3,635 shares of common stock and $32,580 in its 8% subordinated
promissory notes due June 30, 2000 to the sole shareholder of NA Dental
Management, Inc.
In September 1997, the Company issued 119,231 shares of Series B Convertible
Preferred Stock (the "Series B Stock") in connection with the acquisition of SW
Dental. 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 was convertible at the holder's option, for a thirty-day
period beginning one year after its issuance into an equivalent number of shares
of the Company's common stock. On October 1, 1998, the holder of the 119,231
shares of Series B Preferred Stock exercised the right to redeem the shares into
an 8% subordinated note, due June 2002, in the original principal amount of
$1,550,000, payable in quarterly installments of $114,000 in principal and
interest.
On December 30, 1998, in connection with the Company's acquisition of the
assets of DCA Limited Partnership, L.L.P. ("DCA") and Dental Administrators of
Texas Limited Partnership, L.L.P. ("DAI") and 16 related dental practices, the
Company issued 79,352 and 45,648 shares of common stock to DCA and DAI,
respectively. In addition, in connection with such acquisition, the Company
issued to DCA and DAI an aggregate of $1,250,000 in 6% Subordinated Promissory
Notes due December 30, 2001.
Each of the foregoing transactions was exempt from registration under Section
4(2) of the Securities Act, no public offering being involved.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share date)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net patient revenues .......................... $ 18,257 $ 29,601 $ 46,225 $ 74,823 $102,701
Expenses:
Dentist salaries and other professional costs 3,345 7,454 11,325 18,516 26,984
Clinical salaries ........................... 1,879 6,760 10,248 16,612 21,408
Dental supplies and laboratory fees ......... 2,185 3,120 4,335 7,197 9,641
Rental and lease expense .................... 836 1,592 2,590 4,091 6,203
Advertising and marketing ................... 959 1,522 2,033 2,763 3,650
Depreciation and amortization ............... 336 1,088 2,132 3,615 5,941
Other operating expenses .................... 2,260 2,913 4,314 6,976 10,314
General and administrative (1) .............. 9,109 4,292 5,929 8,145 10,909
-------- -------- -------- -------- --------
Total expenses .......................... 20,909 28,741 42,906 67,915 95,050
-------- -------- -------- -------- --------
Operating income (loss) ....................... (2,652) 860 3,319 6,908 7,651
Litigation settlement ......................... -- -- -- -- 1,366
Interest expense .............................. 87 2,596 2,792 1,889 4,220
Other (income) expense ........................ -- (89) (84) (57) 34
-------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary loss ...................... (2,739) (1,647) 611 5,076 2,031
Provision (benefit) for income taxes (2) ...... (325) (561) 200 1,490 835
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss ....... (2,414) (1,086) 411 3,586 1,196
Extraordinary loss ............................ -- -- (3,195) -- --
-------- -------- -------- -------- --------
Net income (loss)(2) .......................... (2,414) (1,086) (2,784) 3,586 1,196
Preferred stock dividends(3) .................. -- -- (1,930) -- --
-------- -------- -------- -------- --------
Net income (loss) attributable to common stock $ (2,414) $ (1,086) $ (4,714) $ 3,586 $ 1,196
======== ======== ======== ======== ========
Income (loss) per common share:
Basic and diluted:
Income (loss) before extraordinary loss ... $ (0.34) $ 0.10 $ 0.54 $ 0.18
Extraordinary loss ........................ -- (0.78) -- --
-------- -------- -------- --------
Net income (loss) ......................... $ (0.34) $ (0.68) $ 0.54 $ 0.18
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic .................................. 3,191 4,100 6,586 6,825
======== ======== ======== ========
Diluted ................................ 3,191 4,132 6,608 6,850
======== ======== ======== ========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ........... $ 6,439 $ 119 $ 2,908 695 $ 59
Working capital (deficit) ........... 6,208 (3,244) 3,917 10,345 15,768
Total assets ........................ 12,677 29,098 44,513 100,035 114,982
Long-term debt, less current portion 9,462 20,529 3,659 44,937 53,996
Redeemable preferred stock .......... 2,928 2,928 1,550 -- --
Total stockholders' equity (deficit) (5,743) (3,509) 31,113 36,397 37,163
</TABLE>
(1) In 1995, the Company expensed $2.6 million of deferred compensation in
connection with an acquisition.
(2) Prior to 1996, the 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 the Company's operations had been
subject to income taxes, net loss would have been $1.7 million for the
year ended December 31, 1995.
(3) The Company recorded a $1.9 million non-cash dividend to accrete the
Series A Convertible Preferred Stock and 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, Tennessee and 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, 1999, the Company provided management
services to 102 dental centers with approximately 250 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. The Company applies
traditional retail principles of business to the 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 Company generally negotiates the
terms and conditions 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. The
Company generally bears the risk of loss resulting from any such arrangements
because it consolidates the financial results of its affiliated dental
practices. However, most of these contracts are cancelable by either party on 30
to 90 days written notice thereby reducing the risk of long-term adverse impact
on the Company.
At December 31, 1999, the Company and its affiliated dental practices
maintained an aggregate of 70 capitated managed care contracts covering
approximately 110,000 members. Capitation fees, excluding supplemental fees and
co-payments by members, totaled $7.4 million, or approximately 7.4% of total
patient
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revenues in 1999. No single contract amounted to a significant portion of the
Company's revenues, as each of the Company's regional operations contracts
separately with managed care providers. The Company periodically evaluates its
capitated managed care contracts by comparing the average reimbursement per
procedure plus the total capitation fees per contract to the usual and customary
fees charged by the affiliated dental practice. If the aggregate reimbursement
percentage for the capitated contract exceeds 55% of the usual and customary
fees, the Company believes that the incremental costs of providing covered
services are being recovered. Management believes that capitated managed care
contracts, in the aggregate, are profitable and will continue to contract with
capitated managed care providers on a case-by-case basis.
COMPONENTS OF REVENUES AND EXPENSES
Net patient revenues 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. Net revenues are reported at
established rates reduced by contractual amounts based on agreements with
patients, third party payers and others obligated to pay for services rendered.
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. While actual terms of the various management agreements may vary from
practice to practice, material aspects of all the management service agreements,
including the ability of the Company to nominate the majority shareholder and
the calculation of the management fees, are consistent. 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.
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 Southwest Dental Associates
("SW Dental") of Austin, Texas in September 1997, and two individual practices
located in Fort Worth, Texas and Nashville, Tennessee in December 1997. In March
1998, the Company acquired Dental World, Inc. a dental practice management
company located in Houston, Texas. In March 1998, the Company acquired an 80.0%
interest in Castle West, which was formed to acquire Dental Consulting Services,
LLC, a California-based dental practice management company. In July 1998, the
Company acquired Dentcor, Inc., a dental management company, and five related
dental practices in Florida. In August 1998, the Company acquired all the
outstanding stock of two dental practices in the Los Angeles area and purchased
the assets of a dental office in Houston. In December 1998, the Company acquired
the assets of Dental Centers of America, Inc., which managed 16 dental centers
in San Antonio, Austin and Dallas/Fort Worth, Texas, and Crenshaw Family Dental
in Los Angeles. (All of the acquisitions in 1997 and 1998 are collectively
referred to as the "Completed Acquisitions").
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YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -----
Net patient revenues .......................... 100.0% 100.0% 100.0%
Expenses:
Dentist salaries and other professional costs 24.5% 24.7% 26.3%
Clinical salaries ........................... 22.2% 22.2% 20.8%
Dental supplies and laboratory fees ......... 9.4% 9.6% 9.4%
Rental and lease expense .................... 5.6% 5.5% 6.0%
Advertising and marketing ................... 4.4% 3.7% 3.6%
Depreciation and amortization ............... 4.6% 4.8% 5.8%
Other operating expenses .................... 9.3% 9.3% 10.0%
General and administrative .................. 12.8% 10.9% 10.6%
----- ----- -----
Total expenses .......................... 92.8% 90.8% 92.6%
----- ----- -----
Operating income .............................. 7.2% 9.2% 7.4%
Litigation settlement ......................... -- -- 1.3%
Interest expense .............................. 6.0% 2.5% 4.1%
Other (income) expense ........................ -0.2% -0.1% 0.0%
----- ----- -----
Income before income taxes
and extraordinary loss ...................... 1.3% 6.8% 2.0%
Provision for income taxes .................... 0.4% 2.0% 0.8%
----- ----- -----
Income before extraordinary loss .............. 0.9% 4.8% 1.2%
Extraordinary loss ............................ -6.9% -- --
----- ----- -----
Net income (loss) ............................. -6.0% 4.8% 1.2%
Preferred stock dividends ..................... -4.2% -- --
----- ----- -----
Net income (loss) attributable to common stock -10.2% 4.8% 1.2%
===== ===== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET PATIENT REVENUES - Net patient revenues increased from $74.8 million for
the year ended December 31, 1998 to $102.7 million for the year ended December
31, 1999, an increase of $27.9 million or 37.3%. Approximately $21.2 million of
the increase was attributable to the acquisitions completed in 1998. Revenues
from DE NOVO dental centers opened in 1998 and 1999 contributed $7.3 million of
the increase, accounting for 26.2% of the revenue increase from 1998. Patient
revenues from dental centers open for more than one year decreased from 1998.
DENTIST SALARIES AND OTHER PROFESSIONAL COSTS -- Dentist salaries and other
professional costs increased from $18.5 million for the year ended December 31,
1998 to $27.0 million for the year ended December 31, 1999, an increase of $8.5
million or 45.7%. Expressed as a percentage of net patient revenues, dentist
salaries increased from 24.7% to 26.3% for the years ended December 31, 1997 and
1998, respectively, reflecting higher compensation paid to dentists and the
impact of new dental center openings in 1998 and 1999.
CLINICAL SALARIES -- Clinical salaries increased from $16.6 million for the
year ended December 31, 1998 to $21.4 million for the year ended December 31,
1999, an increase of $4.8 million or 28.9%. The Completed Acquisitions accounted
for $4.3 million of the increase and the DE NOVO centers accounted for $1.4
million. Clinical salaries in dental centers open for more than one year
decreased by $0.9 million. Expressed as a percentage of patient revenues,
clinical salaries decreased from 22.2% to 20.8% for the years ended December 31,
1998 and 1999, respectively, primarily due to productivity improvements.
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DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $7.2 million for the year ended December 31, 1998 to $9.6 million
for the year ended December 31, 1999, an increase of $2.4 million or 33.3%. This
increase resulted primarily from the Completed Acquisitions, which incurred $2.1
million in dental supplies and laboratory expenses. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees decreased from 9.6% in
1998 to 9.4% in 1999.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from $4.1
million for the year ended December 31, 1998 to $6.2 million for the year ended
December 31, 1999, an increase of $2.1 million or 51.6%. Rental expense from the
29 dental centers opened in 1998 and 1999 accounted for $0.8 million of the
increase and the Completed Acquisitions in Florida, California, and Texas
accounted for $1.1. Expressed as a percentage of patient revenues, rental and
lease expense increased from 5.5% in 1998 to 6.0% in 1999 due primarily to
higher relative lease expense at the DE NOVO centers.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased from
$2.8 million for the year ended December 31, 1998 to $3.7 million for the year
ended December 31, 1999, an increase of 32.1%. Expressed as a percentage of
patient revenues, advertising and marketing costs decreased from 3.7% in 1998 to
3.6% in 1999, as advertising expenses in established markets were favorably
leveraged over additional dental centers opened in 1998 and 1999.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased from
$3.6 million for the year ended December 31, 1998 to $5.9 million for the year
ended December 31, 1999, an increase of $2.3 million or 64.3%, primarily
resulting from higher depreciation and amortization of management services
agreements and other intangibles related to the Completed Acquisitions. As a
percentage of patient revenues, depreciation and amortization increased from
4.8% to 5.8% for the years ended December 31, 1998 and 1999, respectively.
OTHER OPERATING EXPENSES -- Other operating expenses increased from $7.0
million for the year ended December 31, 1998 to $10.3 million for the year ended
December 31, 1999, an increase of approximately $3.3 million or 47.8%. Other
operating expenses include expenses related to the operation of the Company's
dental centers, such as utilities, taxes and management information systems, and
bad debt expense incurred in the financing of patient receivables at the
affiliated dental practices. The increase from 1998 to 1999 resulted from higher
bad debt expense and operating expenses at the DE NOVO dental centers and the
Completed Acquisitions. The increase in bad debt expense from $2.5 million, or
3.4% of revenues, in 1998 to $4.2 million, or 4.1% of revenues, in 1999 resulted
from higher levels of patient receivables. Expressed as a percentage of
revenues, other operating expenses increased from 9.3% in 1998 to 10.0% in 1999,
primarily due to the higher provision for bad debts.
GENERAL & ADMINISTRATIVE EXPENSE -- General and administrative expenses
increased from $8.1 million for the year ended December 31, 1998 to $10.9
million for the year ended December 31, 1999, an increase of $2.8 million or
33.9%. The increase resulted from the addition of general and administrative
expenses of the Completed Acquisitions, the centralization of certain functions
formerly performed at a clinical level, 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 10.9% to 10.6% for years ended December 31, 1998 and 1999,
respectively, due to relatively greater percentage increase in the Company's
patient revenues.
LITIGATION SETTLEMENT -- In August 1998, the former owner of certain dental
practices acquired by the Company in August 1996, filed a lawsuit against the
Company. The lawsuit alleged that the Company committed various acts of fraud,
securities fraud, conspiracy, breach of contract and misrepresentation
concerning the value of the Company's common stock issued in the acquisition of
the dental practices. In August 1999, the Company settled the lawsuit and
recorded a charge of $1.4 million.
INTEREST EXPENSE -- Interest expense increased from $1.9 million for the year
ended December 31, 1998 to $4.2 million for the year ended December 31, 1999,
primarily resulting from higher bank borrowings. Bank borrowings increased from
$39.4 million at December 31, 1998 to $50.9 million at December 31, 1999.
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INCOME TAXES -- For the year ended December 31, 1998, the Company recorded a
provision for income taxes of $1.5 million resulting from income before income
taxes of $5.1 million. For the year ended December 31, 1999, the Company
recorded a provision for income taxes of $0.8 million resulting from the income
before income taxes of $2.0 million. The Company's average tax rate for 1998 was
29.4%, compared to an average tax rate of 41.1% in 1999. A portion of the
litigation settlement was non-deductible for income tax purposes, resulting in
the higher average rate. In addition, during 1998, the Company continued to
realize benefits from net operating loss carry forwards and other tax deductions
not recognized in prior years. Management expects that the average tax rate in
future periods will be similar to the 1999 tax rate.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET PATIENT REVENUES - Net patient revenues increased from $46.2 million for
the year ended December 31, 1997 to $74.8 million for the year ended December
31, 1998, an increase of $28.6 million or 61.9%. Approximately $19.7 million of
the increase was attributable to the Completed Acquisitions. Revenues from
twelve DE NOVO stores opened in 1997 and 1998 contributed patient revenues of
$5.0 million, or a 10.8% increase from 1997, while patient revenues from dental
centers open for more than one year increased $4.1 million, or 9.0%, in 1998.
DENTIST SALARIES AND OTHER PROFESSIONAL COSTS -- Dentist salaries and other
professional costs increased from $11.3 million for the year ended December 31,
1997 to $18.5 million for the year ended December 31, 1998, an increase of $7.2
million or 63.5%. The Completed Acquisitions accounted for $4.9 million of the
increase in dentist salaries. Expressed as a percentage of net patient revenues,
dentist salaries increased from 24.5% to 24.7% for the years ended December 31,
1997 and 1998, respectively.
CLINICAL SALARIES -- Clinical salaries increased from $10.2 million for the
year ended December 31, 1997 to $16.6 million for the year ended December 31,
1998, an increase of $6.4 million or 62.1%. The Completed Acquisitions accounted
for the increase in clinical salaries. Expressed as a percentage of patient
revenues, clinical salaries remained unchanged at 22.2% for the years ended
December 31, 1997 and 1998.
DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $4.3 million for the year ended December 31, 1997 to $7.2 million
for the year ended December 31, 1998, an increase of $2.9 million or 66.0%. This
increase resulted primarily from the Completed Acquisitions, which incurred $2.2
million in dental supplies and laboratory expenses. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees increased from 9.4% in
1997 to 9.6% in 1998.
RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from $2.6
million for the year ended December 31, 1997 to $4.1 million for the year ended
December 31, 1998, an increase of $1.5 million or 57.9%. Rental expense from the
Completed Acquisitions in Florida, California, and Texas accounted for $1.2
million of the increase with the balance resulting from the opening of ten new
dental centers in 1997 and 1998. Expressed as a percentage of patient revenues,
rental and lease expense decreased from 5.6% in 1997 to 5.5% in 1998.
ADVERTISING AND MARKETING -- Advertising and marketing expense increased from
$2.0 million for the year ended December 31, 1997 to $2.8 million for the year
ended December 31, 1997, an increase of 35.9%. Expressed as a percentage of
patient revenues, advertising and marketing costs decreased, primarily due to
economies of scale, from 4.4% in 1997 to 3.7% in 1998.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased from
$2.1 million for the year ended December 31, 1997 to $3.6 million for the year
ended December 31, 1998, an increase of $1.5 million or 69.6%, primarily
resulting from higher depreciation and amortization of management services
agreements and other intangibles related to the Completed Acquisitions. As a
percentage of patient revenues, depreciation and amortization increased from
4.6% to 4.8% for the years ended December 31, 1997 and 1998, respectively.
OTHER OPERATING EXPENSES -- Other operating expenses increased from $4.3
million for the year ended December 31, 1997 to $7.0 million for the year ended
December 31, 1998, an increase of approximately $2.7 million or 61.7%. Other
operating expenses include expenses related to the operation of the Company's
dental centers, such as utilities, taxes and management information systems, and
bad debt expense incurred in the financing of patient receivables at the
affiliated dental practices. The increase from 1997 to 1998 resulted from
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the Completed Acquisitions and the new dental centers opened during 1997 and
1998. Expressed as a percentage of revenues, however, other operating expenses
remained at 9.3%, for the years ended December 31, 1997 and 1998.
GENERAL & ADMINISTRATIVE EXPENSE -- General and administrative expenses
increased from $5.9 million for the year ended December 31, 1997 to $8.1 million
for the year ended December 31, 1998, an increase of $2.2 million or 35.4%. 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
12.8% to 10.9% for the years ended December 31, 1997 and 1998, respectively, due
to relatively greater percentage increase in the Company's patient revenues.
INTEREST EXPENSE -- Interest expense decreased from $2.8 million for the year
ended December 31, 1997 to $1.9 million for the year ended December 31, 1998. 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. Bank borrowings and the issuance of subordinated seller
notes increased from $5.2 million to $42.2 million, for the years ended December
31, 1997 and 1998, respectively.
INCOME TAXES -- For the year ended December 31, 1998, the Company recorded a
provision for income taxes of $1.5 million resulting from income before income
taxes of $5.1 million. For the year ended December 31, 1997, the Company
recorded a provision for income taxes of $200,000 resulting from the income
before income taxes and extraordinary loss of $611,000. The Company's average
tax rate for 1998 was 29.4%, compared to an average tax rate of 30.3% in 1997.
During 1998, the Company continued to realize benefits from net operating loss
carry forwards and other tax deductions not recognized in prior years.
Management expects that the average tax rate will be higher in future periods.
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. No such expense was recorded in 1998.
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 subordinated seller notes,
and the assumption of certain debt and lease obligations to finance its
acquisitions.
At December 31, 1999, the Company had net working capital of $15.8 million,
representing an increase of $5.5 million from net working capital of $10.3
million at December 31, 1998. Current assets at December 31, 1999 consisted of
cash of $59,000, billed and unbilled accounts receivable of $21.6 million,
deferred income taxes of $2.5 million, and prepaid expenses and other current
assets of $4.2 million. These were partially offset by current liabilities of
$12.6 million at December 31, 1999, consisting primarily of $9.9 million in
accounts payable and accrued liabilities, $2.2 million in current maturities of
long-term debt, and $526,000 in accrued deferred compensation payments.
For the year ended December 31, 1999, net cash used in operating activities
was approximately $0.9 million, 2.8 million lower than net cash provided by
operating activities of $1.9 million for the prior year resulting from lower net
income of $2.4 million and changes in working capital, primarily accounts
receivable. During 1999, increases in accounts receivable of $7.7 million, net
of increased provision for bad debts, were partially offset by net income of
$1.2 million, deferred income taxes of $0.8 million and depreciation and
amortization of $6.0 million. Cash used in investing activities in 1999 totaled
approximately $10.4 million, primarily consisting of capital expenditures to
build new dental centers. Net cash provided by financing activities in 1999
amounted to approximately $10.6 million, primarily reflecting proceeds from bank
borrowings of $11.5 million utilized to fund capital expenditures and operating
activities during the year. The Company made principal payments of $1.5 million
on subordinated seller notes and other third-party debt in 1999.
For the year ended December 31, 1998, net cash provided by operating
activities was approximately $1.9 million, compared to net cash used by
operating activities of $502,000 for the prior year, primarily as a result
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of higher net income offset by increased working capital requirements. Cash used
in investing activities in 1998 totaled approximately $37.5 million, primarily
for the acquisition of dental practices and capital expenditures to build new
dental centers. Significant components of cash used in investing activities
included $30.8 million to complete the acquisitions of Dental Consulting
Services in Los Angeles, Dental World, Inc. in Houston, Dentcor Inc./Woolf &
Associates P.A. in Florida, Dental Centers of America in San Antonio, and three
individual practices in Los Angeles and $6.7 million in capital expenditures for
new dental centers and computer systems and software. Cash provided by financing
activities in 1998 amounted to approximately $33.4 million. Significant
components of cash provided by financing activities included bank borrowings of
$37.0 million utilized to finance the acquisitions completed in 1998. During
1998, the Company made principal payments of $3.3 million on its bank credit
facility, subordinated seller notes and other third-party debt.
The Company's principal sources of liquidity as of December 31, 1999
consisted primarily of cash and net accounts receivable. At year-end, there was
less than $500,000 available to borrow under the Company's bank credit facility.
In January 2000, the Company amended its bank credit agreement ("Credit
Agreement") with its existing bank and entered into a senior subordinated note
agreement (Subordinated Note Agreement) and a subordinated convertible note
agreement (Convertible Note Agreement) with two lenders. In March 2000, the
Company advised its lenders under the bank credit facility that it was in
violation of certain financial covenants of the Credit Agreement. Accordingly,
in May 2000, the Company again amended its credit facility to cure its covenant
violations and to provide additional availability for the Company to complete
the DE NOVO dental centers that are under development for 2000.
The Credit Agreement provides for borrowings up to $55.0 million and matures
November 2002. Advances under the bank credit facility require quarterly
interest payments through March 2001 at which time principal becomes payable
quarterly based on a five-year amortization with 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 interest, income 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. In addition, under the May 2000
amended Credit Agreement, capital expenditures for 2000 are limited to no more
than $3.5 million, acquisitions are not permitted in 2000, and the payment of
any litigation settlement is restricted to no more than $100,000, without
consent of the lenders. At September 30, 1999, the Company received waivers
concerning violations of certain financial covenants under the Credit Agreement.
At December 31, 1999, $50.9 million was outstanding under the bank credit
facility and the average interest rate on the Company's bank borrowings was
9.8%. At May 10, 2000, bank borrowings were $43.5 million and the average
interest rate had increased to 11.2%.
The Subordinated Note Agreement and Convertible Note Agreement provided
borrowings of $13.7 and $1.3 million, respectively. Proceeds from these notes
were used to reduce borrowings under the bank credit facility, to acquire the
20% minority interest in Castle West and to reduce other accrued liabilities and
accounts payable. Loans under the Subordinated Note Agreement bear interest at
the 90-day LIBOR rate plus five and one-half percent, payable quarterly, and are
due in eight quarterly installments beginning in the sixty-third month following
the closing date. Loans under the Convertible Note Agreement bear interest at
the same rate as loans under the Subordinated Note Agreement and are due on
demand beginning seven years after the closing date with a final maturity date
of January 30, 2009. The convertible note is convertible at any time into
442,880 shares of Company common stock at the request of the holders at a fixed
conversion price of $3.1125 per share. The Subordinated Note Agreement and
Convertible Note Agreement contain 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.
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During 1999, the Company did not acquire any significant dental practices as
development was concentrated on the addition of 20 de novo dental centers.
During 1998, the Company acquired dental management companies and dental
practices operating 36 dental centers in Texas, Florida and California. Total
purchase consideration for the acquisitions amounted to $41.7 million, including
related acquisition expenses and excluding assumed liabilities, consisting of
$30.8 million in cash, $4.5 million in subordinated seller notes and 595,421
shares of Company stock and common stock equivalents (see "Recent Sales of
Unregistered Securities"). The Company does not anticipate making any
acquisitions in 2000 due to its emphasis on DE NOVO development of dental
centers and limitations under its bank credit facility. At December 31, 1999 the
Company had four dental centers under construction with leases committed on an
additional seven locations. Development of eight centers is anticipated to be
completed during the first seven months of 2000 subject to the availability of
funds generated by cash flow from operations or from the bank credit facility.
The Company has deferred construction of three new dental centers until 2001 and
will be required to incur lease expenses for these facilities unless subleases
are obtained. Capital expenditures in 2000 are expected to be approximately $3.5
million.
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 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 level of capital spending, 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 for the Company to fund its DE NOVO
development plans and to support operations. 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 instead of 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.
During 1998 and 1999, as part of the Company's continuing program to upgrade
its information systems in anticipation of future growth, the Company installed
year 2000 compliant software for its corporate and regional operations. This
installation was completed prior to December 31, 1999 and the Company has not
experienced, nor does it anticipate, any significant disruptions in any of its
computer systems or its operations as a result of the Y2K problem.
To date, the incremental costs incurred by the Company that relate solely to
the year 2000 compliance problem have not been and are not expected to be
material. These costs are exclusive of upgrades made to the Company's systems in
the ordinary course of business and consist primarily of internal employee time.
The Company did not separately track the internal costs incurred for the Year
2000 project, which consisted primarily of payroll and related costs associated
with employee time. Based upon the Company's current assessments, the costs of
the Company's year 2000 compliance program did not have a material effect on the
Company's financial condition, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's only financial instruments with market risk exposure are
revolving credit borrowings under its Credit Agreement which total $50.9 million
at December 31, 1999. Based on this balance, a change of one percent in the
interest rate would cause a change in interest expense of approximately
$509,000, or $0.04 per share, on an annual basis. The bank credit facility was
not entered into for trading purposes and carries interest at a pre-agreed upon
percentage point spread from either the prime interest rate or Eurodollar
23
<PAGE>
interest rate.
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.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information as to the current directors and
executive officers of the Company, including their ages, present principal
occupations, other business experience during the last five years, memberships
on committees of the Board of Directors and directorships in other publicly-held
companies.
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
- -------------------------------------------------------------------------------
Jack H. Castle, Jr. 45 Chairman of the Board and Chief
Executive Officer 1995
Jack H. Castle, D.D.S. 78 Director 1995
Robert J. Cresci (1)(2) 56 Director 1995
G. Kent Kahle (1) 48 Director 1995
Elizabeth A. Tilney(2) 42 Director 1996
Emmett E. Moore(1) 58 Director 1997
G. Daniel Siewert III 56 President and Chief Operating Officer
John M. Slack 52 Vice President and Chief Financial
Officer
------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Jack H. Castle, Jr. became a director in December 1995. He was a co-founder
of the Company in 1981 and has served as Chief Executive Officer since 1990. He
became the Company's Chairman in August 1996. Mr. Castle received a B.A. from
Rollins College and a Masters of Business Administration from Wake Forest
University. Mr. Castle is the son of Jack H. Castle, D.D.S.
Jack H. Castle, D.D.S. became a director in December 1995 and served as
Chairman of the Company from 1981 until August 1996. He is also the sole owner
of Jack H. Castle, D.D.S., P.C., a dental practice managed by the Company (the
"Texas PC"). Prior to co-founding the Company, Dr. Castle operated a single
location dental practice. Dr. Castle graduated from the University of Houston in
1943 and received a Doctorate of Dental Surgery from the University of Texas
Health Science Center in Houston in 1945. He served in the United States Navy
from 1947 to 1949. Dr. Castle is the father of Jack H. Castle, Jr.
Robert J. Cresci became a director in December 1995. Mr. Cresci has been a
Managing Director of Pecks Management Partners Ltd., an investment management
firm, since September 1990. Mr. Cresci currently serves on the boards of
Sepracor, Inc., Aviva Petroleum Ltd., Film Roman, Inc., Quest Educational
Corporation, Jfax.Com, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc., E-Stamp
Corporation and several private companies.
G. Kent Kahle became a director in December 1995. He has been a Managing
Director of The GulfStar Group, Inc., an investment banking firm, since 1990.
From 1982 to 1990 Mr. Kahle held various positions with Rotan Mosle, Inc., most
recently as Senior Vice President and Director. Mr. Kahle has a Masters of
Business Administration from The Wharton School of the University of
Pennsylvania and an A.B. from Brown University. He currently serves on the board
of Total Safety Corporation, U.S. Legal Support, Inc., Plassein Packaging Corp.
and De-Ro Products, Inc.
Elizabeth A. Tilney became a director in August 1996. Ms. Tilney is Senior
Vice President, Marketing, Communications and Human Resources of Enron Energy
Services, having joined Enron in March 1996. From 1987 to 1996, Ms. Tilney held
various positions with Russell Reynolds Associates, an executive search firm,
25
<PAGE>
and was most recently an Executive Director. Ms. Tilney was an account manager
associated with Ogilvy & Mather Advertising in New York and Houston from 1983 to
1987. Ms. Tilney has a Masters of Business Administration from The Amos Tuck
School of Business Administration of Dartmouth College and a B.A. from the
University of Virginia.
Emmett E. Moore became a director in September 1997. Since June 1999, Mr.
Moore has been Chairman of the Board and Chief Executive Officer of MedEvolve,
Inc., a provider of internet-based information technology solutions to
physicians' offices. From November 1997 until joining MedEvolve, he was engaged
in private consulting and investments related to healthcare. From April 1995
until November 1997, Mr. Moore was the Chairman of the Board and Chief Executive
Officer of Physicians Resource Group, Inc., a publicly-traded ophthalmology
practice management company. Mr. Moore received B.B.A., J.D. and M.P.A. degrees
from the University of Texas, and is a certified public accountant.
G. Daniel Siewert III joined the Company in August 1997 as President and
Chief Operating Officer. From January 1995 through June 1997, he served as Chief
Operating Officer for Family Dental Center, Inc., a large group dental practice
with locations in Sears Roebuck & Company stores. From November 1993 to December
1994, Mr. Siewert provided business management consulting for a major retail eye
care company. Prior to that, from September 1990 until August 1993, he was Chief
Executive Officer of National Vision Associates, Inc.
John M. Slack joined the Company in December 1995 as Vice President and Chief
Financial Officer. From November 1994 through November 1995, he served as Vice
President and Chief Financial Officer of Team, Inc., a publicly-held
environmental services company. From 1985 through August 1994, Mr. Slack was
Vice President and Chief Financial Officer of Serv-Tech, Inc., a publicly-held
industrial services company. Mr. Slack received a B.S. in international
economics from Georgetown University in 1969.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and persons holding more than ten percent of a registered
class of the Company's equity securities to file with the Securities and
Exchange Commission ("SEC") and any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted (i) initial reports of
ownership, (ii) reports of changes in ownership and (iii) annual reports of
ownership of Common Stock and other equity securities of the Company. Such
directors, officers and ten-percent stockholders are also required to furnish
the Company with copies of all such filed reports.
Based solely upon review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
1999, the Company believes that all of the Company's executive officers and
directors complied with Section 16(a) reporting requirements during 1999.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation earned by the Company's Chief Executive Officer and each of the
other executive officers of the Company (the "Named Executive Officers") whose
compensation exceeded $100,000 during the year ended December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
OTHER ANNUAL RESTRICTED NUMBER OF ALL OTHER
SALARY BONUS COMPENSATION STOCK OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) $ AWARDS GRANTED ($)(1)
- --------------------------- ------ ------- ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C>
Jack H. Castle, Jr. 1999 249,925 -- -- -- 75,000 3,504
Chief Executive Officer 1998 243,663 -- -- -- 75,000 12,388
1997 254,167 -- -- -- 100,000 --
G. Daniel Siewert III 1999 199,929 -- -- -- 75,000 12,000
President & Chief Operating 1998 199,320 -- -- -- 75,000 12,000
Officer 1997 61,698(2) -- -- -- 110,000 --
John M. Slack 1999 144,231 -- -- -- 50,000 7,407
Vice President, Chief Financial 1998 142,026 -- -- -- 50,000 --
Officer, Treasurer 1997 120,001 -- -- -- 30,000 --
and Secretary
</TABLE>
(1) Other compensation paid to Mr. Castle, Mr. Siewert and Mr. Slack in 1999
and 1998 consisted of automobile allowances.
(2) Represents less than one full year's compensation; pursuant to agreement
between the officer and the Company, such officer's employment began on
August 4, 1997.
STOCK OPTIONS
The following table reflects certain information regarding stock options
granted to the Named Executive Officers during 1999.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE APPRECIATION
UNDERLYING PERCENT OF TOTAL FOR OPTION TERM
OPTIONS OPTIONS GRANTED TO EXERCISE EXPIRATION -----------------------------
NAME GRANTED EMPLOYEES IN 1999 PRICE DATE 5%($) 10%($)
---- ------- ------------------ ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack H. Castle, Jr. 75,000 29.7% $2.3125 11/07/08 $109,074 $276,415
G. Daniel Siewert III 75,000 29.7% $2.3125 11/07/08 $109,074 $267,415
John M. Slack 50,000 19.8% $2.3125 11/07/08 $ 72,716 $184,276
</TABLE>
27
<PAGE>
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END 1999 OPTION VALUES
The following table reflects certain information concerning the number of
unexercised options held by the Named Executive Officers and the value of such
officers' unexercised options as of December 31, 1999. No options were exercised
by the Named Executive Officers during the year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS "IN THE MONEY" OPTIONS
SHARES AT DECEMBER 31, 1999 (#) AT DECEMBER 31, 1999(1)
ACQUIRED ON --------------------------- ----------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack H. Castle, Jr. - - 58,750 191,250 - $51,563
G. Daniel Siewert III - - 68,750 191,250 - $51,563
John M. Slack - - 36,500 113,500 - $34,375
</TABLE>
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price of
the options granted to the Named Executive Officers ranges from $2.3125 to
$10.00 per share. The value of unexercised options for each of the Named
Executive Officers represents the difference between the exercise price of such
options and the closing price of the Company's Common Stock on December 31, 1999
($3.00 per share). None of the "in-the-money" options granted to the Named
Executive Officers were exercisable at December 31, 1999.
28
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 2000 with respect
to beneficial ownership of the Company's Common Stock by (i) each director, (ii)
each executive officer, (iii) the executive officers and directors as a group,
and (iv) each person known to the Company who beneficially owns 5% or more of
the outstanding shares of its voting securities. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF SHARES
NAME AND ADDRESS OF BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED
---------------- ----- -----
<S> <C> <C> <C>
Jack H. Castle, Jr. (1)(2)......................... 1,386,75 22.4%
Jack H. Castle, D.D.S. (2)(3)...................... 974,000 15.2%
Loretta Castle (2)(3).............................. 974,000 15.2%
Castle Interests, Ltd. (2)
1360 Post Oak Boulevard,
Suite 1300, Houston, Texas 77056................... 514,000 8.0%
Pecks Management Partners, Ltd. (4)
One Rockefeller Plaza, Suite 900
New York, New York 10020........................... 913,243 14.2
Robert J. Cresci (5)............................... 923,243 14.4
The Capital Group Companies, Inc.
333 South Hope Street
Los Angeles, California 90071..................... 625,000 9.7
Benson Associates, LLC
111 S.W. Fifth Avenue, Suite 2130
Portland, Oregon 97204............................. 542,900 8.5
G. Kent Kahle (6).................................. 75,329 1.2
G. Daniel Siewert III (7).......................... 110,600 1.7
John M. Slack (8).................................. 51,000 *
Elizabeth A. Tilney (9)............................ 13,000 *
Emmett E. Moore (9)................................ 10,000 *
All directors and executive officers as a group (8
persons) (10).................................... 3,029,922 45.4%
</TABLE>
* Less than 1%
(1) Includes 714,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H.
Castle, Jr., of which Mr. Castle is Trustee. Includes options to acquire
58,750 shares of Common Stock issued under the Castle Dental Centers, Inc.
Omnibus Stock and Incentive Plan (the "Plan") which are exercisable within
60 days. Excludes options to acquire 191,250 shares of Common Stock which
are not exercisable within 60 days.
(2) Includes 514,000 shares of Common Stock owned of record by Castle Interest,
Ltd., a Texas limited partnership of which Jack H. Castle, D.D.S., Loretta
Castle and Jack H. Castle, Jr. are the three general partners. The general
partners of Castle Interests, Ltd. cannot act to vote or dispose of shares
of Common Stock held by Castle Interests, Ltd. without the unanimous vote
of all of the general partners. Loretta Castle is the wife of Jack H.
Castle, D.D.S. and the mother of Jack H. Castle, Jr.
29
<PAGE>
(3) Includes 103,000 shares of Common Stock owned jointly by Jack H. Castle,
D.D.S. and Loretta Castle.
(4) Includes 615,033, 121,708, and 176,502 shares of Common Stock owned of
record by Delaware State Employees' Retirement Fund, Declaration of Trust
for Defined Benefit Plans of ICI American Holdings Inc. and Declaration of
Trust for Defined Benefit Plans of Zeneca Holdings Inc., respectively (the
"Pecks Investors"). Pecks Management Partners Ltd. ("Pecks"), as investment
manager for the Pecks Investors, has sole investment and voting power with
respect to such shares. Mr. Cresci, a director of the Company, is a
Managing Director of Pecks. Pecks disclaims beneficial ownership of such
shares.
(5) Includes all shares deemed to be beneficially owned by Pecks, of which Mr.
Cresci is a Managing Director. As a result, Mr. Cresci may be deemed to
share voting and investment power with respect to such shares. Mr. Cresci
disclaims beneficial ownership of such shares. See note 4 above. Also
includes options to acquire 10,000 shares of Common Stock under the
Directors' Plan which are exercisable within 60 days. Excludes options to
acquire 15,000 shares of Common Stock which are not exercisable within 60
days.
(6) Includes 56,579 shares of Common Stock issuable on exercise of the GulfStar
Warrant and options to acquire 12,500 shares of Common Stock under the
Directors' Plan which are exercisable within 60 days. Mr. Kahle is a
Managing Director of The GulfStar Group, Inc., an affiliate of GulfStar
Investments, Ltd., the holder of the GulfStar Warrant. Excludes options to
acquire 22,500 shares of Common Stock which are not exercisable within 60
days.
(7) Includes options to acquire 68,750 shares of Common Stock issued under the
Plan which are exercisable within 60 days. Excludes options to acquire
191,250 shares of Common Stock which are not exercisable within 60 days.
(8) Includes options to acquire 36,500 shares of Common Stock issued under the
Plan which are exercisable within 60 days. Excludes options to acquire
113,500 shares of Common Stock which are not exercisable within 60 days.
(9) Includes options to acquire 10,000 shares of Common Stock issued under the
Plan which are exercisable within 60 days. Excludes options to acquire
15,000 shares of Common Stock which are not exercisable within 60 days.
(10) Includes (i) 714,000 shares of Common Stock held by the Castle 1995 Gift
Trust f/b/o Jack H. Castle, Jr., (ii) 514,000 shares of Common Stock held
by Castle Interests, Ltd., (iii) 913,243 shares of Common Stock
beneficially owned by the Pecks Investors, and (iv) 56,579 shares of Common
Stock issuable to GulfStar Investments, Ltd. on exercise of the GulfStar
Warrant.
30
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, Inc. and issued a warrant to purchase 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 connection with certain acquisitions. The GulfStar Group, Inc.
received approximately $198,000 in investment banking and financial advisory
fees from the Company in 1996. In 1998, The GulfStar Group, Inc. received a
$183,332 advisory fee in connection with the acquisition of Dental Consulting
Services, LLC. The directors of the Company other than Mr. Kahle approve the
payments made to The GulfStar Group, Inc. by the Company.
At December 31,1999, Jack H. Castle, Jr., the Company's Chief Executive
Officer, G. Daniel Siewert, the Company's President and Chief Operating Officer,
and John M. Slack, Vice-President and Chief Financial Officer, had outstanding
loans in the aggregate amount of $307,000 from the Company. These loans are
repayable over varying periods ranging from one to five years and bear interest
at rates ranging from zero to six percent.
Mr. Cresci, a director of the Company, is a Managing Director of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
owns 948,243 shares of Common Stock. Pursuant to the provisions of the
Stockholders Agreement (as defined below), for so long as certain ownership
thresholds with respect to the Common Stock are maintained, the Signatory
Stockholders (as defined below) are obligated to vote their shares of Common
Stock in favor of the designee of the Pecks Investors to be a member of the
Company's board of directors and Mr. Cresci is currently such nominee.
In December 1995, the Company acquired all of the stock of Jack H. Castle,
D.D.S., Inc., a professional corporation of which Jack H. Castle, D.D.S., a
director of the Company, was the sole owner. In connection with that
transaction, the Company paid Jack H. Castle, D.D.S. $6.0 million in cash and
entered into a Deferred Compensation Agreement with Jack H. Castle, D.D.S.
pursuant to which the Company has agreed to pay Jack H. Castle, D.D.S. $2.6
million in 20 quarterly installments of $131,500 beginning March 1996 and ending
in December 2000.
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 Jack H. Castle, D.D.S.
is the sole owner. Pursuant to the management services agreement, Jack H.
Castle, D.D.S., P.C. receives an annual payment of $100,000 for services
performed in connection therewith. The professional corporation employs or
contracts with all of the dental professionals practicing at the Company's
dental offices in Texas under the Management Agreement. The Company provides the
professional corporation with, among other things, equipment, supplies, support
services, non-dental personnel, office space, management, administration,
financial record keeping and reporting services. The Management Agreement is for
a term of 25 years, with automatic renewal thereafter.
The Company receives a management fee under the Management Agreement with
Jack H. Castle, D.D.S., P.C. equal to the Company's costs plus a base management
fee and a performance fee. The base management fee is equal to 12.5% of adjusted
gross revenues and the performance fee is equal to the professional
corporation's net income after payment of all other fees and expenses. The
Company's costs include all direct and indirect costs, overhead and expenses
relating to the Company's provision of services to the professional corporation
under the Management Agreement.
In addition to the Management Agreement with Jack H. Castle, D.D.S., P.C.,
the Company has a contractual right to designate or approve the licensed dentist
or dentists who own the professional corporation's capital stock in the event
Jack H. Castle, D.D.S. ceases to be affiliated with the Company for any reason.
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
31
<PAGE>
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 certain members of
Jack H. Castle, Jr.'s family have been granted certain registration rights by
the Company with respect to the shares of Common Stock owned by them or acquired
upon exercise of the warrant issued to GulfStar Investments, Ltd.
32
<PAGE>
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
Consolidated Balance Sheets as of December 31, 1998 and 1999... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1998 and 1999...................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1998 and 1999........ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999............................ 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
33
<PAGE>
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 May 19, 2000.
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, 1999, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------- ----
<S> <C> <C>
/s/ JACK H. CASTLE, JR. Chairman of the Board, Chief May 19, 2000
--------------------------------- Executive Officer (Principal
JACK H. CASTLE, JR. Executive Officer)
/s/ G. DANIEL SIEWERT President, Chief Operating Officer May 19, 2000
---------------------------------
G. DANIEL SIEWERT
/s/ JOHN M. SLACK Vice President -- Chief Financial May 19, 2000
---------------------------------
JOHN M. SLACK Officer (Principal Financial and May 19, 2000
Accounting Officer)
/s/ JACK H. CASTLE, D.D.S. Director May 19, 2000
---------------------------------
JACK H. CASTLE, D.D.S.
/s/ G. KENT KAHLE Director May 19, 2000
---------------------------------
G. KENT KAHLE
/s/ ROBERT J. CRESCI Director May 19, 2000
---------------------------------
ROBERT J. CRESCI
/s/ ELIZABETH A. TILNEY Director May 19, 2000
---------------------------------
ELIZABETH A. TILNEY
/s/ EMMETT E. MOORE Director May 19, 2000
---------------------------------
EMMETT E. MOORE
</TABLE>
34
<PAGE>
CASTLE DENTAL CENTERS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants......................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999...........F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.....................................F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1997, 1998 and 1999.......F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.....................................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.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Castle Dental Centers, Inc. at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
April 26, 2000,
except for the second paragraph of Note 4,
as to which the date is May 19, 2000.
Houston, Texas
F-2
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 695 $ 59
Patient receivables, net of allowance for uncollectible accounts of
$8,508 and $13,588 in 1998 and 1999, respectively ........................ 10,700 16,928
Unbilled patient receivables, net of allowance for uncollectible accounts of
$658 and $904 in 1998 and 1999, respectively ............................. 3,251 4,667
Prepaid expenses and other current assets .................................. 2,887 4,199
Deferred income taxes ...................................................... 1,809 2,488
--------- ---------
Total current assets ........................................... 19,342 28,341
--------- ---------
Property and equipment, net ................................................ 13,861 20,361
Intangibles, net ........................................................... 65,956 64,020
Other assets ............................................................... 876 2,260
--------- ---------
Total assets ................................................... $ 100,035 $ 114,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .......................................... $ 1,795 $ 2,192
Accounts payable and accrued liabilities ................................... 6,676 9,855
Deferred compensation payable, related party ............................... 526 526
--------- ---------
Total current liabilities ...................................... 8,997 12,573
--------- ---------
Long-term debt, net of current portion ....................................... 44,411 53,996
Other long-term liabilities, related party ................................... 526 --
Deferred income taxes ........................................................ 5,401 6,896
Minority interest ............................................................ 4,303 4,354
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 30,000,000 shares authorized,
6,417,206 shares issued and outstanding in 1998 and 1999 ................... 6 6
Additional paid-in capital ................................................. 42,516 42,086
Accumulated deficit ........................................................ (6,125) (4,929)
--------- ---------
Total stockholders' equity ..................................... 36,397 37,163
--------- ---------
Total liabilities and stockholders' equity ..................... $ 100,035 $ 114,982
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net patient revenues .......................... $ 46,225 $ 74,823 $102,701
Expenses:
Dentist salaries and other professional costs 11,325 18,516 26,984
Clinical salaries ........................... 10,248 16,612 21,408
Dental supplies and laboratory fees ......... 4,335 7,197 9,641
Rental and lease expense .................... 2,590 4,091 6,203
Advertising and marketing ................... 2,033 2,763 3,650
Depreciation and amortization ............... 2,132 3,615 5,941
Other operating expenses .................... 4,314 6,976 10,314
General and administrative .................. 5,929 8,145 10,909
-------- -------- --------
Total expenses .......................... 42,906 67,915 95,050
-------- -------- --------
Operating income .............................. 3,319 6,908 7,651
Litigation settlement ......................... -- -- 1,366
Interest expense .............................. 2,792 1,889 4,220
Other (income) expense ........................ (84) (57) 34
-------- -------- --------
Income before income taxes
and extraordinary loss ...................... 611 5,076 2,031
Provision for income taxes .................... 200 1,490 835
-------- -------- --------
Income before extraordinary loss .............. 411 3,586 1,196
Extraordinary loss ............................ (3,195) -- --
-------- -------- --------
Net income (loss) ............................. (2,784) 3,586 1,196
Preferred stock dividends ..................... (1,930) -- --
-------- -------- --------
Net income (loss) attributable to common stock $ (4,714) $ 3,586 $ 1,196
======== ======== ========
Income (loss) per common share:
Basic and diluted:
Income before extraordinary loss .......... $ 0.10 $ 0.54 $ 0.18
Extraordinary loss ........................ (0.78) -- --
-------- -------- --------
Net income (loss) ....................... $ (0.68) $ 0.54 $ 0.18
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic ....................................... 4,100 6,586 6,825
======== ======== ========
Diluted ..................................... 4,132 6,608 6,850
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED 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> <C> <C>
Balance, January 1, 1997 ............... 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
Issuance of common stock 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
Issuance of common stock in
connection with acquisitions .... 187,967 -- 1,698 -- 1,698
Net income ......................... -- -- -- 3,586 3,586
--------- --------- --------- --------- ---------
Balance, December 31, 1998 ............. 6,417,206 6 42,516 (6,125) 36,397
Exchange of consideration for
acquisition ...................... -- -- (430) -- (430)
Net income ......................... -- -- -- 1,196 1,196
--------- --------- --------- --------- ---------
Balance, December 31, 1999 ............. 6,417,206 $ 6 $ 42,086 $ (4,929) $ 37,163
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ (2,784) $ 3,586 $ 1,196
Adjustments:
Provisions for bad debts ..................................... 1,897 2,545 4,160
Depreciation and amortization ................................ 2,132 3,615 5,960
Amortization of debt discount ................................ 712 -- --
Minority interest ............................................ -- -- 51
Deferred income taxes ........................................ 100 1,568 816
Extraordinary loss ........................................... 3,195 -- --
Changes in operating assets and liabilities:
Patient receivables ........................................ (3,654) (5,864) (10,142)
Unbilled patient receivables ............................... (1,046) (615) (1,662)
Prepaid expenses and other current assets .................. (651) (1,957) (1,312)
Other assets ............................................... (18) (45) (1,372)
Accounts payable and accrued liabilities ................... 272 (278) 1,931
Deferred compensation payments to related party ............ (657) (657) (526)
-------- -------- --------
Net cash provided by (used in) operating activities .... (502) 1,898 (900)
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures ........................................... (1,515) (6,660) (9,503)
Acquisition of affiliated dental practices, net of cash acquired (5,015) (30,818) (667)
Non-competition agreements ..................................... -- -- (205)
-------- -------- --------
Net cash used in investing activities .................. (6,530) (37,478) (10,375)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ......................... 33,659 -- --
Proceeds from debt ............................................. 2,074 37,000 11,460
Repayment of debt .............................................. (24,376) (3,341) (1,478)
Bank overdraft ................................................. -- -- 818
Offering costs ................................................. (1,263) -- --
Debt and preferred stock issuance costs ........................ (273) (292) (161)
-------- -------- --------
Net cash provided by financing activities .............. 9,821 33,367 10,639
-------- -------- --------
Net change in cash and cash equivalents .......................... 2,789 (2,213) (636)
Cash and cash equivalents, beginning of period ................... 119 2,908 695
-------- -------- --------
Cash and cash equivalents, end of period ......................... $ 2,908 $ 695 $ 59
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
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, California and
Tennessee ("affiliated dental practices") under long-term management services
agreements.
The consolidated financial statements include the accounts of the Company
and all wholly-owned and beneficially-owned subsidiaries and the accounts of
affiliated dental practices in which the Company has a long-term controlling
financial interest. Because of corporate practice of medicine laws in the states
in which the Company operates, the Company does not own dental practices but
instead enters into exclusive long-term management services agreements
("Management Services Agreements") with professional corporations that operate
the dental practices. In addition, the Company has the contractual right to
designate, in its sole discretion and at any time, the licensed dentist who is
the majority shareholder of the capital stock of the professional corporation at
a nominal cost ("nominee arrangements"). At December 31, 1999, all of the
affiliated dental practices were wholly-owned by dentists with whom the Company
had a nominee arrangement. Under the Management Services Agreements, the Company
establishes annual operating and capital budgets for the professional
corporations and compensation guidelines for the licensed dental professionals.
The Management Services Agreements have initial terms of twenty-five to forty
years. 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 management fee earned by the Company, except professional
corporations located in California, is generally comprised of three components:
(i) the costs incurred by it on behalf of the affiliated dental practice; (ii) a
base management fee ranging from 12.5% to 20.0% of patient 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 the agreements.
In California, the Company is paid a monthly management fee comprised of two
components: (i) the costs incurred by it on behalf of the affiliated practice
and (ii) a management fee in an amount ranging from 15.0% to 30.0% of net
patient revenues. With respect to certain professional corporations in
California, the Company is paid a bonus equal to 30% of patient revenues in
excess average monthly patient revenues over the prior two-year period. The
amount of the management fee is reviewed by the Company and the affiliated
dental practice at least annually in order to determine whether such fee should
be adjusted to continue to reflect the fair value of the management services
rendered by the Company.
Through the management services agreements and the nominee arrangements, the
Company has a significant long-term controlling financial interest in the
affiliated dental practices and, therefore, according to Emerging Issues Task
Force Issue No. 97-2, "Application of FASB Statement No. 94, CONSOLIDATION OF
ALL MAJORITY-OWNED SUBSIDIARIES, and APB No. 16, BUSINESS COMBINATIONS, to
Physician Practice Management Entities and Certain Other Entities with
Contractual Management Agreements," must consolidate the results of the
affiliated practices with those of the Company. Net patient revenues are
presented in the accompanying statement of operations because the Company must
present consolidated financial statements. All significant intercompany accounts
and transactions, including management fees, have been eliminated in
consolidation.
REVENUE RECOGNITION
Net patient revenues represent the estimated realizable amounts to be
received from patients, third-party payors and others for services rendered by
affiliated dentists. They are reported at established rates reduced by
contracted amounts based on agreements with patients, third party payers and
others obligated to pay for service rendered. 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
F-7
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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.
Net patient revenues include amounts received from capitated managed care
contracts that the Company negotiates on behalf of its affiliated dental
practices. Under capitated contracts the affiliated dental practice receives a
predetermined amount per patient per month in exchange for providing certain
necessary covered services to members of the plan. Usually, the capitated plans
also provide for supplemental payments and/or co-payments by members for certain
higher cost procedures. These contracts typically result in lower average fees
for services than the usual and customary fees charges by the Company's
affiliated dental practices and may, in certain instances, expose the Company to
losses on contracts where the total revenues received are less than the costs of
providing such dental care. The Company generally bears the risk of such loss
because it consolidates the financial results of its affiliated dental
practices. However, most of these contracts are cancelable by either party on 30
to 90 days written notice thereby reducing the risk of long-term adverse impact
on the Company. Fees from capitated contracts totaled $5.1 million and $7.4
million in 1998 and 1999, respectively, excluding supplemental payments and
co-payments by members. No single contract amounted to a significant portion of
the Company's revenues, as each of the Company's regional operations contracts
separately with managed care providers. The Company periodically evaluates its
capitated managed care contracts by comparing the average reimbursement per
procedure plus the total capitation fees per contract to the usual and customary
fees charged by the affiliated dental practice.
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 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Interest is capitalized on the
construction of new centers. Depreciation is provided using the straight-line
method over the estimated useful lives of the various classes of depreciable
assets. Fully depreciated assets are retained in property and equipment until
they are removed from service. Maintenance and repairs are charged to expense
whereas renewals and major replacements are capitalized. Gains and losses from
dispositions are included in operations.
Useful lives for property and equipment are as follows:
Equipment .......................... 3 - 7 years
Leasehold improvements ............. 5 - 10 years
Furniture and fixtures ............. 5 - 7 years
Vehicles ........................... 3 - 5 years
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
F-8
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
management services agreements acquired through December 31, 1999 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 primarily 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. Other
receivables include $339,000 and $238,000 at December 31, 1998 and 1999,
respectively, in loans made to executive officers (see Note 12).
INCOME TAXES
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.
ADVERTISING
Costs incurred for advertising are expensed when incurred.
PRE-OPENING COSTS
Facility costs incurred prior to opening a dental center are capitalized and
amortized over the life of the lease. All other costs, primarily salaries, 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-9
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SELECTED BALANCE SHEET INFORMATION:
The details of certain balance sheet accounts were as follows:
DECEMBER 31,
----------------------
1998 1999
------- -------
(in thousands)
Property and equipment:
Equipment .................................... $ 9,334 $13,644
Leasehold improvements ....................... 6,529 9,265
Furniture and fixtures ....................... 1,553 2,009
Vehicles ..................................... 130 132
Construction-in-progress ..................... 1,213 3,213
------- -------
Total property and equipment ......... 18,759 28,263
Less accumulated depreciation ................ 4,898 7,902
------- -------
Property and equipment, net .......... $13,861 $20,361
======= =======
Depreciation expense was approximately $1.2 million, $1.8 million and $3.0
million for the years ended December 31, 1997, 1998 and 1999, respectively.
Capitalized interest cost was $329,000 for the year ended December 31, 1999.
There were no amounts capitalized during 1997 and 1998. Fully depreciated assets
in use as of December 31, 1998 and 1999 were approximately $1.2 million and $1.3
million, respectively.
DECEMBER 31,
-----------------------
1998 1999
------- -------
(in thousands)
Intangible assets:
Management services agreements ............. $68,584 $69,251
Other ...................................... 150 355
------- -------
Total intangilbe assets ................ 68,734 69,606
Less accumulated amortization .................. 2,778 5,586
------- -------
Intangible assets, net ................. $65,956 $64,020
======= =======
Amortization expense was approximately $900,000, $1.8 million and $2.8
million for the years ended December 31, 1997, 1998 and 1999, respectively.
DECEMBER 31,
-----------------
1998 1999
------ ------
(in thousands)
Accounts payable and accrued liabilities:
Bank overdraft ......................................... $ -- $ 818
Trade .................................................. 3,083 3,792
Salaries, wages and payroll taxes ...................... 1,959 2,021
Due to patients ........................................ 1,420 1,772
Legal .................................................. -- 991
Other .................................................. 214 461
------ ------
Total accounts payable and accrued liabilities . $6,676 $9,855
====== ======
F-10
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. ACQUISITIONS:
In March 1998, the Company acquired all the outstanding capital stock of
Dental World, Inc., a dental practice management company, and the assets of
Dental Delivery Services, P.C., a dental professional corporation, both located
in Houston, Texas. The purchase price of $2.5 million, including related
acquisition expenses, consisted of $2.2 million in cash and 23,342 shares of
Company common stock.
In March 1998, the Company acquired an 80.0% interest in Castle Dental
Centers of California L.L.C. ("Castle West"), a company formed to acquire the
assets of Dental Consulting Services LLC ("DCS"), a dental practice management
company with headquarters in Los Angeles, California. The purchase price of
$18.1 million included cash of $10.8 million, $2.7 million in 8% subordinated
seller notes payable and an option granted to the sellers to convert a portion
of their ownership interests into 407,454 shares of Company common stock (the
"conversion right"). The conversion right may be exercised beginning twelve
months after the closing date. This convertible ownership interest has been
recorded at fair market value. The difference between the estimated fair value
of the convertible ownership interest at the acquisition date and the Company's
common stock into which it may be converted is being amortized over the period
to the earliest conversion date. In connection with these acquisitions, the
Company entered into management and consulting 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. In addition,
the former owners of DCS have the right to put all or a portion of their 20%
minority ownership in Castle West to the Company, beginning twenty-four months
after the closing date, for a combination of cash and common stock. In January
2000, the Company and the former owners of DCS entered into a settlement
agreement under which the Company acquired the 20% minority interest and the
conversion right. The total consideration paid by the Company was $5.3 million
of which $300,000 was paid in November 1999 as a deposit. The amount paid by the
Company will be accounted for as additional consideration at the date of the
settlement.
In July 1998, the Company acquired all the outstanding capital stock of
Dentcor, Inc, a dental practice management company, located in Florida. The
purchase price of $1.0 million, including related acquisition expenses,
consisted of $800,000 in cash and 20,566 shares of Company common.
In July 1998, the Company acquired the assets of Jared Woolf, D.D.S. &
Associates of Palmetto, P.A., Jared Woolf, D.D.S. & Associates of Venice, P.A.
and Woolf Dentistry, P.A. ("Woolf Dentistry"), all dental professional
associates, located in Sarasota, Florida. The purchase price of $2.6 million,
including related acquisition expenses, consisted of $2.1 million in cash,
$370,000 in 9% Subordinated Promissory Notes due July 9, 2001 and 15,424 shares
of Company common stock.
In December 1998, the Company acquired the assets of DCA Limited
Partnership, L.L.P. ("DCA") and Dental Administrators of Texas Limited
Partnership, L.L.P. ("DAI") and 16 related dental practices, located in San
Antonio, Texas. The purchase price of $15.8 million, including related
acquisition expenses, consisted of $13.2 million in cash, $1.3 million in 6%
Subordinated Promissory Notes due December 30, 2001 and 125,000 shares of
Company common stock. In addition, the Company entered into non-competition
agreements with the shareholders' of DCA and DAI and paid $130,000 in connection
therewith in January 1999. As provided for in the Asset Purchase Agreement,
$430,000 was payable in December 1999 in connection with a guaranteed amount of
the 125,000 shares of Company common stock issued upon the close of the
acquisition. In January 2000, the Company paid the $430,000, which was accrued
at December 31, 1999 and recorded as a reduction of additional paid-in capital.
In addition, during 1998, the Company acquired the assets and stock of four
additional dental practices. Three of the dental practices were located in
California and one was located in Texas. The aggregate purchase price of $1.7
million, including related acquisition expenses, consisted of $1.4 million in
cash, $229,000 in 8% and 8.5% Subordinated Promissory Notes due June 30, 2000
and October 1, 2001, respectively, and 3,635 shares of Company common stock.
The purchase price allocations were originally calculated on a preliminary
basis, subject to adjustment should new or additional facts about the business
become known. During 1999, the purchase price allocations were adjusted by
approximately $667,000 to reflect additional information that became available
throughout
F-11
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
the year.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1998 1999
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Patient receivables, net ................................................ $ 236 $ 1,470 $ --
Unbilled patient receivables, net ....................................... 37 188 --
Prepaid expenses and other current assets ............................... 31 92 --
Property and equipment, net ............................................. 554 3,866 --
Other assets ............................................................ 3 93 --
Management services agreements .......................................... 9,934 42,072 667
Accounts payable and accrued liabilities ................................ (452) (2,019) --
Deferred taxes .......................................................... -- (3,149) --
Long-term debt, assumed ................................................. (138) (1,254) --
Minority interest ....................................................... -- (4,305) --
-------- -------- --------
10,205 37,054 667
Less: fair value of common stock issued and other equity instruments .... 3,241 1,698 --
Less: issuance of notes payable ......................................... 1,449 4,538 --
Less: escrow deposit .................................................... 500 -- --
-------- -------- --------
Cash purchase price, net of cash acquired ........................... $ 5,015 $ 30,818 $ 667
======== ======== ========
</TABLE>
Unaudited pro forma combined results of operations, assuming all of the
acquisitions occurred at the beginning of the year, are as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
-------- --------
Net patient revenues .................... $ 63,414 $ 93,473
Net income (loss) ....................... (1,933) 3,918
Income (loss) per common share:
Basic ................................... (0.42) 0.58
Diluted ................................. (0.41) 0.57
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.
F-12
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consisted of the following:
DECEMBER 31,
-------------------------
1998 1999
------- -------
(in thousands)
Revolving credit loans ..................... $39,400 $50,860
Subordinated Seller Notes .................. 5,442 4,393
Other notes payable ........................ 1,364 935
------- -------
Total debt ............................. 46,206 56,188
Less current portion ....................... 1,795 2,192
------- -------
Long-term debt ......................... $44,411 $53,996
======= =======
In December 1998, the Company entered into a credit agreement with a bank
group (the "Credit Agreement") that provides for borrowings up to $55.0 million
and matures in November 2002. Advances under the Credit Agreement require
quarterly interest payments through March 2001 at which time principal becomes
payable quarterly based on a five-year amortization with final payment at
maturity. Borrowings under the Credit Agreement may at no time exceed a
specified borrowing base, which is calculated as a multiple of the Company's
earnings before interest, income 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 Credit Agreement. 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 contains affirmative
and negative covenants that require the 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, 1999, $50.9
million was outstanding under the Credit Agreement and the average interest rate
on the Company's bank borrowings was 9.8%.
In January 2000, the Company amended the Credit Agreement and entered into a
senior subordinated note agreement (Subordinated Note Agreement) and a
subordinated convertible note agreement (Convertible Note Agreement) with two
lenders (Note 15). In March 2000, the Company advised its lenders under the bank
credit facility that it was in violation of certain financial covenants of the
Credit Agreement. Accordingly, in May 2000, the Company amended the credit
facility to cure the covenant violations and to provide additional borrowing
availability. In addition, under the May 2000 amended Credit Agreement, capital
expenditures for 2000 are limited to no more than $3.5 million, acquisitions are
not permitted in 2000, and the payment of any litigation settlement is
restricted to no more than $100,000, without consent of the lenders. At
September 30, 1999, the Company received waivers concerning violations of
certain financial covenants under the Credit Agreement. At May 10, 2000,
borrowings under the Credit Agreement were $43.5 million and the average
interest rate had increased to 11.2%.
In 1997, the Company retired approximately $23.9 million of long-term debt
with proceeds of an 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, 1999, approximately $484,000 (net of accumulated
amortization of approximately $238,000) of debt issuance costs had been
capitalized in connection with the issuance of the Credit Agreement.
F-13
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company has issued various subordinated seller notes payable in
connection with certain acquisitions ("Subordinated Seller Notes"). These notes
bear interest at varying rates ranging from 6.0% to 9.0%, require quarterly
payments of interest and principal, and mature at varying dates ranging from
June 2000 through June 2002.
The aggregate maturities of long-term debt for each of the next five years
subsequent to December 31, 1999 were as follows (in thousands):
2000..................................... $ 2,192
2001..................................... 13,081
2002..................................... 40,915
-------
$56,188
5. 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,
1999 (in thousands):
2000..................................... $ 5,163
2001..................................... 4,526
2002..................................... 3,755
2003..................................... 3,110
2004..................................... 2,251
Thereafter............................... 3,884
-------
Total minimum lease obligation........... $22,689
=======
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
In August 1998, the former owner of certain dental practices acquired by the
Company in August 1996, filed a lawsuit against the Company in the 190th
District Court of Harris County, Texas. The lawsuit alleged that the Company
committed various acts of fraud, securities fraud, conspiracy, breach of
contract and misrepresentation concerning the value of the Company's common
stock issued in the acquisition of the dental practices. In August 1999, the
Company settled the lawsuit for $1.4 million.
In December 1998, a dentist with whom the Company had entered into an
agreement to acquire his dental practice filed a demand for arbitration alleging
that the Company is liable for damages resulting from the failure to complete
the transaction. The transaction was not completed because at least one of the
conditions required for closing was not met. The dentist is claiming damages
equal to the difference between the purchase price provided for in the agreement
of $8.1 million and the fair market value of the practice. The Company believes
that the asserted claims are without merit and that it is not liable for damages
resulting from these allegations.
The Company carries insurance with coverage 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.
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-14
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities)
were as follows:
DECEMBER 31,
------------------------
1998 1999
------- -------
(in thousands)
Deferred tax assets:
Net operating loss carryforward ......... $ 756 $ 543
Deferred compensation .................... 400 200
Allowance for bad debts .................. 1,232 2,018
Other .................................... 24 114
------- -------
Total deferred assets .............. 2,412 2,875
------- -------
Deferred tax liabilities:
Unbilled receivables ..................... (1,236) (1,778)
Loss of Subchapter S status .............. (211) (4)
Management services agreement ............ (4,047) (4,428)
Property and equipment ................... (400) (1,057)
Other .................................... (110) (16)
------- -------
(6,004) (7,283)
------- -------
Net deferred tax liabilities ................. (3,592) (4,408)
Less current portion ......................... 1,809 2,488
------- -------
Non-current liabilities .................. $(5,401) $(6,896)
======= =======
Significant components of the provision for income taxes on continuing
operations were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
------- ------- -------
(in thousands)
Current tax provision (benefit):
Federal ......................... $ - $ (70) $ 17
State ........................... 100 (8) 2
------- ------- -------
Total current .............. 100 (78) 19
------- ------- -------
Deferred tax provision (benefit):
Federal ......................... 90 1,403 730
State ........................... 10 165 86
------- ------- -------
Total deferred ............. 100 1,568 816
------- ------- -------
Provision (benefit) for income taxes ...... $ 200 $ 1,490 $ 835
======= ======= =======
F-15
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The differences between the statutory federal tax rate and the Company's
effective tax rate on continuing operations were as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------- ------- -------
(in thousands)
Tax at U.S. statutory rate (34%) ........ $ 208 $ 1,726 $ 691
State income taxes, net of federal tax .. 24 203 81
Nondeductible expenses and other ........ (32) 26 63
Change in estimate of net operating
loss carryforward .................... -- (465) --
------- ------- -------
$ 200 $ 1,490 $ 835
======= ======= =======
At December 31, 1999, the Company had net operating loss carryforwards
available to reduce future taxable income of approximately $2.5 million,
expiring in 2016. 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.
7. 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
recognizes stock-based compensation issued to employees at the intrinsic value
between the exercise price of options granted and the fair value of stock for
which the options may be exercised. However, pro forma disclosures as if the
Company recognized stock-based compensation at the fair-value of the options
themselves are presented below.
Under the Employees' Plan, the Company is authorized to issue 1,050,000
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 930,100 and 100,000 options granted under the Employees' Plan and
the Directors' Plan, respectively, at December 31, 1999. The Compensation
Committee administers the Plans. 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 varying rates over a four or five-year
period, beginning on the first anniversary of the date of grant.
F-16
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Following is a summary of the status of the Company's stock options as of
December 31, 1999 and the changes during the three-year period then ended:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
---------- ---------
Outstanding at January 1, 1997 ........... 91,750 $10.00
Granted .................................. 562,500 10.67
Excercised ............................... -- --
Forfeited ................................ (20,000) 10.00
Expired .................................. -- --
---------- ------
Outstanding at December 31, 1997 ......... 634,250 $10.59
========== ======
Excercisable at December 31, 1997 ........ 14,350 $10.00
========== ======
Granted .................................. 281,750 $ 5.31
Excercised ............................... -- --
Forfeited ................................ (72,600) 11.03
Expired .................................. -- --
---------- ------
Outstanding at December 31, 1998 ......... 843,400 $ 8.79
========== ======
Excercisable at December 31, 1998 ........ 126,680 $10.47
========== ======
Granted .................................. 252,650 $ 2.57
Excercised ............................... -- --
Forfeited ................................ (52,223) 6.23
Expired .................................. (13,727) 8.93
---------- ------
Outstanding at December 31, 1999 ......... 1,030,100 $ 7.27
========== ======
Excercisable at December 31, 1999 ........ 287,682 $ 9.34
========== ======
Weighted-average fair value of options granted during the year:
1997 ..................................... $ 5.06
1998 ..................................... 2.85
1999 ..................................... 1.58
The fair value of each stock option granted by the Company is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions: dividend yield of 0% for each year;
expected volatility of 45.0% for 1997, 56.9% for 1998, and 67.9% for 1999;
risk-free interest rates are 5.9% for 1997, 4.7% for 1998 and 6.1% for 1999; and
the expected lives of the options average five years.
F-17
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
OUTSTANDING CONTRACT EXERCISE AT EXERCISE
RANGE OF EXERCISE PRICE AT 12/31/99 LIFE PRICE 12/31/99 PRICE
- ----------------------- ----------- --------- -------- ----------- ---------
$2.00 to $8.00 ........ 499,650 9.25 $ 3.77 61,752 $ 5.00
$8.00 to $13.00 ....... 530,450 7.65 $10.57 225,930 $10.53
--------- -----------
1,030,100 8.43 $ 7.27 287,682 $ 9.34
========= ===========
Had the compensation cost for the Company's stock-based compensation plans
been determined using the fair value rather than the intrinsic value of the
options, the net loss and basic and diluted net loss per common share for 1997
would approximate $2.9 million or $0.71 per share; the Company's net income and
diluted net income per share for 1998 would approximate $3.5 million, or $0.54
per share; the Company's net income and diluted net income per share for 1999
would approximate $796,000, or $0.12 per share.
The effects of applying fair value accounting in this pro forma disclosure
are not indicative of future amounts.
8. EARNINGS PER SHARE:
A reconciliation of the numerators and denominators of the basic and diluted
per-share computations for net income follows:
DECEMBER 31,
----------------------------------
1997 1998 1999
------- ------- -------
(in thousands)
Net income (loss) attributable to
common stock (1) .................... $(4,714) $ 3,586 $ 1,196
Preferred stock accretion .............. 1,930 -- --
------- ------- -------
Net income (loss) ...................... (2,784) 3,586 1,196
Less extraordinary loss ................ 3,195 -- --
------- ------- -------
Income before extraordinary loss ....... $ 411 $ 3,586 $ 1,196
======= ======= =======
Shares (denominator)
Shares - basic (2) ................ 4,100 6,586 6,825
Options and warrants .............. 32 22 25
------- ------- -------
Shares - diluted .................. 4,132 6,608 6,850
======= ======= =======
(1) The effect of the preferred stock accretion 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.
(2) Includes the weighted average of 407,544 shares of common stock
issuable upon the exercise of the conversion right.
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.
Options to purchase an aggregate 616,000 shares of common stock at exercise
prices of $10.00 to $13.00 per share were
F-18
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
excluded from the calculation of diluted earnings per share for 1998 because
their effect would have been antidilutive. The options, which expire in 2007,
were still outstanding at December 31, 1998. Options to purchase an aggregate
604,000 shares of common stock at exercise prices of $6.00 to $13.00 per share
were excluded from the calculation of diluted earnings per share for 1999
because their effect would have been antidilutive. The options, 588,300 expiring
2007 and 15,700 expiring 2009, were still outstanding at December 31, 1999.
A warrant to purchase 56,579 shares of common stock at $11.00 per share was
excluded from the calculation of diluted earnings per share for 1997, 1998, and
1999 because its effect would have been antidilutive. The warrant, which expires
in December 2000, was still outstanding at December 31, 1999.
9. 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 are eligible to participate in the 401(k)
Plan upon the completion of three months of service. The Company may match
contributions made by participants under the Plan each year in an amount
determined by the Company on a year-to-year basis. The Company did not make any
contributions to the Plan in 1997, 1998, or 1999.
10. SUPPLEMENTAL CASH FLOW INFORMATION:
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
(in thousands)
Cash paid during the period for:
Interest ...................................... $1,707 $1,803 $3,997
Income taxes .................................. 44 222 595
Supplemental disclosure of noncash
investing and financing activities:
Acquisition stock guarantee payment accrual ... -- -- 430
Issuance of notes payable for accrued
interest and purchase of property
and equipment .............................. 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 -- --
Conversion of Series B Preferred Stock
to subordinated notes ...................... -- 1,550 --
11. 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 up to $100,000 by the Federal Deposit
Insurance Corporation. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in
F-19
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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 as of December 31, 1998 and 1999, respectively,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.
12. RELATED PARTY TRANSACTIONS:
The Company maintains a management services agreement with one of the
Company's affiliated dental practices in Texas pursuant to which the sole
shareholder of the affiliated dental practice, a member of the Board of
Directors of the Company, 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
1995, in connection with the Company's acquisition of the assets of the
shareholder's dental practice, the Company entered into a deferred compensation
agreement with the shareholder pursuant to which the Company agreed to pay the
shareholder $2.6 million in 20 quarterly installments of $131,500, beginning
March 1996. As of December 31, 1999, there was $526,000 payable to the
shareholder under the terms of the deferred compensation agreement.
At December 31, 1998 and 1999, three executive officers of the Company had
outstanding loans in the aggregate amount of $339,000 and $307,000 from the
Company. These loans are repayable over varying periods ranging from one to five
years and bear interest at rates ranging from zero to six percent.
A director of the Company is a Managing Director of The GulfStar Group, Inc.
("GulfStar"), which has provided investment banking and advisory services to the
Company. The Company paid $183,000 during 1998 in investment banking fees to
GulfStar. The Company made no payments to Gulfstar during 1997 and 1999.
A director of the Company is a Managing Director of Pecks Management
Partners Ltd., the investment advisor to investors in the Company owning an
aggregate of 913,243 shares of Company common stock. Pursuant to the provisions
of the Securities Purchase Agreement dated December 18, 1995, for so long as
certain ownership thresholds are maintained with respect to the common stock,
the investors have the contractual right to nominate one member of the Company's
Board of Directors.
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 $174,000 under this agreement
during 1997, 1998 and 1999.
F-20
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(in thousands, except per share data)
1998
Net patient revenues ...... $ 14,541 $ 19,679 $ 20,175 $ 20,427
Operating income .......... 1,076 1,713 1,973 2,146
Net income ................ 662 781 1,021 1,122
Basic and diluted
earnings per share (1) . $ 0.11 $ 0.12 $ 0.15 $ 0.17
1999
Net patient revenues ...... $ 25,167 $ 25,661 $ 26,092 $ 25,781
Operating income .......... 2,639 2,565 2,033 414
Net income (loss) ......... 1,003 107 507 (421)
Basic and diluted
earnings per share (1) . $ 0.15 $ 0.02 $ 0.07 $ (0.06)
(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
that occurred.
The Company has restated its previously issued financial statements on Form
10-Q for the third quarter of 1999. The restatement is attributable to an
increase in the Company's bad debt expense and allowance for doubtful accounts,
and capitalization of interest on construction of dental centers. The net impact
of these adjustments on the third quarter of 1999 is as follows:
PREVIOUSLY
REPORTED RESTATED
---------- ----------
(in thousands)
Net patient revenues ......................... $26,092 $26,092
Operating income ............................. 2,625 2,033
Net income ................................... 856 507
Basic and diluted earnings
per share ................................. $ 0.13 $ 0.07
F-21
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. OPERATING SEGMENTS:
Financial information is provided below for each of the Company's operating
regions. The Company measures the performance of its regional operations
primarily based on net patient revenues and operating income. There are no
inter-regional revenues. The Company's primary measure of profit by which it
formulates decisions and communicates to investors and analysts is net income
and earnings per share. Financial information internally reported for the
Company for the years ended December 31, 1997, 1998 and 1999 is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
Net patient revenues:
Texas ......................... $ 29,631 $ 47,464 $ 68,362
Florida ....................... 9,650 11,951 12,142
Tennessee ..................... 6,944 7,853 10,236
California .................... -- 7,555 11,961
--------- --------- ---------
Total revenue .................. 46,225 74,823 102,701
--------- --------- ---------
Operating expenses:
Texas ......................... $ 25,460 $ 39,865 $ 59,406
Florida ....................... 8,708 10,351 11,607
Tennessee ..................... 6,552 7,419 9,276
California .................... -- 6,289 10,387
Corporate, general and
administrative expenses ..... 2,186 3,991 4,374
--------- --------- ---------
Total operating expenses ....... 42,906 67,915 95,050
--------- --------- ---------
Operating income (loss):
Texas ......................... 4,171 7,599 8,956
Florida ....................... 942 1,600 535
Tennessee ..................... 392 434 960
California .................... -- 1,266 1,574
Corporate, general and
administrative expenses ..... (2,186) (3,991) (4,374)
--------- --------- ---------
Total operating income .... 3,319 6,908 7,651
Litigation settlement ................ -- -- 1,366
Interest expense ..................... 2,792 1,889 4,220
Other (income) expense ............... (84) (57) 34
--------- --------- ---------
Income (loss) before income
taxes and extraordinary loss ...... $ 611 $ 5,076 $ 2,031
========= ========= =========
Assets:
Texas ....................................... $ 37,953 $ 32,201
Florida ..................................... 12,203 11,928
Tennessee ................................... 6,276 9,320
California .................................. 20,259 22,302
-------- --------
Total assets for
reportable segments .................. 76,691 75,751
Other unallocated amounts ................... 23,344 39,231
-------- --------
Total assets ............................ $100,035 $114,982
======== ========
F-22
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
15. SUBSEQUENT EVENTS
In January 2000, the Company amended its Credit Agreement and entered into a
senior subordinated note agreement (Subordinated Note Agreement) and a
subordinated convertible note agreement (Convertible Note Agreement) with two
lenders. The Subordinated Note Agreement and Convertible Note Agreement provide
for borrowings of $13.7 million and $1.3 million, respectively. Loans under the
Subordinated Note Agreement bear interest at the 90-day LIBOR rate plus five and
one-half percent, payable quarterly, and are due in eight quarterly installments
beginning in the sixty-third month following the closing date. Loans under the
Convertible Note Agreement bear interest at the same rate as loans under the
Subordinated Note Agreement and are due on demand beginning seven years after
the closing date with a final maturity date of January 30, 2009. The convertible
note is convertible at any time into 442,880 shares of Company common stock at
the request of the holders at a fixed conversion price of $3.1125 per share. The
Subordinated Note Agreement and Convertible Note Agreement contain affirmative
and negative covenants that require that the Company 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.
In January 2000, the Company paid $5.0 million to the former owners of DCS
as consideration for entering into a settlement agreement. Under the terms of
the settlement agreement, the Company acquired the 20% minority interest and the
conversion right held by the former owners of DCS (Note 3).
In January 2000, the Company paid the former owners of DCA and DCI
approximately $430,000 pursuant to the terms of the Asset Purchase Agreement
(Note 3).
F-23
<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.
PricewaterhouseCoopers LLP
Houston, Texas
April 26, 2000
S-1
<PAGE>
CASTLE DENTAL CENTERS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSAND)
<TABLE>
<CAPTION>
PATIENT RECEIVABLES: BALANCE BALANCE
BEGINNING CHARGED TO AT END
OF YEAR EXPENSES DEDUCTIONS OTHER(1) OF YEAR
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for uncollectible accounts -
patient receivables ........................... $ 2,425 $ 1,698 $ 451 $ 257(1) $ 3,929
======= ======= ======= ======= =======
Year ended December 31, 1998:
Allowance for uncollectible accounts -
patient receivables ........................... $ 3,929 $ 2,474 $ 1,092 $ 3,197(1) $ 8,508
======= ======= ======= ======= =======
Year ended December 31, 1999:
Allowance for uncollectible accounts -
patient receivables ........................... $ 8,508 $ 3,914 $ -- $ 1,166(1)(2) $13,588
======= ======= ======= ======= =======
BALANCE BALANCE
UNBILLED PATIENT RECEIVABLES BEGINNING CHARGED TO AT END
OF YEAR EXPENSES DEDUCTIONS OTHER(1) OF YEAR
------- ------- ------- ------- -------
Year ended December 31, 1997:
Allowance for uncollectible accounts -
unbilled patient receivables .................. $ 361 $ 199 $ -- $ 8 $ 568
======= ======= ======= ======= =======
Year ended December 31, 1998:
Allowance for uncollectible accounts -
unbilled patient receivables .................. $ 568 $ 71 $ 30 $ 49 $ 658
======= ======= ======= ======= =======
Year ended December 31, 1999:
Allowance for uncollectible accounts -
unbilled patient receivables .................. $ 658 $ 246 $ -- $ -- $ 904
======= ======= ======= ======= =======
</TABLE>
(1) Acquired allowances for uncollectible accounts of affiliated dental
practices.
(2) Adjustments to patient accounts that are charged to the allowance for
doubtful accounts.
S-2
<PAGE>
(a)(3) 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 -- Certificate of Amendment of Certificate of Incorporation of
Castle Dental Centers, Inc., dated June 16, 1997.
*3.4 -- Bylaws of Castle Dental Centers, Inc.
*3.5 -- Amendment to Bylaws of Castle Dental Centers, Inc. dated
August 16, 1996.
*4.1 -- Form of Certificate representing the Common Stock, par
value $.001 per share, of Castle Dental Centers, Inc.
*4.2 -- 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.
4.3 -- Stockholders Agreement dated as of January 31, 2000, by and
among Castle Dental Centers, Inc., Heller Financial, Inc.,
Midwest Mezzanine Fund II, L.P., and certain stockholders and
investors in the Company.
4.4 -- Registration Rights Agreement dated as of January 31, 2000,
by and among Castle Dental Centers, Inc., Heller Financial,
Inc., Midwest Mezzanine Fund II, L.P., and certain
stockholders and investors in the Company.
*10.1 -- Management Services Agreement effective December 18, 1995
by and between Castle Dental Centers of Texas, Inc. and Jack
H. Castle, D.D.S., P.C.
*10.2 -- Amendment to Management Services Agreement between Castle
Dental Centers of Texas, Inc. and Jack H. Castle, D.D.S.,
P.C., dated as of August 15, 1996.
*10.3 -- Indemnity Agreement dated December 18, 1995 by and between
Castle Dental Centers, Inc. and G. Kent Kahle.
*10.4 -- Indemnity Agreement dated December 18, 1995, by and between
Castle Dental Centers, Inc. and Jack H. Castle, D.D.S.
*10.5 -- Indemnity Agreement dated December 18, 1995 by and between
Castle Dental Centers, Inc. and Jack H. Castle, Jr.
*10.6 -- Indemnity Agreement dated December 18, 1995 by and between
Castle Dental Centers, Inc. and Robert J. Cresci.
*10.7 -- Indemnity Agreement dated August 16, 1996 by and between
Castle Dental Centers, Inc. and Elizabeth A. Tilney.
*10.8 -- Management Services Agreement effective May 19, 1996 by and
between Castle Dental Centers of Florida, Inc. and Castle 1st
Dental Care, P.A.
*10.9 -- 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.
*10.10 -- Management Services Agreement effective May 31, 1996 by and
between Castle Dental Centers of Tennessee, Inc. and Castle
Mid-South Dental Center, P.C.
<PAGE>
*10.11 -- 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.
*10.12 -- 1996 Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan, as amended.
*10.13 -- 1996 Castle Dental Centers, Inc. Non-Employee Directors'
Plan, as amended.
*10.14 -- Lease dated January 1, 1996 by and between Goforth, Inc.
and Family Dental Services of Texas, Inc.
10.15 -- Form of Subordinated Promissory Note issued to former
members of Dental Consulting Services, LLC ("DCS").
(Incorporated by reference from the Company's Form 8-K dated
as of March 30, 1998.)
10.16 -- Form of Subordination Agreement entered into between each
former member of DCS, Castle and NationsBank of Texas, N.A.,
as Agent. (Incorporated by reference from the Company's Form
8-K dated as of March 30, 1998.)
10.17 -- Asset Purchase Agreement dated as of December 30, 1998, by
and among Castle Dental Centers of Texas, Inc., Castle Dental
Centers, Inc., and Jack H. Castle, D.D.S., P.C., and DCA
Limited Partnership, L.L.P. ("DCA, Ltd."), Dental
Administrators of Texas Limited Partnership, L.L.P. ("DAI,
Ltd."), Dental Centers of America Paymaster P.C.
("Paymaster"), Bandera Road Dental Center, P.C. ("Bandera"),
Ingram Park Family Dental Center, P.C. ("Ingram"), Northeast
Family Dental Center, P.C. ("Northeast"), Dental Centers of
America at Rolling Oaks Mall, PLLC ("Rolling Oaks"), San Pedro
Family Dental Center, P.C. ("San Pedro"), Southpark Family
Dental Center, P.C. ("Southpark"), Windsor Park Family Dental
Center, P.C. ("Windsor"), Dental Centers of America at Barton
Creek Square Mall, PLLC ("Barton Creek"), Dental Centers of
America at Lakeline Mall, PLLC ("Lakeline"), Dental Centers of
America at Hurst Northeast Mall, PLLC ("Hurst"), Dental
Centers of America at Irving Mall, PLLC ("Irving"), Dental
Centers of America at Six Flags Mall, PLLC ("Six Flags"),
Dental Centers of America at Waco, P.C. ("Waco"), Dental
Centers of America at Mesquite, P.C. ("Mesquite"), Dental
Centers of America at Sherman, P.C. ("Sherman"), Dental
Centers of America at Richardson Square Mall, P.C.
("Richardson" and, collectively with DCA, Ltd., DAI, Ltd.,
Paymaster, Bandera, Ingram, Northeast, Rolling Oaks, San
Pedro, Southpark, Windsor, Barton Creek, Lakeline, Hurst,
Irving, Six Flags, Waco, Mesquite and Sherman, the "DCA
Sellers"), Barry E. Solomon, D.D.S., an individual living in
San Antonio, Texas ("B. Solomon"), Marc A. Solomon, an
individual living in San Antonio, Texas ("M. Solomon"), Hebron
D. Cutrer, an individual living in San Antonio, Texas
("Cutrer"), Stan E. Faye, an individual living in San Antonio,
Texas ("Faye"), and Robert B. Grau, an individual living in
San Antonio, Texas ("Grau", and together with B. Solomon, M.
Solomon, Cutrer and Faye, the "DCA Shareholders").
(Incorporated by reference from the Company's Form 8-K dated
as of December 30, 1998.)
10.18 -- Form of Subordinated Promissory Note issued to DCA Sellers
and/or DCA shareholders. (Incorporated by reference from the
Company's Form 8-K dated as of December 30, 1998.)
10.19 -- Form of Subordination Agreement entered into between each
DCA Seller and/or DCA Shareholder receiving a Subordinated
Promissory Note, Castle Dental and NationsBank, N.A., as
Agent. (Incorporated by reference from the Company's Form 8-K
dated as of December 30, 1998.)
10.20 -- Amended and Restated Credit Agreement dated as of December
18, 1998, by and among Castle Dental, NationsBank, N.A., as
agent, and the lenders thereunder.
<PAGE>
(Incorporated by reference from the Company's Form 8-K dated
as of December 30, 1998.)
10.21 -- Third Amendment to Amended and Restated Credit Agreement
dated as of January 31, 2000, by and among Castle Dental
Centers, Inc., Bank of America, N.A., as agent, and the
lenders thereunder.
10.22 -- Settlement Agreement dated January 28, 2000, between Castle
Dental Centers, Inc., Castle Dental Centers of California,
L.LC., CDC of California, Inc. and the former owners of DCS.
10.23 -- Senior Subordinated Note Purchase Agreement dated as of
January 31, 2000, is among Castle Dental Centers, Inc., Heller
Financial, Inc., and Midwest Mezzanine Fund II, L.P.
10.24 -- Form of Subordinated Note issued pursuant to Senior
Subordinated Note Purchase Agreement dated January 31, 2000.
10.25 -- Form of Convertible Subordinated Note issued pursuant to
Senior Subordinated Note Purchase Agreement dated January 31,
2000.
10.26 -- Fourth Amendment to Amended and Restated Credit Agreement
dated effective as of December 31, 1999, by and among Castle
Dental Centers, Inc., Bank of America, N.A., as agent, and the
lenders thereunder.
10.27 -- First Amendment to Senior Subordinated Note Purchase Agreement
dated as of May 19, 2000, by and among Castle Dental Centers,
Inc., Heller Financial, Inc., and Midwest Mezzanine
Fund II, L.P.
21 -- Subsidiaries of the Registrant.
27.1 -- Financial Data Schedule as of December 31, 1999.
-------------
* Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (registration number 333-1335)
<PAGE>
EXHIBIT 4.3
STOCKHOLDERS AGREEMENT
Stockholders Agreement (this "AGREEMENT") dated as of January 31, 2000, by
and among Castle Dental Centers, Inc., a Delaware corporation (the "COMPANY"),
Heller Financial, Inc., a Delaware corporation ("HELLER"), Midwest Mezzanine
Fund II, L.P., a Delaware limited partnership ("MIDWEST"), and each Person whose
name appears on SCHEDULE I hereto (collectively, the "CURRENT STOCKHOLDERS").
Capitalized terms used and not otherwise defined herein have the respective
meanings ascribed thereto in Article I.
RECITALS
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, Heller, Midwest and the Company will enter into a Senior Subordinated
Note Purchase Agreement (the "PURCHASE AGREEMENT");
WHEREAS, pursuant to the Purchase Agreement, Heller and Midwest will
purchase notes convertible into shares of Common Stock of the Company; and
WHEREAS, each of the Current Stockholders, Heller, Midwest and the Company
desire to enter into this Agreement to regulate certain aspects of their
relationship and to provide for, among other things, restrictions on the
transfer or other disposition of securities of the Company.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1. DEFINED TERMS.
(a) The following capitalized terms, when used in this Agreement,
have the respective meanings set forth below:
"ACQUISITION" means the acquisition of another Person by the
Company, directly or indirectly, by merger, purchase of shares of capital
stock or purchase of all or substantially all of such other Person's
assets.
"AFFILIATE" means, as applied to any Person, (i) any other Person
directly or indirectly controlling, controlled by or under common control
with, that Person, (ii) any other Person that owns or controls 5% or more
of any class of equity securities (including any equity securities
issuable upon the exercise of any option or convertible security) of that
Person or any of its Affiliates, or (iii) any director, partner, officer,
agent, employee
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or relative of such Person. For the purposes of this definition, "control"
(including with correlative meanings, the terms "controlling", "controlled
by", and "under common control with") as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of that Person whether through
ownership of voting securities, by contract or otherwise.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the State of Illinois are authorized or
required by law or executive order to remain closed.
"CALL PRICE" shall mean 150.00% of the Conversion Amount of the
Convertible Notes called.
"CHANGE OF CONTROL" shall mean (i) the direct or indirect sale,
lease, exchange or other transfer of all or substantially all of the
assets of the Company to any Person or entity or group of Persons or
entities acting in concert as a partnership or other group within the
meaning of Rule 13d-5 under the Exchange Act (a "GROUP OF PERSONS"), (ii)
the merger or consolidation of the Company with or into another
corporation, in which transaction the Company's shares of capital stock
outstanding immediately prior to such transaction would entitle the
holders thereof immediately after such transaction to ownership of less
than a majority of the equity securities of the surviving corporation or
its parent, (iii) the replacement of a majority of the Board of Directors
of the Company, over a two-year period, from the directors who constituted
the Board of Directors at the beginning of such period, except to the
extent any such replacement shall have been approved by the Board of
Directors of the Company as constituted at the beginning of such period,
(iv) a Person or Group of Persons (other than any of the Current
Stockholders, Investor Stockholders or their respective Affiliates) shall,
as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, have become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of
securities of the Company representing a majority of the combined voting
power of the then outstanding securities of the Company ordinarily (and
apart from rights accruing under special circumstances) having the right
to vote in the election of directors.
"CLOSING DATE" means the date on which the transaction contemplated
by the Purchase Agreement shall have been consummated.
"COMMISSION" means the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" means the common stock of the Company, par value
$.001 per share, any securities into which such Common Stock shall have
been changed or any securities resulting from any reclassification or
recapitalization of such Common Stock and all other securities of any
class or classes (however designated) of the Company the holders
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of which have the right, without limitation as to amount, after payment on
any securities entitled to a preference on dividends or other
distributions upon any dissolution, liquidation or winding up, either to
all or to a share of the balance of payments upon such dissolution,
liquidation or winding up, including without limitation, any non-voting
common stock issuable pursuant to Section 3.2 of this Agreement.
"COMPANY" means Castle Dental Centers, Inc., a Delaware corporation.
"CONVERSION AMOUNT" has the meaning ascribed to it in the
Convertible Notes.
"CONVERTIBLE NOTES" means the notes dated the date hereof initially
convertible for an aggregate of 442,880 shares of Common Stock, issued to
Heller and Midwest, and any securities issued upon subdivision or
combination, or in substitution, thereof.
"CURRENT MARKET PRICE" means, with respect to each share of Common
Stock as of any date, the dollar volume-weighted average trading price per
share of Common Stock (as reported by Bloomberg through its "Volume at
Price" function) for the ten (10) consecutive trading days prior to such
date; provided that if on any such date the shares of Common Stock are not
listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for a
share of Common Stock shall be the fair market value of such share as
determined in good faith by the Board of Directors of the Company. If the
Board of Directors is unable to determine the fair market value, or if the
Majority Holders disagree with the Board's determination of fair market
value by written notice delivered to the Company within five Business Days
after the Board's determination thereof is communicated in writing to the
holders of Convertible Notes, then the Company and the Majority Holders
shall select an Independent Financial Expert which shall determine such
fair market value. If the Company and the Majority Holders are unable to
agree upon an Independent Financial Expert within fifteen Business Days
after the notice by the Majority Holders, each of the Company and the
Majority Holders shall select an Independent Financial Expert within five
Business Days following the expiration of such fifteen Business Day
period, and these Independent Financial Experts shall select a third
Independent Financial Expert, and the third Independent Financial Expert
shall determine such fair market value. The determination of fair market
value by such Independent Financial Expert shall be final, binding and
conclusive on all parties. All costs and fees of any of this Independent
Financial Expert(s) retained in accordance with the foregoing shall be
borne by the Company.
"CURRENT STOCKHOLDER" means each Person whose name appears on
SCHEDULE I hereto and each of their Permitted Transferees and any other
Person who becomes a "Current Stockholder" by execution and delivery of a
Joinder Agreement. The parties acknowledge and agree that no Investor
Stockholder shall be included in the definition of the term "Current
Stockholder" for purposes of this Agreement.
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"EXEMPTED SECURITIES" means the 100,000 shares of Common Stock
acquired by Jack H. Castle, Jr. in September 1998 and the 103,000 shares
of Common Stock acquired by Jack H. Castle, D.D.S. and Loretta Castle,
jointly in September 1998.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"FULLY DILUTED BASIS" means, with respect to the calculation of the
number of shares of Common Stock, (i) all shares of Common Stock
outstanding at the time of determination, and (ii) all shares of Common
Stock issuable upon the conversion, exchange or exercise of all securities
(including the Convertible Notes) convertible, exchangeable or exercisable
for or into shares of Common Stock regardless of whether such securities
are then convertible, exchangeable or exercisable.
"GAAP" means generally accepted accounting principles, consistently
applied.
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"INVESTOR STOCKHOLDERS" means, so long as any such Person shall hold
Restricted Securities, Heller, Midwest and any Person to whom Heller or
Midwest shall Transfer any Restricted Securities other than pursuant to an
Open Market Sale.
"JOINDER AGREEMENT" means a Joinder Agreement substantially in the
form attached hereto as EXHIBIT A.
"LIEN" means any lien, claim, charge, encumbrance, security interest
or other adverse claim of any kind, other than any restrictions imposed
under this Agreement or under federal or state securities laws.
"MAJORITY HOLDERS" means, as of any particular date, the holders of
a majority of the outstanding Redeemable Securities based upon the sum of
the total number of Redeemable Shares then outstanding and the total
number of shares of Common Stock issuable with respect to any Convertible
Notes then outstanding.
"OPEN MARKET SALE" means a sale of shares of Common Stock pursuant
to a "brokers' transaction" within the meaning of Section 4(4) of the
Securities Act or in a transaction directly with a "market maker", as that
term is defined in Section 3(1) (38) of the Exchange Act.
"OPEN MARKET SALES THRESHOLD" means, as of any particular date, a
number of shares of Restricted Securities equal to the lesser of (i) 1% of
the total number of shares of Common Stock then outstanding, without
giving effect to the conversion, exchange or exercise of any securities,
and (ii) 50% of the average weekly trading volume of the
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Company's Common Stock for the four consecutive calendar weeks immediately
prior to the week in which such date occurs.
"PERMITTED TRANSFEREE" means (i) the spouse or lineal descendants of
any Current Stockholder, (ii) any trust for the benefit of such Current
Stockholder or the benefit of the spouse or lineal descendants of such
Current Stockholder, any corporation or partnership in which such Current
Stockholder, the spouse and the lineal descendants of such Current
Stockholder are the direct and beneficial owners of all of the equity
interests (provided such Current Stockholder, spouse and lineal
descendants agree in writing to remain the direct and beneficial owners of
all of the equity interests thereof), (iii) the personal representative of
such Current Stockholder upon such Current Stockholder's death for
purposes of administration of such Current Stockholder's estate or upon
such Current Stockholder's incompetency for purposes of the protection and
management of the assets of such Current Stockholder, or (iv) with respect
to a Current Stockholder that is a partnership, trust, or other entity,
any partner, beneficiary, or individual that is a beneficial owner of such
entity as of the date hereof; PROVIDED, HOWEVER, in each case, that such
transferee must agree to be bound by the terms of this Agreement by
executing a Joinder Agreement.
"PERSON" means an individual, partnership, corporation, trust,
unincorporated organization, joint venture, government (or agency or
political subdivision thereof) or any other entity of any kind.
"REDEEMABLE SECURITIES" means the Convertible Notes and the
Redeemable Shares.
"REDEEMABLE SHARES" means, as of any given date of determination,
any shares of Common Stock beneficially owned by an Investor Stockholder
that have been issued on or prior to such date upon conversion of the
Convertible Notes and any securities issued with respect thereto as a
result of any stock dividend, stock split, reclassification,
recapitalization, reorganization, merger, consolidation or similar event
or upon the conversion, exchange or exercise thereof.
"REDEMPTION PRICE" means: (i) with respect to any Conversion Amount
of the Convertible Notes tendered for redemption, an aggregate amount
equal to the greater of (A)(I) the number of shares of Common Stock
issuable upon conversion of such Conversion Amount as of the date of the
Redemption Notice, multiplied by (II) the Current Market Price, or (B) the
Conversion Amount of the Convertible Notes tendered for redemption, and
(ii) with respect to any Redeemable Shares tendered for redemption, an
aggregate amount equal to (A) the number of Redeemable Shares tendered for
redemption, multiplied by (B) the Current Market Price, provided, however,
that in the case of an event described in clause (i)(A) of the definition
of "Triggering Event", the Redemption Price shall equal the Conversion
Amount of the Convertible Notes tendered for redemption.
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"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the date hereof, among the Company, Heller and
Midwest as the same may be amended from time to time.
"REGULATORY PROBLEM" means any set of facts or circumstances wherein
any Investor Stockholder reasonably believes it is not entitled to hold,
or exercise any significant right with respect to, the Common Stock.
"RESTRICTED SECURITIES" means the Common Stock, Convertible Notes,
the Common Stock issued or issuable upon conversion of the Convertible
Notes, and any securities issued with respect thereto as a result of any
stock dividend, stock split, reclassification, recapitalization,
reorganization, merger, consolidation or similar event or upon the
conversion, exchange or exercise thereof.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"SUBSIDIARY" means, with respect to any Person, any corporation of
which an aggregate of 50% or more of the outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, capital 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 by such Person and/or one or more
Subsidiaries of such Person.
"TRANSFER" means, directly or indirectly, any sale, transfer,
assignment, hypothecation, pledge or other disposition of any Restricted
Securities or any interests therein.
"TRIGGERING EVENT" means the occurrence of any of the following:
(i) with respect to the Convertible Notes and Redeemable Shares:
(A) January 31, 2007;
(B) any prepayment of principal pursuant to any of the
Subordinated Notes (as defined in the Purchase
Agreement); or
(C) the occurrence of an Event of Default (as such term is
defined in the Purchase Agreement); or
(ii) with respect to the Redeemable Shares only:
(A) a Change of Control;
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(B) the Common Stock failing to be traded or listed for
quotation on The New York Stock Exchange, American Stock
Exchange, Nasdaq National Market or Nasdaq Smallcap
Market; or
(C) after January 31, 2003 and prior to January 31, 2004,
the average weekly trading volume of the Company's
Common Stock for four consecutive calendar weeks falling
below 25,000 shares, or after January 31, 2004, the
average weekly trading volume of the Company's Common
Stock for four consecutive calendar weeks falling below
50,000 shares (in both cases, subject to equitable
adjustment with respect to any stock split, stock
dividend, recapitalization or other similar event).
(b) Unless otherwise provided herein, all accounting terms used in
this Agreement shall be interpreted in accordance GAAP as in effect from time to
time.
ARTICLE II
TRANSFERS OF RESTRICTED SECURITIES
2.1. RESTRICTIONS GENERALLY; SECURITIES ACT.
(a) Each Current Stockholder agrees that it will not, directly or
indirectly, Transfer any Restricted Securities except in accordance with the
terms of this Agreement. Each Investor Stockholder agrees that it will not,
directly or indirectly, Transfer any Restricted Securities except in accordance
with Section 2.1(b) of this Agreement. Any attempt to Transfer any Restricted
Securities not in accordance with the terms of this Agreement shall be null and
void and neither the issuer of such securities nor any transfer agent of such
securities shall give any effect to such attempted Transfer in its stock
records.
(b) Each Current Stockholder and Investor Stockholder agrees that,
in addition to the other requirements herein relating to Transfer, it will not
Transfer any Restricted Securities except pursuant to an effective registration
statement under the Securities Act, or upon receipt by the Company of an opinion
of counsel to the Current Stockholder or Investor Stockholder, as the case may
be, reasonably satisfactory to the Company or counsel to the Company, or a
no-action letter from the Commission addressed to the Company, to the effect
that no registration statement is required because of the availability of an
exemption from registration under the Securities Act.
2.2. LEGEND.
(a) Each certificate representing Restricted Securities other than
Exempted Securities shall be endorsed with the following legends and such other
legends as may be required by applicable state securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS
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AMENDED, OR ANY STATE SECURITIES LAWS. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE AND ANY INTEREST THEREIN MAY NOT BE SOLD, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN A STOCKHOLDERS AGREEMENT, DATED AS OF JANUARY
31, 2000. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT
THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE.
(b) The legends set forth above shall be removed and the Company
shall issue a certificate without such legends to the holder of the Restricted
Securities upon which it is stamped, if, unless otherwise required by state
securities laws, (i) a registration statement with respect to such Restricted
Securities shall have become effective under the Securities Act, and such
Restricted Securities shall have been disposed of in accordance with such
registration statement, (ii) in connection with a Transfer permitted under or
made in compliance with this Agreement, such holder provides the Company, at the
Company's expense, with an opinion of counsel, in a generally acceptable form,
to the effect that a public sale, assignment or transfer of the Restricted
Securities may be made without registration under the Securities Act, or (iii)
the Restricted Securities are not subject to restrictions on Transfer under this
Agreement and can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold.
2.3. TAG-ALONG RIGHTS.
(a) If any Current Stockholder (the "TRANSFEROR") proposes to
Transfer any Restricted Securities ("TRANSFEROR SHARES") to any Person (the
"BUYER"), other than to a Permitted Transferee or pursuant to an Open Market
Sale, then, as a condition to such Transfer, the Transferor shall cause the
Buyer to include an offer (the "TAG-ALONG OFFER") to each of the Investor
Stockholders (collectively, the "OFFEREES"), to purchase from each Offeree, at
the option of each Offeree, up to a number of shares of Restricted Securities
determined in accordance with Section 2.3(b), on the same terms and conditions
as are applicable to the Transferor Shares. The Transferor shall provide a
written notice (the "TAG-ALONG NOTICE") of the Tag-Along Offer to each Offeree,
which may accept the Tag-Along Offer by providing a written notice of acceptance
of the Tag-Along Offer to the Transferor within thirty days of delivery of the
Tag-Along Notice.
(b) Each Offeree shall have the right (a "TAG-ALONG RIGHT") to sell
pursuant to the Tag-Along Offer up to a number of shares of Restricted
Securities equal to: (i) the number of shares of Restricted Securities that the
Buyer is willing to purchase from the Transferor and the Offerees, in the
aggregate, multiplied by (ii) a fraction, the numerator of which is the number
of
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Restricted Securities owned by such Offeree and the denominator of which is the
number of Restricted Securities owned by the Transferor and all of the Offerees
exercising their respective Tag-Along Rights; PROVIDED, HOWEVER, that, if all
Common Stock beneficially owned by all Offerees is permitted to be sold to the
Buyer, the Transferor shall be entitled to sell the number of shares set forth
in the Tag-Along Offer which any Offeree has chosen not to sell without
providing additional notice to the Offerees.
(c) Upon exercise of a Tag-Along Right, at the closing of the
proposed Transfer (which date, place and time shall be designated by the
Transferor and provided to the Offerees in writing at least five Business Days
prior thereto), each Offeree shall deliver to the Buyer a certificate or
certificates representing the shares of Common Stock to be sold or otherwise
disposed of pursuant to the Tag-Along Offer by such Offeree, free and clear of
all Liens, against delivery of the purchase price therefor; PROVIDED that
neither the Transferor nor any Offeree shall sell any Restricted Securities to
any Buyer if such Buyer does not purchase, simultaneously and pursuant to the
same terms, all of the Restricted Securities which the Offerees are entitled to
sell to such Buyer pursuant to Section 2.3(b).
In the event that, following delivery of a Tag-Along Notice, the
30-day period set forth in Section 2.3(a) shall have expired and the Transferor
shall not have received a written notice from any Offeree pursuant to Section
2.3(a), the Transferor shall have the right, during the remainder of the 120-day
period following the expiration of such 30-day period, to sell the Transferor
Shares to the proposed Buyer, at a price not less than the price within the
Tag-Along Offer and on terms no more favorable to such proposed Buyer than the
terms of the Tag-Along Offer.
(d) Promptly after the consummation of the sale or other disposition
of the Transferor Shares and shares of Common Stock of the Offerees to the Buyer
pursuant to the Tag- Along Offer, the Transferor shall notify the Offerees
thereof, and the Buyer shall pay to the Transferor and each of the Offerees
their respective portions of the sales price of the shares of Common Stock sold
or otherwise disposed of pursuant thereto, and shall furnish such other evidence
of the completion of such sale or other disposition and the terms thereof as may
be reasonably requested by the Offerees.
(e) The Exempted Securities shall not be subject to the provisions
of Section 2.3 hereof.
2.4. NOTICE OF OPEN MARKET SALES. In any ninety-day period, a Current
Stockholder may not sell a number of shares of Restricted Securities in excess
of the Open Market Sales Threshold then in effect unless and until all of the
following criteria shall have been met: (a) all of the Restricted Securities
then held by the Investor Stockholders either are (i) then registered for resale
under the Securities Act on a Form S-2 or S-3 (or any successor or similar
short-form registration statement) that remains effective as of the date of such
sale and during the ten Business Days prior thereto, or (ii) freely transferable
in Open Market Sales, other than restrictions with respect to the number of
securities that can be sold pursuant to Rule 144; and (b) no less than ten
Business Days prior to the placing with a broker of an order to execute such
sale or the execution
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directly with a market maker of such sale, such Current Stockholder shall have
filed with the Commission a notice of proposed sale on Form 144 with respect to
such sale and shall have delivered a copy thereof to each of the Investor
Stockholders; provided, however, that the Exempted Securities shall not be
subject to Section 2.4 hereof.
ARTICLE III
COMPANY OBLIGATIONS
3.1. REDEMPTION RIGHT. From the date hereof until January 31, 2009, each
Investor Stockholder shall have the following redemption rights:
(a) In addition to all other rights of any Investor Stockholder
contained herein, within 60 days following a Triggering Event any Investor
Stockholder may notify the Company in writing (the "REDEMPTION NOTICE") of such
Investor Stockholder's desire to cause the Company to redeem all or any portion
of the Redeemable Securities held by such Investor Stockholder for their
Redemption Price. Furthermore, following an event described in clause (ii) of
the definition of a "Triggering Event", but prior to an event described in
clause (i) of the definition of a "Triggering Event", an Investor Stockholder
may convert all or any portion of the Conversion Amount of any Convertible Note
for the purpose of tendering for redemption any shares of Common Stock issuance
upon such exercise pursuant to this Section 3.1.
(b) If the Company receives a Redemption Notice pursuant to Section
3.1(a), it shall deliver to the tendering Investor Stockholders in writing
within thirty days of the receipt by the Company of the Redemption Notice, a
notice stating: (i) the date as of which such redemption shall occur which date
(the "REDEMPTION CLOSING") shall be not less than ten days nor more than thirty
days following the date of such notice, but in any event prior to January __,
2009; (ii) the Redeemable Securities to be redeemed from the such Investor
Stockholders and the Redemption Price (which shall be calculated as of the date
of the Redemption Notice) and (iii) the place or places where the Redeemable
Securities are to be surrendered for payment, subject to Section 3.1(e) below
with respect to any Convertible Notes.
(c) If the Company fails to pay the Redemption Price on the date
fixed for redemption, in addition to any other remedies available to the
Investor Stockholders, the Company shall also pay interest thereon at the rate
of 1.5% per month (prorated for partial months) until such Redemption Price, any
interest thereon and all accrued and unpaid interest on the Convertible Notes
shall have been paid in full.
(d) At the Redemption Closing, the tendering Investor Stockholders
shall deliver to the Company any Redeemable Shares being tendered for
redemption, in each case, duly endorsed for transfer to the Company, and subject
to Section 3.1(e), any Convertible Notes being tendered for redemption, and the
Company shall deliver to each tendering Investor Stockholder a cashier's or
certified check payable to such Investor Stockholder in an amount equal to the
Redemption Price payable thereto plus all accrued and unpaid interest on the
Convertible Notes held by such Investor Stockholder being tendered for
redemption.
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(e) Notwithstanding anything to the contrary set forth herein, upon
redemption of any portion of the Convertible Notes in accordance with the terms
hereof, the Investor Stockholders shall not be required to physically surrender
any of the Convertible Notes to the Company unless the full Conversion Amount
then outstanding with respect thereto is being redeemed. The Company shall
maintain records showing the Conversion Amount so redeemed and the dates of such
redemptions or shall use such other method, reasonably satisfactory to the
Investor Stockholders, so as not to require physical surrender of any
Convertible Note upon any such partial redemption. Notwithstanding the
foregoing, if any portion of a Convertible Note is redeemed as aforesaid,
thereafter, the holder thereof may not transfer a Convertible Note unless such
Investor Stockholder first physically surrenders such Convertible Note to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of such Investor Stockholder a new Convertible Note (a "NEW CONVERTIBLE NOTE")
of like tenor, registered as such Investor Stockholder may request, representing
in the aggregate the remaining Conversion Amount represented by the Convertible
Note. The Investor Stockholders and any assignees, by acceptance of the
Convertible Notes or any New Convertible Note, acknowledge and agree that, by
reason of the provisions of this paragraph, following redemption of any portion
of any Convertible Note, the Conversion Amount represented by a New Convertible
Note may be less than the principal amount set forth on the face of the
corresponding Convertible Note dated January 31, 2000.
(f) The Company shall not (and shall not permit any Affiliate of the
Company to) hereafter enter into any contract or other consensual arrangement
that by its terms restricts the Company's ability to redeem any of the
Redeemable Securities, except as provided in the Senior Credit Agreement and the
Subordination Agreement (as defined in the Purchase Agreement).
3.2. REGULATORY PROBLEM. In the event an Investor Stockholder determines
that it has a Regulatory Problem, such Investor Stockholder shall have the right
to transfer its entire interest in the Company without regard to any restriction
on transfer set forth in this Agreement (other than securities laws
restrictions), and the Company agrees to take all such actions as are reasonably
requested by such Investor Stockholder in order to (i) effectuate and facilitate
any transfer by such Investor Stockholder of its interests to any person
designated by such Investor Stockholder (subject to compliance with applicable
federal and state securities) or (ii) permit such Investor Stockholder (or any
Affiliate thereof) to exchange all or any portion of the Common Stock then held
by, or issuable to, it on a "share-for-share" basis for interests of a class of
non- voting common stock of the Company, which non-voting common stock shall be
identical in all respects to such Common Stock, except such stock shall be
non-voting common stock and shall be convertible into voting common stock on
such terms as are requested by such Investor Stockholder in light of regulatory
considerations then prevailing. Company and each Current Stockholder and each
Investor Stockholder agree to enter into such additional agreements, adopt such
amendments hereto and to the Certificate of Incorporation of the Company and to
take such additional actions as are reasonably requested by such Investor
Stockholder in order to effectuate the intent of the foregoing.
3.3. APPROVAL OF ACQUISITIONS. During the term of this Agreement, any
Acquisition by the Company of another Person shall require the approval of at
least two-thirds of the members of the board of directors then in office.
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ARTICLE IV
OTHER AGREEMENTS
4.1. TERMINATION OF SECURITYHOLDERS AGREEMENT. Each of the Company and the
Current Stockholders hereby agrees that the Amended and Restated Securityholders
Agreement, dated as of June 16, 1997, and as amended to date, among the Company,
Jack H. Castle, D.D.S., P.C. and the Current Stockholders, is hereby terminated
and shall be of no further force and effect.
4.2. CONSENT TO REGISTRATION RIGHTS AGREEMENT. Each of the Current
Stockholders hereby acknowledges that the Company is entering into the
Registration Rights Agreement with the Investor Stockholders and that the
Registration Rights Agreement conflicts with the terms of the Amended and
Restated Registration Rights Agreement, dated as of June 16, 1997, and as
amended to date, among the Company and the Current Stockholders (the "EXISTING
REGISTRATION AGREEMENT") and grants preferential registration rights to the
Investor Stockholders over those registration rights previously granted to the
Current Stockholders pursuant to the Existing Registration Rights Agreement.
Each of the Current Stockholders hereby consents to the Company entering into
the Registration Rights Agreement and to the granting by the Company thereunder
of such preferential registration rights and agrees that all registration rights
held by such Current Stockholder shall be subject to the terms of the
Registration Rights Agreement.
4.3. VOTING AGREEMENTS.
(a) Each of the Current Stockholders hereby agrees that as long as
Delaware State Employees' Retirement Fund, Declaration of Trust for Defined
Benefit Plans of ICI American Holdings Inc. and Declaration of Trust for Defined
Benefit Plans of Zeneca Holdings Inc. (collectively, the "PECKS INVESTORS")
beneficially own in the aggregate at least 4.4 percent of the fully diluted
outstanding shares of Common Stock, the Current Stockholders shall take all
action within their respective power, including without limitation, the voting
of capital stock of the Company, required to cause the Board of Directors of the
Company to at all times consist of at least 4 and no more than 7 members, one of
whom shall be designated by the Pecks Investors (the "DESIGNEE"). Each of the
Current Stockholders agrees to vote all of its shares of Common Stock which are
outstanding at all meetings of stockholders of the Company (or any written
consents in lieu thereof) in which directors are elected in favor of the
Designee.
(b) The Company agrees to place on the agenda for its next annual
meeting of stockholders, which will take place on or before June 1, 2000 (the
"ANNUAL MEETING"), a proposal (the "PROPOSAL") to amend its certificate of
incorporation (the "AMENDMENT") to authorize a class of no less than 500,000
shares of non-voting Common Stock of the Company which will be reserved for
issuance to the Investor Stockholders in accordance with Section 2(c) of the
Convertible Note or Section 3.2 of this Agreement. Furthermore, the Company
agrees to recommend to its stockholders that they vote in favor of, and to
solicit proxies for the purpose of
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voting in favor of, the Proposal at the Annual Meeting. In furtherance of the
foregoing, each of the Current Stockholders agrees to take all actions within
their respective power, including without limitation, the voting of all capital
stock of the Company, required to approve the Proposal, and following such
approval, the Company shall cause the Amendment to be promptly filed with the
Secretary of State of the State of Delaware, and the Company will promptly
deliver to each Investor Stockholder a copy of the Amendment, certified by the
Secretary of State of the State of Delaware, following its filing therewith.
(c) Each of the Current Stockholders hereby agrees that upon the
request of Jack H. Castle, D.D.S. or Loretta Castle, the Current Stockholders
shall take all action within their respective power, including without
limitation, the voting of capital stock of the Company, required to cause the
Company to exercise its right under Section 2.2 of the Registration Rights
Agreement to cause the registration of the Registrable Securities (as defined in
the Registration Agreement).
ARTICLE V
CALL RIGHT
5.1. CALL RIGHT. From the date hereof until January 31, 2009, the Company
shall have the following call rights:
(a) At any time within 30 days after the consummation of a Change of
Control of the type described in any of clauses (i), (ii) or (iv) of the
definition of Change of Control, the Company may notify each Investor
Stockholder in writing (the "CALL NOTICE") of the Company's desire to call for
redemption all and not any lesser portion of the Convertible Notes held by such
Investor Stockholder for their Call Price. Following the Call Notice, an
Investor Stockholder shall retain the right to convert all or any portion of the
Conversion Amount of any Convertible Note into shares of Common Stock, or tender
all or any portion of the Conversion Amount of any Convertible Note or the
resulting Redeemable Shares of Common Stock for redemption pursuant to Section
3.1 of this Agreement, at any time prior to the Call Closing (defined below).
(b) The Call Notice shall state: (i) the date as of which such call
shall occur (the "CALL CLOSING"), which date shall not be earlier than the
sixtieth (60th) day following the Call Notice; (ii) the Convertible Notes to be
called from each Investor Stockholder and the Call Price (which shall be
calculated as of the date of the Call Notice) and (iii) the place or places
where the Convertible Notes are to be surrendered for payment.
(c) At the Call Closing, the tendering Investor Stockholders shall
deliver to the Company all Convertible Notes called for redemption and which
have not been converted into shares of Common Stock or tendered for redemption
pursuant to Section 2.1 of this Agreement, in each case, duly endorsed for
transfer to the Company and the Company shall deliver to each tendering Investor
Stockholder a cashier's or certified check payable to such Investor Stockholder
in an amount equal to the Call Price payable thereto plus all accrued and unpaid
interest on the
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Convertible Notes held by such Investor Stockholder being tendered for
redemption pursuant to this Section 5.1.
ARTICLE VI
MISCELLANEOUS
6.1. GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Illinois.
(b) Any legal action or proceeding with respect to this agreement
shall be brought in the courts of the State of Illinois or of the United States
of America for the northern district of Illinois, and, by execution and delivery
of this agreement, each of the Company and each Stockholder and Investor
Stockholder 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 Company and each Current Stockholder and Investor
Stockholder hereby irrevocably waives any 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 any holder to serve
process in any other manner permitted by law.
(d) The Company and each Current Stockholder and Investor
Stockholder 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 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 and the transactions contemplated hereby among other things, the
mutual waivers and certifications contained in this Section 5.1.
6.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersedes any and all previous oral or written communications, representations
or agreements. This Agreement may be amended, modified or supplemented only by a
written instrument duly executed by the Company, the Current Stockholders and
the Investor Stockholders.
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<PAGE>
6.3. TERM. Sections 2.3 and 2.4, Article III, Section 4.3(b) and Article V
of this Agreement will terminate ("Partial Termination") at the earlier to occur
of (a) such time as the Restricted Securities owned by the Investor
Stockholders, in the aggregate, represent less than both (i) 1% of the Company's
outstanding shares of Common Stock on a Fully Diluted Basis, and (ii) the
average weekly trading volume of the Company's Common Stock for four consecutive
calendar weeks and (b) immediately following the consummation of the Call
Closing or its scheduled date if all Convertible Notes are converted prior to
such date. Following a Partial Termination, the remaining provisions of this
Agreement will terminate when the Pecks Investors beneficially own in the
aggregate less than 4.4 percent of the fully diluted outstanding shares of
Common Stock.
6.4. INSPECTION. For so long as this Agreement shall remain in effect,
this Agreement shall be made available for inspection by any Current Stockholder
or Investor Stockholder at the principal executive offices of the Company.
6.5. RECAPITALIZATION, EXCHANGES, ETC., AFFECTING RESTRICTED SECURITIES.
The provisions of this Agreement shall apply, to the full extent set forth
herein with respect to the Restricted Securities, to any and all shares of the
Company capital stock or any successor or assign of the Company (whether by
merger, consolidation, sale of assets, or otherwise, including shares issued by
a parent corporation in connection with a triangular merger) which may be issued
in respect of, in exchange for, or in substitution of, Restricted Securities and
shall be appropriately adjusted for any stock dividends, splits, reverse splits,
combinations, reclassifications and the like occurring after the date hereof.
6.6. WAIVER. No waiver by any party of any term or condition of this
Agreement, in one or more instances, shall be valid unless in writing, and no
such waiver shall be deemed to be construed as a waiver of any subsequent breach
or default of the same or similar nature. Any rights of the Investor
Stockholders hereunder may be waived by the affirmative vote of the Majority
Holders and each of Heller and Midwest so long as such Investor Stockholders own
any Restricted Securities.
6.7. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, personal representatives, successors
and permitted assigns, as the case may be; PROVIDED, HOWEVER, that nothing
contained herein shall be construed as granting any Current Stockholder the
right to transfer any of its Restricted Securities except in accordance with
this Agreement.
6.8. REMEDIES. In the event of a breach by any party to this Agreement of
its obligations under this Agreement, the loss of any right as provided in this
Agreement as a result of such breach shall not be the sole and exclusive remedy
of any party injured by such breach. Any such injured party will be entitled to
specific performance of its rights under this Agreement, in addition to being
entitled to exercise all rights granted by law, including recovery of damages.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being
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agreed by the parties that the remedy at law, including monetary damages, for
breach of any such provision will be inadequate compensation for any loss and
that any defense in any action for specific performance that a remedy at law
would be adequate is waived.
6.9. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
6.10. HEADINGS. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.
6.11. FURTHER ASSURANCES. Each party hereto shall cooperate and shall take
such further action and shall execute and deliver such further documents as may
be reasonably requested by any other party in order to carry out the provisions
and purposes of this Agreement.
6.12. GENDER. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable words in the singular shall be read and construed as though in the
plural and words in the plural shall be construed as though in the singular in
all cases where they would so apply.
6.13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
6.14. NOTICES. All notices and other communications provided for herein
(including, without limitation, any modifications of, or waivers or consents
under, this Agreement) 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 specified below; or, as to any party, at such
other address as shall be designated by such party in a notice to each other
party:
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If to the Company or the Current Stockholders:
Castle Dental Centers, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Attention: Jack H. Castle, Jr.
Telecopy: (713) 513-1401
If to Heller:
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attention: Account Manager
Corporate Finance
Telecopy: (312) 441-7367
with a copy to:
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attention: Legal Services
Corporate Finance Group
Telecopy: (312) 441-6876
If to Midwest:
Midwest Mezzanine Fund II, L.P.
208 South LaSalle Street, 10th floor
Chicago, Illinois 60604-1003
Attention: J. Allan Kayler
Telecopy: (312) 553-6647
Except as otherwise provided in this Agreement, 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.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Stockholders Agreement as of the date first above written.
HELLER FINANCIAL, INC.,
A DELAWARE CORPORATION
By :_________________________________
MIDWEST MEZZANINE FUND II, L.P.,
A DELAWARE LIMITED PARTNERSHIP
By: ABN AMRO Mezzanine Management
II, L.P., its general partner
By: ABN AMRO Mezzanine Management
II, Inc., its general partner
By :_________________________________
J. Allan Kayler
Senior Vice President
CASTLE DENTAL CENTERS, INC.,
A DELAWARE CORPORATION
By :_________________________________
Jack H. Castle, Jr.
Chairman and Chief Executive
Officer
STOCKHOLDERS
[SEE FOLLOWING PAGE]
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Exhibit A
FORM OF JOINDER AGREEMENT
Castle Dental Centers, Inc.
1360 Post Oak Blvd., Suite 1300
Houston, Texas 77056
Gentlemen:
In consideration of the transfer to the undersigned of ________ shares of
Common Stock, par value $.001 per share, [DESCRIBE ANY OTHER SECURITY BEING
TRANSFERRED] of Castle Dental Center, Inc., a Delaware corporation (the
"Company"), the undersigned represents that it is a Permitted Transferee of
[INSERT NAME OF TRANSFEROR] and agrees that, as of the date written below, [HE]
[SHE] [IT] shall become a party to, and a Permitted Transferee as defined in,
that certain Stockholders Agreement dated as of January 31, 2000, as such
agreement may have been amended from time to time (the "Agreement"), among the
Company and the persons named therein, and as a Permitted Transferee shall be
fully bound by, and subject to, all of the covenants, terms and conditions of
the Agreement that were applicable to the undersigned's transferor, as though an
original party thereto and shall be deemed a Current Stockholder for purposes
thereof.
Executed as of the _________ day of __________________________________.
TRANSFEREE:
Address:
ACKNOWLEDGED AND ACCEPTED:
CASTLE DENTAL CENTERS, INC.
By:___________________________________________
Name:___________________________________
Title:__________________________________
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Exhibit 4.4
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of January 31,
2000, by and between CASTLE DENTAL CENTERS, INC., a Delaware corporation (the
"COMPANY"), HELLER FINANCIAL, INC., a Delaware corporation ("HELLER") and
MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("MIDWEST")
(Heller and Midwest are sometimes referred to individually as a "HOLDER" and
together, as the "HOLDERS"). Capitalized terms used and not other defined herein
have the respective meanings ascribed thereto in Article I.
RECITALS
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the Holders and the Company will enter into a Subordinated Note
Purchase Agreement (the "PURCHASE AGREEMENT");
WHEREAS, pursuant to the Purchase Agreement, the each Holder will purchase
a note or notes convertible into shares of Common Stock of the Company; and
WHEREAS, each of the Holders and the Company desire to enter into this
Agreement to provide the Holders with certain rights with respect to their
ownership of the Company's Common Stock issuable upon conversion of the
Convertible Note.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 DEFINED TERMS. The following capitalized terms, when used in this
Agreement, have the respective meanings set forth below:
"COMMISSION" means the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" means the common stock of the Company, par value
$.001 per share, any securities into which such Common Stock shall have
been changed or any securities resulting from any reclassification or
recapitalization of such Common Stock and all other securities of any
class or classes (however designated) of the Company the holders of which
have the right, without limitation as to amount, after payment on any
securities entitled to a preference on dividends or other distributions
upon any dissolution, liquidation
Registration Rights Agreement
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or winding up, either to all or to a share of the balance of payments upon
such dissolution, liquidation or winding up.
"CONVERTIBLE NOTES" means the notes dated the date hereof initially
convertible for an aggregate of 442,880 shares of Common Stock, issued to
the Holders, and any securities issued upon subdivision or combination, or
in substitution, thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"EXISTING REGISTRABLE SECURITIES" means the 2,969,822 shares of
Common Stock defined as "Registrable Securities" and "Registrable inside
Shareholder Securities" pursuant to that certain Amended and Restated
Registration Rights Agreement, dated as of June 16, 1997, among the
Company and those Persons whose names appear thereon, as such agreement
exists as of the date hereof, without giving effect to any further
amendment or modifications thereto, so long as such shares remain
"Registrable Securities" or "Registrable inside Shareholder Securities"
thereunder.
"FULLY DILUTED BASIS" means, with respect to the calculation of the
number of shares of Common Stock, (i) all shares of Common Stock
outstanding at the time of determination, and (ii) all shares of Common
Stock issuable upon the conversion, exchange or exercise of all securities
(including the Convertible Notes) convertible, exchangeable or exercisable
for or into shares of Common Stock regardless of whether such securities
are then convertible, exchangeable or exercisable.
"HOLDERS" means the Holders and any permitted successors or assigns,
so long as such Persons are the owners of record of any Registrable
Securities or any Convertible Notes pursuant to which any Registrable
Securities may be issued.
"MAJORITY HOLDERS" means, as of any particular date, the holders of
a majority of the outstanding Registrable Securities based upon the sum of
the total number of shares of Registrable Securities then outstanding and
the total number of shares of Registrable Securities issuable with respect
to any Convertible Notes then outstanding.
"PERSON" means an individual, partnership, corporation, trust,
unincorporated organization, joint venture, government (or agency or
political subdivision thereof) or any other entity of any kind.
"REGISTRABLE SECURITIES" means any shares of Common Stock issuable
upon conversion of the Convertible Note or securities issued or issuable
with respect to such Convertible Note or 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 Registrable
Securities, such securities shall cease to be Registrable Securities when
(a)
Registration Rights Agreement
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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, or
(b) they shall have been distributed to the public pursuant to Rule 144
(or any successor provision) under the Securities Act.
"REGISTRATION EXPENSES" means 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 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 a majority of the
Registrable Securities being registered, premiums and other costs of
policies of insurance, if any, obtained by the Company against liabilities
arising out of the public offering of the Registrable 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" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
ARTICLE II
REGISTRATION UNDER SECURITIES ACT
2.1 REGISTRATION OF REGISTRABLE SECURITIES ON REQUEST.
(a) REQUEST. The Majority Holders shall have the right to request in
writing that the Company effect one registration under the Securities Act of
1933, as amended (the "SECURITIES ACT") of all or part of such Holders'
Registrable Securities pursuant to this SECTION 2.1. Within ten days after
receipt of any such request, the Company will give written notice of such
requested registration to all other Holders of Registrable Securities, which
Holders shall be entitled to include their Registrable Securities in such
registration subject to SECTION 2.1(F). Thereupon the Company will use its best
efforts to effect, as expeditiously as possible, the registrations under the
Securities Act on the form requested by the Holders of Registrable Securities
requesting registration of the following securities, subject to SECTIONS 2.1(F):
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(i) the Registrable Securities which the Company has been so
requested to register by the Majority Holders; and
(ii) all other Registrable Securities which the Company has
been requested to register by the Holders thereof by written request given
to the Company within thirty (30) days after the giving of such written
notice by the Company (which request shall specify the intended method of
disposition of such Registrable Securities).
The Holders of a majority of the Registrable Securities requesting a
registration under this ARTICLE II may, at any time prior to the effective date
of the registration statement relating to such registration, revoke, without
liability, such request by providing written notice to the Company. The Company
will pay all Registration Expenses in connection with any registration pursuant
to this SECTION 2.1.
(b) REGISTRATION OF OTHER SECURITIES. Whenever the Company shall
effect a registration pursuant to this SECTION 2.1, no securities other than
Registrable Securities shall be included among the securities covered by such
registration unless (i) the managing underwriter of such offering shall have
advised each Holder of Registrable Securities to be covered by such registration
in writing that the inclusion of such other securities would not in the
underwriter's reasonable judgment adversely affect such offering or (ii) the
Holders of a majority of Registrable Securities to be covered by such
registration shall have consented in writing to the inclusion of such other
securities. The Company has not granted, and the Company will not grant to any
person at any time on or after the date hereof, the right to be included among
the securities registered pursuant to this SECTION 2.1 that is inconsistent with
the provisions of this SECTION 2.1(B).
(c) REGISTRATION STATEMENT FORM. Registrations under this SECTION
2.1 shall be on such appropriate registration form of the Commission (i) as
shall be selected by the Holders of a majority of the Registrable Securities so
to be registered and (ii) as shall permit the disposition of such Registrable
Securities in accordance with the intended method or methods of disposition
specified in their request for such registration. The Company agrees to include
in any such registration statement all information which Holders of Registrable
Securities being registered shall reasonably request.
(d) EFFECTIVE REGISTRATION STATEMENT. A registration requested
pursuant to this SECTION 2.1 shall not be deemed to have been effected and shall
not count as a requested registration pursuant to SECTION 2.1(A) hereof (i)
unless a registration statement with respect thereto has become effective under
the Securities Act and has remained effective for a period of at least 180 days
(or such shorter period in which all Registrable Securities included in such
registration have actually been sold thereunder, but subject to extension
pursuant to SECTION 2.4(B)), (ii) if after it has become effective, such
registration is interfered with by any stop order, injunction or other order or
requirement of the Commission or other governmental agency or court for any
reason not the fault of a Holder of Registrable Securities covered thereby have
not been sold, or (iii) if the conditions to closing specified in the selling
agreement or
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underwriting agreement entered into in connection with such registration are not
satisfied or waived by the parties thereto other than a Holder of Registrable
Securities. Notwithstanding the foregoing, the Company will pay all Registration
Expenses in connection with any registration that is not deemed to have been
effected pursuant to SECTION 2.1(A) as a result of the terms of this SECTION
2.1(D).
(e) UNDERWRITERS. Any registration effected pursuant to this SECTION
2.1 shall, at the election of the Holders of a majority of the Registrable
Securities to be so registered, be an underwritten public offering on a firm
commitment basis or a best efforts basis. The managing underwriter or
underwriters thereof shall be selected by the Company, subject to the approval
of such selection by the Holders of a majority of the Registrable Securities to
be so registered, and the price, terms and provisions of the offering shall be
subject to the approval of the Company and the Holders of a majority of the
Registrable Securities to be so registered.
(f) APPORTIONMENT IN REGISTRATIONS REQUESTED. If, in connection with
a registration requested pursuant to this SECTION 2.1, the managing underwriter
shall advise the Company in writing (with a copy to each Holder of Registrable
Securities requesting registration) that, in its opinion, the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering within a price range acceptable to the
Holders of a majority of the Registrable Securities requested to be included in
such registration, the number of securities that are otherwise entitled to be
included in such registration shall be allocated in the following manner: the
Registrable Securities requested to be included in such registration shall be
reduced, on a pro rata basis among the Holders thereof requesting such
registration on the basis of the percentage of the Registrable Securities held
by the Holders of Registrable Securities which have requested that such
Registrable Securities be included.
2.2 REGISTRATIONS ON FORM S-3. Anything contained in SECTION 2.1 to the
contrary notwithstanding, the Holder or Holders of the Registrable Securities
shall have the right to request in writing an unlimited number of registrations
on Form S-3 (or any successor or similar short- form registration statement), of
Registrable Securities, which request or requests shall (i) specify the number
of Registrable Securities intended to be sold or disposed of and the Holders
thereof, and (ii) state the intended method of disposition of such Registrable
Securities. A requested registration in compliance with this SECTION 2.2 shall
not count as a registration statement initiated pursuant to SECTION 2.1 but
shall otherwise be treated as a registration initiated pursuant to, and shall,
except as otherwise expressly provided in this SECTION 2.2, be subject to
SECTION 2.1. In addition, the Company may at any time initiate a registration on
Form S-3 (or any successor or similar short-form registration statement) of the
Registrable Securities. The Holder or Holders of such Registrable Securities
shall cooperate with such registration, including providing the information
regarding such Holder or Holders required to be included in the Prospectus by
the Securities Act. The Company will pay all Registration Expenses in connection
with any registration on Form S-3 (or any successor or similar short-form
registration statement).
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2.3 "PIGGYBACK" REGISTRATIONS.
(a) RIGHT TO INCLUDE REGISTRABLE 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, and other than
pursuant to SECTION 2.1 or SECTION 2.2), whether or not for sale for its own
account, and the registration form to be used may be used for the registration
of Registrable Securities, the Company will give prompt written notice (in any
event within ten (10) business days after its receipt of any notice of exercise
of other demand registration rights and at least thirty (30) days prior to the
anticipated filing date of the registration statement relating to such
registration) to all Holders of Registrable Securities of its intention to do so
and of such Holders' rights under this SECTION 2.3. Upon the written request of
any such Holder made within twenty (20) days after the date of any such notice,
the Company will include in such registration all Registrable Securities which
the Company has been so requested to register by the Holders thereof, 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 Registrable Securities and, thereupon, (i) in the case of a determination not
to register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from its obligation to
pay the Registration Expenses in connection therewith or to include any
Registrable Securities in subsequent registrations), without prejudice, however,
to the rights of any Holder of Registrable Securities entitled to do so to
request that such registration be effected as a registration under SECTION 2.1
or SECTION 2.2, and (ii) in the case of a determination to delay registering,
shall be permitted to delay registering any Registrable Securities for the same
period as the delay in registering its Common Stock. No registration effected
under this SECTION 2.3 shall relieve the Company of its obligation to effect any
registration upon request under SECTION 2.1 or SECTION 2.2. The Company will pay
all Registration Expenses in connection with each registration of Registrable
Securities requested pursuant to this SECTION 2.3.
(b) APPORTIONMENT IN "PIGGYBACK" REGISTRATIONS.
(i) If a registration under this SECTION 2.3 is an
underwritten primary registration on behalf of the Company and the
managing underwriter of such underwritten offering advises the Company in
writing of its belief that the aggregate number of shares of Common Stock
requested to be included in such registration exceeds the number which can
be sold in such offering, then the Company will include in such
registration, (A) first, the securities proposed by the Company to be sold
for its own account, (B) second, the Registrable Securities and Existing
Registrable Securities requested to be included in such registration;
PROVIDED, THAT if the managing underwriter advises the Company in writing
of its belief that a lower number of Registrable Securities and Existing
Registrable Securities should be included, then the Company shall be
required to include in the underwriting only that lower number of
Registrable Securities and Existing Registrable Securities, and the
holders of Registrable Securities and Existing Registrable Securities
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who have requested registration shall participate in the underwriting in
accordance with the terms of SECTION 2.3(B)(III) below, and (C) third, if
all of the Registrable Securities and Existing Registrable Securities
requested to be included in such registration have been included therein,
then any other securities requested to be included in such registration.
(ii) If a registration under this SECTION 2.3 is an
underwritten secondary registration on behalf of holders of the Company's
Securities, and the managing underwriter advises the Company in writing of
its belief that the aggregate number of shares of Common Stock requested
to be included in such registration exceeds the number which can be sold
in such offering, then the Company will include in such registration (A)
first, the securities requested to be included therein by the holders
requesting such registration, (B) second, the Registrable Securities and
Existing Registrable Securities requested to be included in such
registration; PROVIDED, THAT if the managing underwriter advises the
Company in writing of its belief that a lower number of Registrable
Securities and Existing Registrable Securities should be included, then
the Company shall be required to include in the underwriting only that
lower number of Registrable Securities and Existing Registrable
Securities, and the holders of Registrable Securities and Existing
Registrable Securities who have requested registration shall participate
in the underwriting in accordance with the terms of SECTION 2.3(B)(III)
below, and (C) third, if all of the Registrable Securities and Existing
Registrable Securities requested to be included in such registration have
been included therein, then any other securities requested to be included
in such registration.
(iii) If the number of Registrable Securities and Existing
Registrable Securities to be included in a registration are to be reduced
pursuant to either SECTION 2.3(B)(I)(B) or SECTION 2.3(B)(II)(B), the
maximum number of Registrable Securities and Existing Registrable
Securities that are entitled to be included in such registration (other
than Registrable Securities included pursuant to SECTION 2.3(B)(II)(A),
which shall not be reduced) (the "MAXIMUM NUMBER OF SHARES") shall be
allocated among the holders of Registrable Securities and Existing
Registrable Securities in the following manner:
(A) first, each Holder of Registrable Securities shall be
entitled to include in such registration a number of shares of Registrable
Securities determined in accordance with the following formula:
1 degree = 2 x (H/R x M)
Where:
1 degree = the number of shares of Registrable Securities that such
Holder shall be entitled to include in such registration
pursuant to this clause (A).
H = the number of shares of Registrable Securities owned by such
Holder.
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R = the total number of shares of Registrable Securities and
Existing Registrable Securities for which registration has
been requested.
M = the Maximum Number of Shares.
(B) second, each Holder of Registrable Securities and each
holder of Existing Registrable Securities shall be entitled to include in
such registration a portion of the remaining Maximum Number of Shares
determined in accordance with the following formula:
2 degree = H/R x (M-I)
Where:
2 degree = the number of shares of Registrable Securities or Existing
Registrable Securities that such Holder shall be entitled to
include in such registration pursuant to this clause (B).
H = the number of shares of Registrable Securities and Existing
Registrable Securities owned by such Holder.
R = the aggregate number of shares of Registrable Securities and
Existing Registrable Securities for which registration has
been requested.
M = the Maximum Number of Shares.
I = the aggregate number of shares of Registrable Securities to be
included in such registration pursuant to clause (A) above.
2.4 REGISTRATION PROCEDURES. Whenever the holders of Registrable
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:
(a) prepare and file with the Commission within 90 days, and use its
best efforts to prepare and so file within 45 days, after receipt of a request
for registration with respect to such Registrable Securities, a registration
statement with respect to such Registrable Securities (such registration
statement to include all information which the holders of the Registrable
Securities to be registered thereby shall reasonably request) and use its best
efforts to cause such registration statement to become and remain effective;
PROVIDED, THAT at least five days before filing a registration statement or
prospectus or any amendments or supplements thereto, the Company will (i)
furnish to counsel selected by the holders of a majority of the Registrable
Securities covered by such registration statement copies of all such documents
proposed to be filed, and the Company
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shall not file any thereof to which such counsel shall have reasonably objected
on the grounds that such document does not comply in all material respects with
the requirements of the Securities Act or of the rules or regulations
thereunder, and (ii) notify each holder of Registrable Securities covered by
such registration statement of (x) any request by the Commission to amend such
registration statement or amend or supplement any prospectus, or (y) any stop
order issued or threatened by the Commission, and take all reasonable actions
required to prevent the entry of such stop order or to remove it if entered;
(b) (i) 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 for
a period of not less than 180 days (except that such 180 day period shall be
extended (x) by the length of any period that a stop order or similar proceeding
is in effect which prohibits the distribution of the Registrable Securities, and
(y) by the number of days during the period from and including the date on which
each seller of Registrable Securities shall have received a notice delivered
pursuant to clause (g) below until the date when such seller shall have received
a copy of the supplemented or amended prospectus contemplated by clause (g)
below), and (ii) comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish to each seller and each underwriter, if any, of Registrable
Securities, without charge, such number of conformed copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus and, in each
case including all exhibits) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement remains in
effect and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller to consummate the disposition in
such jurisdictions of the Registrable Securities owned by such Seller; PROVIDED,
HOWEVER, that the Company will not be required to (i) qualify generally to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this clause (d), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction;
(e) furnish to each seller of Registrable Securities a signed copy,
addressed to such seller (and the underwriters, if any) of an opinion of counsel
for the Company, dated the effective date of such registration statement (and,
if such registration statement includes an underwritten public offering, dated
the date of the closing under the underwriting agreement), reasonably
satisfactory in form and substance to such seller, covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) as are customarily
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covered in opinions of issuer's counsel delivered to the underwriters in
underwritten public offerings, and such other legal matters as the seller (or
the underwriters, if any) may reasonably request;
(f) furnish to each seller of Registrable Securities a signed copy,
addressed to such seller (and the underwriters, if any) of a "comfort" letter,
dated the effective date of such registration statement signed by the
independent public accountants who have certified the Company's financial
statements, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and 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 the
underwriters may reasonably request;
(g) immediately notify the managing underwriter, if any, and each
seller of Registrable Securities, at a time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event known to the Company as a result of which the prospectus included in such
registration statement, as then in effect, contains an untrue statement of a
material fact or omits to state any fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made, and, at the request of any such
seller, the Company will prepare and furnish such seller, as soon as
practicable, 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
purchasers of such Registrable 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; PROVIDED THAT, if (i)
the providing of copies of such supplement or amendment would require the
Company to publicly disclose information sooner than it otherwise would be
required to disclose such information and (ii) the Board of Directors of the
Company determines, in its reasonable business judgment, that the disclosure of
such information would interfere with any material financing, acquisition,
corporate reorganization or other material transaction or development involving
the Company, then the Company may postpone providing copies of such supplement
or amendment until the earlier of (x) the date 30 days after the occurrence of
the event necessitating such supplement or amendment and (y) a date as soon as
practicable after the date on which the Board of Directors determines, in its
reasonable business judgment, that the disclosure of such information would not
interfere with any material financing, acquisition, corporate reorganization or
other material transaction or development involving the Company;
(h) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and on any Securities Exchange or National Automated Quotation System
requested by the holders of a majority (by number of shares) of such Registrable
Securities, provided that the Company then meets or is reasonably capable of
meeting the eligibility requirements for such exchange or system and such
exchange or system is reasonably satisfactory to the managing underwriters, and
to enter into such
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customary agreements as may be required in furtherance thereof, including,
without limitation, listing applications and indemnification agreements in
customary form;
(i) retain a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(j) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries, if any,
and cause the Company's and its affiliates' and subsidiaries' officers,
directors, employees and independent accountants to supply all information
reasonably requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement to enable them to conduct a
reasonable investigation within the meaning of the Securities Act;
(k) subject to other provisions hereof, use its best efforts to cause
such Registrable Securities covered by such registration statement to be
registered with or approved by such other governmental agencies or authorities
or self-regulatory organizations as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities;
(l) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission and make available to its security holders, in
each case as soon as practicable, an earnings statement covering a period of at
least twelve months, beginning with the first month after the effective date (as
the term "effective date" is defined in Rule 158(c) under the Securities Act) of
the registration statement, which earnings statement shall satisfy the
provisions of SECTION 11(A) of the Securities Act and Rule 158 thereunder;
(m) permit any holder of Registrable Securities, which holder, in the
sole judgment, exercised in good faith, of such holder might be deemed to be a
controlling person of the Company (within the meaning of the Securities Act or
the Exchange Act) to participate in the preparation of any registration
statement covering such holder's Registrable Securities and to include therein
material, furnished to the Company in writing, which in the reasonable judgment
of such holder should be included and which is reasonably acceptable to the
Company; and
(n) use every reasonable effort to obtain the lifting at the earliest
possible time of any stop order suspending the effectiveness of any registration
statement or of any order preventing or suspending the use of any preliminary
prospectus.
2.5 REGISTRATION EXPENSES. All expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation,
all Registration Expenses will be borne by the Company.
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ARTICLE III
INDEMNIFICATION
3.1 INDEMNIFICATION BY THE COMPANY. In the event of any registration of
any securities by the Company under the Securities Act, the Company agrees to
indemnify and hold harmless, to the fullest extent permitted by law, each of the
holders of any Registrable Securities covered by such registration statement,
each other Person, if any, who controls such holder within the meaning of the
Securities Act or the Exchange Act, and each of their respective directors,
officers, general partners, limited partners and managing directors and each
other person who participates as an underwriter in the offering or sale of such
securities as follows:
(a) against any and all loss, liability, claim, damage or expense
arising out of or based upon an untrue statement or alleged untrue statement of
a material fact contained in any registration statement (or any amendment or
supplement thereto), including all documents incorporated therein by reference,
or in any preliminary prospectus or prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or any
violation by the Company of any federal, state or common law rule or regulation
applicable to the Company and relating to action required of or inaction by the
Company in connection with any such registration;
(b) against any and all loss, liability, claim, damage and expense to
the extent of the aggregate amount paid in settlement of any litigation,
investigation or proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue statement or
omission or any such alleged untrue statement or omission, or any violation by
the Company of any federal, state or common law rule or regulation applicable to
the Company and relating to action required of or inaction by the Company in
connection with any such registration, if such settlement is effected with the
written consent of the Company, which consent shall not be unreasonably
withheld; and
(c) against any and all expense incurred by them in connection with
investigating, preparing or defending against any litigation, or investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission or any
such alleged untrue statement or omission, or any violation by the Company of
any federal, state or common law rule or regulation applicable to the Company
and relating to action required of or inaction by the Company in connection with
any such registration, to the extent that any such expense is not paid under
SECTION 3.1 (A) or (B) above;
PROVIDED, THAT this indemnity does not apply with respect to any particular
holder, to any loss, liability, claim, damage or expense to the extent arising
out of an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of that holder expressly for use in the
preparation of any registration statement (or any amendment or supplement
thereto), including all documents incorporated therein by reference, or in any
preliminary prospectus or prospectus
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(or any amendment or supplement thereto); PROVIDED, FURTHER, that the Company
will not be liable to any holder or any person who participates as an
underwriter in the offer or sale of Registrable Securities, if any, under the
indemnity agreement in this SECTION 3.1, with respect to any preliminary
prospectus or the final prospectus or the final prospectus as amended or
supplemented, as the case may be, to the extent that any such loss, liability,
claim, damage or expense of such underwriter, controlling Person or holder
results from the fact that such underwriter sold Registrable Securities to a
Person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the final prospectus or of the final
prospectus as then amended or supplemented, whichever is most recent, if the
Company has previously and timely furnished copies thereof to such underwriter
and such final prospectus, as then amended or supplemented, has corrected any
such misstatement or omission. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such holder or
any such director, officer, general partner, underwriter or other controlling
person and shall survive the transfer of such securities by such seller.
3.2 INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. In connection
with any registration statement in which a holder of Registrable Securities is
participating, each such holder agrees to indemnify and hold harmless (in the
same manner and to the same extent as set forth in SECTION 3.1 of this
Agreement), to the extent permitted by law, the Company and its directors,
officers and controlling Persons, and their respective directors, officers and
general partners, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary,
final 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 or on behalf of such holder, specifically stating that it is
for use in the preparation of such registration statement, preliminary, final or
summary prospectus or 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 such holder, as the case may be, or any of their respective
directors, officers, controlling Persons or general partners and shall survive
the transfer of such securities by such holder; PROVIDED that no such holder
shall be liable under SECTION 3.2 for any amounts exceeding the product of the
purchase price per Registrable Security and the number of Registrable Securities
being sold pursuant to such registration statement or prospectus by such holder.
3.3 WRITTEN NOTICE. Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or proceeding
involving a claim referred to in SECTION 3.1 or SECTION 3.2 of this Agreement,
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 SECTION 3.1 or SECTION 3.2 of this Agreement except to the extent that the
indemnifying party is actually materially prejudiced by such failure to give
notice. In case any such action is brought against an indemnified party, the
indemnifying party will be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified, to the
extent that it
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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 will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, in
which case the indemnifying party shall not be liable for the fees and expenses
of (i) more than one counsel for all holders of Registrable Securities, selected
by a majority (by number of shares) of the holders of Registrable Securities
(which choice shall be reasonably satisfactory to the Company), or (ii) more
than one counsel for the Company in connection with any one action or separate
but similar or related actions. An indemnifying party who is not entitled to, or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim, in which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or counsels. The indemnifying party will
not, without the prior written consent of each indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not such indemnified party or any Person who
controls such indemnified party is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of such indemnified party from all liability arising out
of such claim, action, suit or proceeding. Notwithstanding anything to the
contrary set forth herein, and without limiting any of the rights set forth
above, in any event any party will have the right to retain, at its own expense,
counsel with respect to the defense of a claim.
3.4 UNDERWRITING AGREEMENT. The Company and each holder of Registrable
Securities requesting registration shall provide for the foregoing indemnity
(with appropriate modifications) in any underwriting agreement with respect to
any required registration or other qualification of securities under any Federal
or state law or regulation of any governmental authority other than the
Securities Act.
3.5 CONTRIBUTIONS. If the indemnification provided for in SECTIONS 3.1 and
3.2 of this Agreement is unavailable or insufficient to hold harmless an
indemnified party under such Sections, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in SECTION 3.1 or
SECTION 3.2 of this Agreement in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand, and the
indemnified party on the other, in connection with statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations, including, without limitation, the
relative benefits received by each party from the offering of the securities
covered by such registration statement, the parties' relative knowledge and
access to information concerning the matter with respect to which the claim was
asserted and the opportunity to correct and prevent any statement or omission.
The relative fault shall be determined by reference to,
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among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statements or omission. The parties hereto agree
that it would not be just and equitable if contributions pursuant to this
SECTION 3.5 were to be determined by pro rata or per capita allocation (even if
the underwriters, if any, were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the first sentence of this SECTION 3.5. The amount
paid by an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this SECTION 3.5 shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim (which shall be limited as provided in SECTION 3.3 of this Agreement if
the indemnifying party has assumed the defense of any such action in accordance
with the provisions thereof) which is the subject of this SECTION 3.5. Promptly
after receipt by an indemnified party under this SECTION 3.5 of notice of the
commencement of any action against such party in respect of which a claim for
contribution may be made against an indemnifying party under this SECTION 3.5,
such indemnified party shall notify the indemnifying party in writing of the
commencement thereof if the notice specified in SECTION 3.3 of this Agreement
has not been given with respect to such action; PROVIDED, THAT the omission to
so notify the indemnifying party shall not relieve the indemnifying party from
any liability which it may otherwise have to any indemnified party under this
SECTION 3.5, except to the extent that the indemnifying party is actually
materially prejudiced by such failure to give notice. The Company and each
holder of Registrable Securities agrees with each other and the underwriters of
the Registrable Securities, if requested by such underwriters, that (i) the
underwriters' portion of such contribution shall not exceed the underwriting
discount and (ii) that the amount of such contribution shall not exceed an
amount equal to the net proceeds actually received by such indemnifying party
from the sale of Registrable Securities in the offering to which the losses,
liabilities, claims, damages or expenses of the indemnified parties relate. No
Person guilty of fraudulent misrepresentation (within the meaning of SECTION
11(F) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
3.6 PERIODIC PAYMENTS. The indemnification required by this Article III
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.
ARTICLE IV
OTHER AGREEMENTS
4.1 HOLDBACK AGREEMENTS.
(a) HOLDERS OF REGISTRABLE SECURITIES. Each holder of Registrable
Securities agrees not to sell, make any short sale of, loan, grant any option
for the purchase of, effect any public sale or distribution of or otherwise
dispose of any securities of the Company, during the seven days
Registration Rights Agreement
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prior to, and the 90-day period beginning on, the effective date of any
underwritten registration pursuant to Article II hereof (except as part of such
underwritten registration), unless the managing underwriters of the registered
public offering otherwise agree.
(b) THE COMPANY. The Company agrees (i) not to sell, make any short
sale of, loan, grant any option for the purchase of, effect any public sale or
distribution of its securities, during the seven days prior to, and during the
90-day period beginning on, the effective date of any underwritten registration
pursuant to Article II hereof in which holders of Registrable Securities are
selling stockholders (except as part of such underwritten registration or
pursuant to registrations on Form S-4 or Form S-8 or any successor form), unless
the managing underwriters of the registered public offering otherwise agree, and
(ii) to use all reasonable efforts to cause each holder of at least 5% (on a
fully-diluted basis) of its equity securities, or any securities convertible,
exchangeable or exercisable for or into such securities, to agree not to sell,
make any short sale of, loan, grant any option for the purchase of, or effect
any public sale or distribution of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the managing underwriters of the registered public offering otherwise
agree.
4.2 UNDERWRITTEN OFFERINGS.
(a) DEMAND UNDERWRITTEN OFFERINGS. If requested by the managing
underwriter for any underwritten offering of Registrable Securities pursuant to
a registration pursuant to SECTION 2.1 or 2.2 above, the Company will enter into
an underwriting agreement with such underwriters for such offering, such
agreement to be reasonably satisfactory in substance and form to the Company,
and to contain such representations and warranties by the Company and such other
terms as are generally included in agreements of this type, including, without
limitation, indemnities customarily included in such agreements. The holders of
the Registrable Securities will cooperate with the Company in the negotiation of
the underwriting agreement. The holders of Registrable Securities to be
distributed by such underwriters shall be parties to such underwriting
agreement. The Company shall cooperate with any such holder of Registrable
Securities in order to limit any representations or warranties to, or agreements
with, the Company or the underwriters to be made by such holder only to those
representations, warranties or agreements regarding such holder, such holder's
Registrable Securities and such holder's intended method of distribution and any
other representation required by law.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by SECTION 2.3 of this Agreement and such securities are to be
distributed by or through one or more underwriters, the Company will, if
requested by any holder of Registrable Securities as provided in SECTION 2.3 of
this Agreement, arrange for such underwriters to include all the Registrable
Securities to be offered and sold by such holder, subject to the limitations set
forth in SECTION 2.3 hereof, among the securities to be distributed by such
underwriters. The holders of Registrable Securities to be distributed by such
underwriters shall be parties to the underwriting agreement between the Company
and such underwriters. The Company shall cooperate with any such holder of
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Registrable Securities in order to limit any representations or warranties to,
or agreements with, the Company or the underwriters to be made by such holder
only to those representations, warranties or agreements regarding such holder,
such holder's Registrable Securities and such holder's intended method of
distribution and any other representation required by law.
4.3 ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not
take any action, or fail to take any action which it may properly take, with
respect to its securities which would adversely affect the ability of the
holders of Registrable Securities to include such Registrable Securities in any
registration of its securities contemplated by this Agreement or the
marketability of such Registrable Securities under any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
4.4 RULE 144. The Company covenants that it will file the reports required
to be filed by it under the Securities Act and the Exchange Act and the rules
and regulations adopted by the Commission thereunder (or, if the Company is not
required to file such reports, it will, upon the request of any holder of
Registrable Securities, make publicly available other information), and it will
take such further action as any holder of Registrable Securities may reasonably
request, all to the extent required from time to time to enable such holder to
sell shares of Registrable Securities without registration under the Securities
Act within the limitation of the exemption provided by (i) Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or (ii) any
similar rule or regulation hereafter adopted by the Commission. Upon the request
of any holder of Registrable Securities, the Company will deliver to such holder
a written statement as to whether it has complied with such requirements.
ARTICLE V
MISCELLANEOUS
5.1 NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
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 Registrable Securities for
purposes of any request or other action by any Holder or Holders of Registrable
Securities pursuant to this Agreement or any determination of any number or
percentage of shares of Registrable Securities held by any Holder or Holders of
Registrable Securities contemplated by this Agreement. The Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership of
such Registrable Securities.
5.2 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Illinois.
(b) Any legal action or proceeding with respect to this agreement shall
be brought in the courts of the State of Illinois or of the United States of
America for the northern district of Illinois,
Registration Rights Agreement
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and, by execution and delivery of this agreement, each of the Company and the
Holder 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 Company and the Holder hereby irrevocably waives
any 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 any holder to serve
process in any other manner permitted by law.
(d) The Company and the Holder 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 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 and the
transactions contemplated hereby among other things, the mutual waivers and
certifications contained in this SECTION 5.2.
5.3 ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersedes any and all previous oral or written communications, representations
or agreements. This Agreement may be amended, modified or supplemented only by a
written instrument duly executed by the Company, the Holders of a majority of
the outstanding Registrable Securities, and each of Heller and Midwest so long
as such Holders own any Registrable Securities.
5.4 TERM. This Agreement will terminate at such time as the Registrable
Securities, in the aggregate, represent less than both (i) 1% of the Company's
outstanding shares of Common Stock on a fully diluted basis, and (ii) the
average weekly trading volume of the Company's Common Stock for four consecutive
calendar weeks.
5.5 WAIVER. No waiver by any party of any term or condition of this
Agreement, in one or more instances, shall be valid unless in writing, and no
such waiver shall be deemed to be construed as a waiver of any subsequent breach
or default of the same or similar nature.
5.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
permitted assigns, as the case may be.
5.7 REMEDIES. In the event of a breach by any party to this Agreement of
its obligations under this Agreement, the loss of any right as provided in this
Agreement as a result of such breach shall not be the sole and exclusive remedy
of any party injured by such breach. Any such injured
Registration Rights Agreement
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party will be entitled to specific performance of its rights under this
Agreement, in addition to being entitled to exercise all rights granted by law,
including recovery of damages. The parties agree that the provisions of this
Agreement shall be specifically enforceable, it being agreed by the parties that
the remedy at law, including monetary damages, for breach of any such provision
will be inadequate compensation for any loss and that any defense in any action
for specific performance that a remedy at law would be adequate is waived.
5.8 INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
5.9 HEADINGS. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.
5.10 FURTHER ASSURANCES. Each party hereto shall cooperate and shall take
such further action and shall execute and deliver such further documents as may
be reasonably requested by any other party in order to carry out the provisions
and purposes of this Agreement.
5.11 GENDER. Whenever the pronouns "he" or "his" are used herein they
shall also be deemed to mean "she" or "hers" or "it" or "its" whenever
applicable words in the singular shall be read and construed as though in the
plural and words in the plural shall be construed as though in the singular in
all cases where they would so apply.
5.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
5.13 NOTICES. All notices and other communications provided for herein
(including, without limitation, any modifications of, or waivers or consents
under, this Agreement) 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 specified below; or, as to any party, at such
other address as shall be designated by such party in a notice to each other
party:
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If to the Company:
Castle Dental Centers, Inc.
1360 Post Oak Boulevard
Suite 1300
Houston, Texas 77056
Attention: Jack H. Castle, Jr.
Telecopy: (713) 513-1401
If to Heller:
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attention: Account Manager
Corporate Finance
Telecopy: (312) 441-7367
with a copy to:
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attention: Legal Services
Corporate Finance Group
Telecopy: (312) 441-6876
If to Midwest:
Midwest Mezzanine Fund II, L.P.
208 South LaSalle Street, 10th floor
Chicago, Illinois 60604-1003
Attention: J. Allan Kayler
Telecopy: (312) 553-6647
Except as otherwise provided in this Agreement, 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.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Registration Rights Agreement as of the date first above written.
HELLER FINANCIAL, INC., CASTLE DENTAL CENTERS, INC.,
A DELAWARE CORPORATION A DELAWARE CORPORATION
By_________________________________ By_________________________________
Jack H. Castle, Jr.
Chairman and Chief Executive
MIDWEST MEZZANINE FUND II, L.P. Officer
By: ABN AMRO Mezzanine Management
II, L.P., its general partner
By: ABN AMRO Mezzanine Management
II, Inc., its general partner
By_________________________________
J. Allan Kayler, Senior Vice
President
Registration Rights Agreement
EXHIBIT 10.21
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT to AMENDED AND RESTATED CREDIT AGREEMENT (this "THIRD
Amendment") executed effective as of January 31, 2000 (the "EFFECTIVE DATE"), is
by and among CASTLE DENTAL CENTERS, INC., a Delaware corporation ("BORROWER"),
and BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), a national
banking association (in its individual capacity, "BANK OF AMERICA"), as agent
(in such capacity, "AGENT") for each of the lenders that is a signatory hereto
(individually, together with its successors and assigns, "LENDER" and
collectively, "LENDERS") and such Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders are parties to that
certain Amended and Restated Credit Agreement dated as of December 18, 1998, as
amended by First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 1999, as amended by Second Amendment to Amended and Restated Credit
Agreement dated as of September 30, 1999 (such Amended and Restated Credit
Agreement as amended and as the same may be further amended from time to time,
the "CREDIT AGREEMENT"), pursuant to which the Lenders agreed to make loans to
and extensions of credit on behalf of the Borrower; and
WHEREAS, the Borrower has requested that the Agent and the Lenders amend
the Credit Agreement, and the Agent and the Lenders have agreed 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:
1. TERMS DEFINED ABOVE. As used in this Third Amendment, each of the terms
"Agent," "Bank of America," "Borrower," "Credit Agreement," "Effective Date,"
"Lenders," and "Third Amendment" shall have the meaning assigned to such term
herein above.
2. 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.
3. OTHER DEFINITIONAL PROVISIONS. The words "hereby," "herein,"
"hereinafter," "hereof," "hereto," and "hereunder" when used in this Third
Amendment shall refer to this Third Amendment as a whole and not to any
particular paragraph or provision of this Third Amendment.
4. AMENDMENTS AND SUPPLEMENTS TO DEFINITIONS.
(1) The following terms, which are defined in Section 1.02 of the Credit
Agreement, are hereby amended in their entirety to read as follows:
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"AGREEMENT" shall mean this Amended and Restated Credit Agreement,
as amended and supplemented by the First Amendment, the Second Amendment,
and the Third Amendment and as the same may from time to time be further
amended or supplemented.
"SUBORDINATED DEBT" shall mean the 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 or
otherwise on terms satisfactory to the Majority Lenders.
(2) Section 1.02 of the Credit Agreement is hereby further amended and
supplemented by adding the following new definitions where alphabetically
appropriate, which read in their entirety as follows:
"EFFECTIVE DATE" shall mean the Effective Date of this Third
Amendment.
"THIRD AMENDMENT" shall mean that certain Third Amendment to Amended
and Restated Credit Agreement dated as of the Effective Date, by and among
the Borrower, the Agent and Lenders.
"NEW MEZZANINE FINANCING" shall mean Subordinated Debt issued by the
Borrower pursuant to which net cash proceeds to the Borrower shall be up
to but not to exceed $20,000,000, provided such New Mezzanine Financing is
upon terms satisfactory to the Majority Lenders.
"SETTLEMENT AGREEMENT" shall mean that certain letter agreement
dated as of January 28, 2000 among the Company, Castle Dental Centers of
California, Inc. and the Persons referred to therein as the "DCS Parties".
5. AMENDMENT TO SECTION 2.03(A). Section 2.03(a) of the Credit Agreement is
hereby amended in its entirety to read as follows:
"The Aggregate Commitments shall at all times be equal to the lesser
of (i) the Aggregate Maximum Credit Amounts after adjustments resulting
from reductions pursuant to Section 2.03(b) or increases pursuant to
Section 2.03(d) or (ii) the Borrowing Base as determined from time to
time."
6. AMENDMENT TO SECTION 8.01(H). Section 8.01(h) of the Credit Agreement is
hereby amended by adding the following sentence at the end thereof:
"Borrower shall issue an additional borrowing base report as of
September 30, 1999 on January 20, 2000 which shall reflect on a pro forma
basis all Debt outstanding on January 20, 2000 and include, without
limitation, the effects of the New Mezzanine Financing."
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7. AMENDMENT TO SECTION 8.11. Section 8.11 of the Credit Agreement is hereby
amended in its entirety to read as follows:
"The Borrower hereby covenants and agrees that, beginning 20
Business Days after the Effective Date, Borrower shall maintain at all
times Hedging Agreements 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 50% of Borrower's Total Funded
Debt for a fixed rate relating to such amount."
8. AMENDMENT TO SECTION 9.11. Section 9.11 of the Credit Agreement is hereby
amended in its entirety to read as follows:
"Section 9.11 RATIO OF TOTAL FUNDED DEBT TO CAPITALIZATION. For the
four fiscal quarters ending on December 31, 1999, March 31, 2000, June 30,
2000, and September 30, 2000, the Borrower will not permit its ratio of
Total Funded Debt to Capitalization to be greater than .65 to 1.0. For the
one fiscal quarter ending on December 31, 2000, the Borrower will not
permit its ratio of Total Funded Debt to Capitalization to be greater than
.625 to 1.0. For each fiscal quarter thereafter, 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 .60 to 1.0."
9. AMENDMENT TO SECTION 9.14. Section 9.14 of the Credit Agreement is hereby
amended by deleting the chart contained therein in its entirety and replacing it
with the following:
------------- ---------------------------------
RATIO PERIOD
------------- ---------------------------------
1.10 to 1.00 from the Effective Date through
and including 3/31/2001
------------- ---------------------------------
1.15 to 1.00 from 6/30/2001 and thereafter
------------- ---------------------------------
10. AMENDMENT TO SECTION 9.16. Section 9.16 of the Credit Agreement is hereby
amended in its entirety to hereafter read as follows:
"Section 9.16 CAPITAL EXPENDITURES. Without the prior written
consent of the Majority Lenders, the Borrower will not make any
expenditures for fixed or capital assets if, after giving effect thereto,
the aggregate of all such expenditures would, in the case of the 12 month
periods ending at the end of the fiscal quarters ending on December 31,
1999, March 31, 2000 and June 30, 2000 respectively, exceed $11,000,000,
and in the case of each 12 month period ending at the end of each fiscal
quarter thereafter, exceed $10,000,000."
11. AMENDMENT - NEW SECTION 9.24. A new Section 9.24 to Article IX is hereby
added to read as follows:
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"Section 9.24 PRE-PAYMENT OF NEW MEZZANINE FINANCING. Neither the Borrower
nor any Subsidiary will directly or indirectly prepay any sums outstanding
on the New Mezzanine Financing whether voluntarily, mandatorily or through
any redemption pursuant to the Stockholders Agreement dated January 31,
2000, between the Borrower, Heller Financial, Inc. and Midwest Mezzanine
Fund II, L.P. (the "STOCKHOLDERS AGREEMENT") or otherwise without the
express written consent of the Majority Lenders. In furtherance hereof and
in addition, the Borrower will not redeem any "Redeemable Securities" (as
defined in the Stockholders Agreement) without the express written consent
of the Majority Lenders."
12. AMENDMENT TO EXHIBIT H. Exhibit H to the Credit Agreement is hereby
amended to read as Exhibit H attached hereto.
13. LIMITED WAIVER. Borrower's Default with respect to Section 8.11 of the
Credit Agreement as it existed prior to the Effective Date is hereby waived.
This waiver is effective as of the Effective Date and does not apply to
compliance with Section 8.11 after the Effective Date. This limited waiver shall
not be deemed to be a consent to, or waiver or modification of, any other term
or condition of the Credit Agreement, the Security Agreement, the Guaranty
Agreement, or any other Loan Document and shall not prejudice any right or
rights which the Lenders may now have or may have in the future under the Credit
Agreement, Security Agreement, Guarantee Agreement, or any other Loan Document.
14. CONDITIONS. The effectiveness of this Third Amendment against the Agent
and the Lenders is subject to the following conditions precedent:
(1) the New Mezzanine Financing in an amount of at least $15,000,000 shall
have been closed and funded;
(2) the Agent's receipt of multiple original counterparts, as requested by
the Agent, of this Third Amendment, executed and delivered by a duly
authorized officer of the Borrower, the Agent, and each Lender, as
applicable and ratified by the Guarantors;
(3) the Agent's receipt of a copy of the Subordinated Note and a fully
executed Subordination Agreement in connection therewith;
(4) the Agent's receipt of such other instruments or documents as the
Agent may reasonably request; and
(5) the "Closing" (as defined in the Settlement Agreement) shall have
occurred and payment of the "Full Settlement Amount" (as defined in the
Settlement Agreement) shall occur concurrently herewith.
15. REPRESENTATIONS AND WARRANTIES. Except as affected by the transactions
contemplated in the Credit Agreement and this Third Amendment, each of the
representations and warranties made by the Borrower in or pursuant to the Credit
Agreement and the Security Instruments shall be true and
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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).
16. ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT AGREEMENT. Each of the
Borrower, 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.
17. SUCCESSORS AND ASSIGNS. This Third 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.
18. COUNTERPARTS. This Third 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 Agent and the Lenders.
In this regard, each of the parties hereto acknowledges that a counterpart of
this Third Amendment containing a set of counterpart execution pages reflecting
the execution of each party hereto shall be sufficient to reflect the execution
of this Third Amendment by each necessary party hereto and shall constitute one
instrument.
19. ENTIRE AGREEMENT. This Third 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 Third Amendment.
20. GOVERNING LAW. This Third 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 THIRD 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]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third 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: _____________________________________
LENDER AND AGENT: BANK OF AMERICA, N.A. (formerly known as
NationsBank, N.A.)
By _________________________________________
Matt Bryant, Vice President
LENDERS: BANKBOSTON, N.A.
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
AMSOUTH BANK
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
HELLER FINANCIAL, INC.
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
6
<PAGE>
RATIFICATION
Each of the Guarantors hereby expressly (i) acknowledges the terms of this
Third Amendment, (ii) ratifies and affirms its obligations under its Guaranty
Agreement, 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.
GUARANTORS: CASTLE DENTAL CENTERS OF FLORIDA, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE DENTAL CENTERS OF TENNESSEE, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE DENTAL CENTERS OF TEXAS, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CDC OF CALIFORNIA, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
7
<PAGE>
CASTLE DENTAL CENTERS OF CALIFORNIA, L.L.C.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
DENTAL WORLD, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE DENTAL CENTERS OF AUSTIN, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
DENTCOR, INC.
By: ________________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
8
<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, N.A., as agent for the senior creditors defined below ("AGENT").
INTRODUCTION
Reference is made to the Amended and Restated Credit Agreement dated as of
December 18, 1998 (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 (including interest
accruing after the commencement of a Bankruptcy Event, without regard to whether
or not such interest is an allowed claim), fees, reimbursements,
indemnifications, and other amounts now or hereafter owed by the Debtor and its
Subsidiaries 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.
Exhibit H-1
<PAGE>
"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, 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 in cash, 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 in cash 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 in
cash 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 or any of
its Subsidiaries (each, a "BANKRUPTCY EVENT"), all amounts due with respect to
the
Exhibit H-2
<PAGE>
Senior Debt shall be irrevocably paid in full in cash 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 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
in cash.
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 LIMITATION OF ACTION. Until the Senior Debt is paid in full in cash,
Subordinated Creditor shall not, without the prior written consent of Senior
Creditors, initiate or participate with others in any suit, action or proceeding
against Debtor or any of its Subsidiaries to enforce payment of or to collect
all or any part of the Subordinated Debt or commence judicial enforcement of any
of its rights or remedies with respect to the Subordinated Debt.
2.5 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, or add or
make more restrictive any default or covenant, 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
Exhibit H-3
<PAGE>
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.
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:
______________________________
Exhibit H_4
<PAGE>
______________________________
Telephone: ___________________
Telecopier: __________________
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:
Bank of America, N.A.
Attn: Matt Bryant
700 Louisiana, 7th Floor
Houston, Texas 77002
Telephone: 713-247-6056
Telecopier: 713-247-7748
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.
Exhibit H-5
<PAGE>
EXECUTED as of the date first above written.
BANK OF AMERICA, N.A. (formerly NationsBank,
N.A.)
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
CASTLE DENTAL CENTERS, INC.
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
[SUBORDINATED CREDITOR]
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
Exhibit H-6
EXHIBIT 10.22
January 28, 2000
To the Parties on the Signature Page
Re: Castle Dental Centers of California, L.L.C.
Ladies & Gentlemen:
The purpose of this letter is to set forth certain agreements among Castle
Dental Centers of California, L.L.C., a Delaware limited liability company
("Castle West"), CDC of California, Inc., a Delaware corporation ("CDC"), Castle
Dental Centers, Inc., a Delaware corporation ("Castle Dental," and together with
Castle West and CDC, the "Castle Parties"), and each of the other parties listed
on the signature page hereto (the "DCS Parties" and, collectively with the
Castle Parties, the "Parties").
(A) The Parties hereto have previously entered into the following
agreements (hereinafter, the "Castle West Transaction Documents"):
1. The Master Contribution and Combination Agreement, dated as of
January 30, 1998, among the Castle Parties and the DCS Parties, as amended
by the First Amendment to Master Contribution and Combination Agreement
dated as of February 27, 1998, the Second Amendment to Master Contribution
and Combination Agreement dated as of March 16, 1998, and the Third
Amendment to Master Contribution and Combination Agreement dated as of
March 30, 1998 (as so amended, the "Combination Agreement");
2. The letter agreement dated as of May 29, 1998, among the Castle
Parties and the DCS Parties (the "Letter Agreement");
3. The Limited Liability Company Agreement of Castle West dated as
of March 30, 1998 ("Limited Liability Company Agreement"), among Castle
Dental, CDC, Castle West Holdings, LLC, a California limited liability
company ("Holdings"), and Dental Consulting Services, LLC, a California
limited liability company ("DCS");
4. The Management Agreement between Castle West and Holdings dated
as of March 30, 1998 ("Management Agreement");
5. The Shareholders' Agreement between the Castle Parties and the
DCS Parties dated as of March 30, 1998 ("Shareholders' Agreement");
<PAGE>
6. The Registration Rights Agreement between Castle Dental and
Jeffrey D. Schechter, D.D.S. ("J. Schechter"), S. Alexander Soleimani,
D.M.D. ("Soleimani"), Martin Schechter, D.D.S. ("M. Schechter"), Elliot
Schlang, D.D.S. ("Schlang"), Dental Advisory Group, LLC, a California
limited liability company ("DAG"), and Julie D'Aguanno ("D'Aguanno"),
dated March 30, 1998 (the "Registration Rights Agreement");
7. Confidentiality and Noncompetition Agreements each dated as of
March 30, 1998 (the "Noncompetition Agreements") between Castle Dental and
each of J. Schechter, Soleimani, M. Schechter, Schlang and DAG;
8. Operating Agreement dated as of March 30, 1998 for Holdings among
J. Schechter, Soleimani, M. Schechter, Schlang, D'Aguanno and DAG
("Holdings Operating Agreement");
9. Consulting Agreement dated as of March 30, 1998 between Holdings
and DAG ("Consulting Agreement");
10. 8% Subordinated Notes of Castle Dental each dated March 30, 1998
issued to each of J. Schechter, Soleimani, M. Schechter, Schlang and DAG
in the aggregate original principal amount of $2,689,151 (the "Original
Notes");
11. Subordination Agreements dated as of March 30, 1998
("Subordination Agreements"), by and among Castle Dental, Nationsbank of
Texas, N.A. and each of J. Schechter, Soleimani, M. Schechter, Schlang and
DAG; and
12. Assumption Agreement, dated March 30, 1998, by Castle West and
DCS ("Assumption Agreement").
As a result of the consummation of the transactions contemplated by the
Castle West Transaction Documents, CDC acquired the Class A and Class D
Membership Interests in Castle West, DCS acquired the Class B Membership
Interest in Castle West and Holdings acquired the Class C Membership Interest in
Castle West. J. Schechter and Schlang currently serve as directors of Castle
West, and J. Schechter serves as President, and M. Schechter, Schlang and
Soleimani each serve as a Vice President of Castle West.
(B) In addition, in connection with the foregoing, the following documents
were executed by Castle West in connection with Castle Dental's bank facility
(hereinafter, the "Castle Bank Documents"):
2
<PAGE>
1. Guarantee, dated as of March 30, 1998, by Castle West in favor of
Nationsbank of Texas, N.A., as amended or supplemented to date;
2. Security Agreement, dated as of March 30, 1998, by Castle West in
favor of Nationsbank of Texas, N.A., as amended or supplemented to date;
3. Financing Statement, dated as of March 30, 1998, by Castle West
in favor of Nationsbank of Texas, N.A., as amended or supplemented to
date; and
4. Certain other documents evidencing Castle West's liabilities, if
any, with respect to Castle Dental's senior creditors.
(C) In addition, in connection with the foregoing, the following documents
were executed by the DCS Parties and never delivered to the Castle Parties
(collectively, the "Undelivered Documents"):
1. Asset Purchase Agreement between Martin Schechter, D.D.S., Inc.
("Schechter, Inc.") and DCS (the "Schechter Agreement").
2. Asset Purchase Agreement between Elliot Schlang, D.D.S., Inc.
("Schlang, Inc.") and DCS (the "Schlang Agreement").
3. Asset Purchase Agreement between S.A. Soleimani, D.M.D., Inc.
("Soleimani, Inc.") and DCS (the "Soleimani Agreement" and, together with
the Schechter Agreement and the Schlang Agreement, the "Asset Purchase
Agreements").
4. Management Services Agreement between Castle West and Schechter,
Inc. ("Schechter MSO").
5. Stock Put/Call Option and Successor Designation Agreement between
Castle West, Schechter, Inc. and M. Schechter regarding the outstanding
capital stock of Schechter, Inc. ("Schechter Buy/Sell").
6. Management Services Agreement between Castle West and Schlang,
Inc. ("Schlang MSO").
7. Stock Put/Call Option and Successor Designation Agreement between
Castle West, Schlang, Inc. and Schlang regarding the outstanding capital
stock of Schlang, Inc. ("Schlang Buy/Sell").
3
<PAGE>
8. Management Services Agreement between Castle West and Soleimani,
Inc. ("Soleimani MSO" and collectively with the Schechter MSO and the
Schlang MSO, the "MSO Agreements").
9. Stock Put/Call Option and Successor Designation Agreement between
Castle West, Soleimani, Inc. and Soleimani regarding the outstanding
capital stock of Soleimani, Inc. ("Soleimani Buy/Sell" and collectively
with the Schechter Buy/Sell and the Schlang Buy/Sell, the "Buy/Sell
Agreements").
(D) The following forms of consideration have not yet been paid or
delivered by the Castle Parties to the DCS Parties pursuant to the Castle West
Transaction Documents and the MSO Agreements (collectively, the "Outstanding
Castle Obligations"):
1. The "Acquisition Purchase Price Adjustment" as defined in Section
3.4 of the Combination Agreement;
2. The "B Merger Consideration" as defined in Section 7.1 of the
Combination Agreement;
3. The "C Merger Consideration" as defined in Section 8.1 of the
Combination Agreement, as well as any Incentive Payment payable pursuant
to the provisions of Section 8.1(c) of the Combination Agreement;
4. Certain distributions of cash payable pursuant to Article 8 of
the Limited Liability Company Agreement;
5. Certain management fees payable pursuant to Section 3 of the
Management Agreement (including any amounts which Holdings was to use to
pay the Consulting Fee to DAG pursuant to Section 4 of the Consulting
Agreement); and
6. Certain Gross Practice Revenues (as defined in the MSO
Agreements) excluded from MSO compensation under the MSO Agreements.
On July 22, 1999, the DCS Members appropriately gave notice to the Castle
Parties of their exercise of their right to cause the B Merger (as defined in
the Contribution Agreement). On September 30, 1999, Castle West gave notice to
Holdings of Castle West's intention not to extend the term of the Management
Agreement beyond its initial term and consequently the Management Agreement will
terminate by its terms on March 30, 2000. On November 17, the Castle Parties
delivered to counsel for the DCS Parties for the benefit and on behalf of the
DCS Parties a wire
4
<PAGE>
transfer payable to the trust account of Kaye, Scholer, Fierman, Hays & Handler,
LLP in the amount of $300,000. The character of such payment, which is
non-refundable, shall be determined in accordance with Section (E)18 below.
Certain differences and disagreements have arisen between the Parties
hereto with regard to the foregoing transactions (the "Castle West Transaction")
and the Parties hereto desire to settle all of their differences in the manner
stated below:
(E) NOW, THEREFORE, in consideration of the foregoing, the Parties hereto
agree as follows:
1. Other than as specifically stated to the contrary in this
Agreement below, following the Payment Date (as defined below), if any,
the Parties hereto shall have no further obligations under the Castle West
Transaction Documents and the Undelivered Documents (collectively, the
"Existing Documents"), and such agreements shall be terminated and be of
no further force or effect.
The Castle Bank Documents shall remain in full force and effect
following the Closing. However, each of the Castle Parties, jointly and
severally, shall indemnify and hold each of the DCS Parties, and any
affiliate or related person thereof (other than Castle West), harmless
from and against any and all Damages (as defined in the Combination
Agreement) suffered by any DCS Party, and any affiliate or related person
thereof (other than Castle West), following the Payment Date as a result
of, caused by, arising out of, or in any way relating to the Castle Bank
Documents.
2. The closing of the transactions contemplated hereby ("Closing")
shall occur when all documents required to be signed are signed by all
Parties hereto and delivered at the law offices of Kaye, Scholer, Fierman,
Hays & Handler, LLP in Los Angeles, California on or before January 28,
2000. At the Closing, the Parties hereto shall deliver the items as stated
below. The Parties agree that for purposes of holding and delivering
documents under this Agreement, counsel for the DCS Parties is Kaye,
Scholer, Fierman, Hays & Handler, LLP and counsel for the Castle Parties
is Boyer, Ewing & Harris Incorporated. All items shall be exchanged and
delivered to the respective legal counsel for the Parties. If the Closing
does not occur on or before January 28, 2000, the provisions of this
Agreement shall be terminated and be of no further force and effect.
(a) The respective DCS Parties shall deliver to counsel for
the Castle Parties executed copies of the Undelivered Documentation.
5
<PAGE>
(b) The DCS Parties shall deliver to counsel for the DCS
Parties the following:
(i) DCS shall deliver membership certificates and a
membership power transferring the Class B Membership Interest
in Castle West to CDC free and clear of all liens other than
those that may exist under any of the Castle West Transaction
Documents in favor of the Castle Parties, effective only after
the occurrence of the Payment Date;
(ii) Holdings shall deliver membership certificates and
a membership power transferring the Class C Membership
Interest in Castle West to CDC free and clear of all liens
other than those that may exist under any of the Castle West
Transaction Documents in favor of the Castle Parties,
effective only after the occurrence of the Payment Date; and
(iii) J & K Partnership, a California general
partnership ("J&K"), and M. Schechter and Schlang, as the
respective landlords under the following leases:
(x) lease agreement dated August 1, 1996, by and
between J&K", as the landlord, and Schechter, Inc. as
the tenant, regarding the premises located at 13220
Hawthorne Blvd., Hawthorne, California (as amended by
First Amendment to Lease Agreement dated effective as of
November 1, 1996), which lease has been assigned by
Schechter, Inc. to DCS and has been further assigned by
DCS to Castle West such that Castle West is currently
the tenant thereunder (the "Hawthorne Lease"); and
(y) lease agreement dated August 1, 1996, by and
between M. Schechter and Schlang, as the landlord, and
Elliot Schlang, Inc. as the tenant, regarding the
premises located at 4433 Tweedy Blvd., South Gate,
California (as amended by First Amendment to Lease
Agreement dated effective as of November 1, 1996), which
lease has been assigned by Elliot Schlang, Inc. to DCS
and has been further assigned by DCS to Castle West such
that Castle West is currently the tenant thereunder (the
"South Gate Lease");
6
<PAGE>
shall enter into new lease agreements (the "New Leases") with
Castle West replacing the Hawthorne Lease and the South Gate
Lease. The New Leases shall be in the forms of Exhibits A-1
and A-2 attached hereto; and
(iv) The side letter agreement between the DCS Parties
and the Castle Parties (the "Side Letter Agreement"), which
shall supercede the provisions of this Agreement.
(c) The Castle Parties shall deliver to counsel for the DCS
Parties:
(i) three original executed copies of this Letter;
(ii) the New Leases;
(iii) guaranties by Castle Dental of the obligations of
Castle West under the New Leases and the month-to-month lease
by and between Schlang, as the landlord, and Castle West as
the tenant, regarding the premises located at 140 North
Victory Boulevard, Burbank, California (the "Burbank Lease");
(iv) a check in the amount of $3,000.00 made payable to
Carol Perrin in payment of services rendered in dissolving
corporations owned by J. Schechter and Soleimani; and
(v) the Side Letter Agreement.
Counsel for the DCS Parties shall hold copies of the executed documents
described in Section (E)2(b) and Section (E)2(c) (the "Remaining
Documents") in escrow pending the occurrence of the Payment Date. If the
Payment Date occurs, Counsel for the DCS Parties shall deliver the
Remaining Documents to the Castle Parties. If the Payment Date does not
occur, Counsel for the DCS Parties shall deliver the Remaining Documents
to the DCS Parties, upon which time they shall be cancelled and of no
effect and shall be null and void.
3. On or prior to February 1, 2000, Castle Dental shall (a) wire
transfer to the trust account of Kaye, Scholer, Fierman, Hays & Handler,
LLP, $5,000,000 as a final payment in settlement of, and in lieu of, all
amounts owed by the Castle Parties to the DCS Parties as Outstanding
Castle Obligations or otherwise in connection with the Castle West
Transaction, (b) delivery of checks to Kaye, Scholer, Fierman, Hays &
Handler, LLP made payable to the DCS Members equal the past-due interest
and principal payments on the
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Current Notes and (c) delivery of a check in the amount of $9,493 payable
to Kaye, Scholer, Fierman, Hays & Handler, LLP to be held in trust for
payment of the amounts payable under Sections (E)12(d) and (E)12(g)
hereunder (collectively, the "Full Settlement Amount"). If the Castle
Parties pay the Full Settlement Amount on or prior to February 1, 2000,
then the date that such payment is received shall be the "Payment Date".
If the Castle Parties do not pay the Full Settlement Amount by February 1,
2000, there shall be no Payment Date hereunder and all transactions and/or
amendments contemplated hereby that are predicated on the occurrence of
the Payment Date shall be of no force and effect. Notwithstanding anything
herein to the contrary, the Castle Parties shall remain obligated to pay
to the DCS Parties distributions of cash payable pursuant to Article 8 of
the Limited Liability Company Agreement that accrue during the three-month
period ending December 31, 1999 ("Fourth Quarter Earnings"), such amount
to be payable on March 15, 2000.
4. If the Payment Date does not occur, the Existing Documents shall
remain in full force and effect except for those Existing Documents that
are specifically amended herein effective as of the Closing, which
Existing Documents shall remain amended as described herein following the
Closing regardless of the occurrence or nonoccurrence of the Payment Date.
If the Payment Date does not occur, on February 1, 2000, the Castle
Parties shall: (a) wire transfer to the trust account of Kaye, Scholer,
Fierman, Hays & Handler, LLP $336,530; (b) file the B Merger Certificate
(as defined in the Combination Agreement) with the Delaware Secretary of
State and (c) deliver 421,116 shares of Castle Dental Common Stock to the
DCS Parties as payment in full of the B Merger Consideration
(collectively, the "Partial Settlement Amount"). The shares of Castle
Dental Common Stock deliverable pursuant to item (c) of this Section (E)4
shall be dated as of July 22, 1999, the date the B Merger Notice was
provided to Castle Dental, and such shares shall be deemed for all
purposes to have been outstanding since such date. Following payment of
the Partial Settlement Amount, if made on or before February 1, 2000, the
Castle Parties shall be relieved of any obligation to pay any further
amounts regarding (i) the Acquisition Purchase Price Adjustment applicable
to the purchase of the Class A Membership Interest and the Class B
Membership Interest, (ii) any payments due and owing by the Castle Parties
or otherwise accrued through December 31, 1999 or which should otherwise
have been paid by the Castle Parties on or prior to such date as (x)
management fees payable pursuant to Section 3 of the Management Agreement
(including any amounts which Holdings was to use to pay the Consulting Fee
to DAG pursuant to Section 4 of the Consulting Agreement); or (y) Gross
Practice Revenues excluded from MSO compensation under the MSO Agreements,
(iii) any payments due and owing by the Castle Parties or otherwise
accrued through September 30, 1999 or which should otherwise have been
paid by the Castle Parties on or prior to such date as distributions of
cash payable pursuant to Article 8 of the Limited Liability Company
Agreement and (iv) the B Merger Consideration (collectively, the
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"Adjustment Obligations"). Notwithstanding anything herein to the
contrary, the Castle Parties shall remain obligated to pay to the DCS
Parties the Fourth Quarter Earnings, such amount to be payable on March
15, 2000.
5. If the Payment Date does not occur, in addition to payment and
delivery of the Partial Settlement Amount and the Fourth Quarter Earnings,
the Castle Parties shall immediately resume making all payments due under
the Existing Documents to the extent the obligation to make such payments
accrues on or after January 1, 2000 in accordance with the terms of the
Existing Documents, the Management Agreement shall be terminated as of
March 30, 2000, and the DCS Parties shall be entitled to receive the C
Merger Consideration upon delivery of the C Merger Notice (as defined in
the Contribution Agreement). The Parties agree that time is strictly of
the essence regarding the obligations of the Parties under this agreement.
In addition, if the Partial Settlement Amount is not timely paid and
delivered on or before February 1, 2000, the Castle Parties shall not be
relieved of any obligations under any agreement giving rise to the
Adjustment Obligations and shall be obligated to pay the full amount
thereof including, without limitation, the Adjustment Obligations.
6. The Asset Purchase Agreements and all documents transferring
ownership of the assets of DCS's business to Castle West as described
therein shall remain in full force and effect in order to effect the
transfer of such assets of Schechter, Inc., Schlang, Inc. and Soleimani,
Inc. to DCS, and the subsequent transfer of DCS's assets (with the
exception of any interest in or assets of the Canoga Park office which was
not, and shall not be deemed to have been, transferred) to Castle West.
The Parties hereto hereby ratify the transfers of all of such assets to
Castle West and agree that, following the Closing, Castle West shall
continue to own and operate the assets and business it acquired from DCS
in connection with the Castle West Transaction, subject to the terms and
provisions of the New Leases and the Burbank Lease. The Parties further
agree that following the Payment Date Castle West shall be owned solely by
CDC.
7. The Parties hereto hereby ratify the assumption of the
obligations, liabilities and responsibilities under the Assumption
Agreement and related documents and agree that Castle West shall continue
to pay such obligations and liabilities and to perform such
responsibilities in accordance with their respective terms.
8. The consideration previously received by the DCS Parties,
regardless of the form thereof, shall be retained by the DCS Parties and
the Original Notes and the Subordination Agreements shall remain in full
force and effect following the Closing.
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9. Following the earlier of March 30, 2000 or the Payment Date,
other than as set forth in Sections (E)11 and (E)12 hereof, no DCS Party
shall be obligated to provide any services to any Castle Party pursuant to
any Existing Document, oral employment agreement or otherwise. Following
the Closing, the Castle Parties shall be free to contract with D'Aguanno
in any capacity. Effective as of the Payment Date, J. Schechter, M.
Schechter, Schlang and Soleimani hereby resign from all of their positions
as officers and/or directors of Castle West.
10. Following the Closing, the Noncompetition Agreements shall be
and are hereby amended and restated as set forth in Exhibit B attached
hereto and incorporated herein by this reference, with such agreement
remaining in full force and effect following the Closing as so amended.
11. Following the Closing, the MSO Agreements shall remain in full
force and effect provided that the MSO Agreements (other than the
Schechter MSO Agreement) shall be and hereby are amended as of the Payment
Date to delete the $2,500 per month exclusion of Gross Practice Revenues
from the compensation payable to the MSO thereunder (the "Ownership Fee").
Following the Closing, the $2,500 per month Ownership Fee shall remain
payable to Schechter, Inc. until such time as the Capital Stock of
Schechter, Inc. is transferred to a qualified transferee pursuant to
Section (E)12(d) below.
12. Following the Closing, the Buy/Sell Agreements shall remain in
full force and effect provided that as of the Payment Date they shall be
and hereby are amended as follows:
(a) The Put Option and the Call Option currently set forth in
Sections 2 and 3 are deleted in their entirety.
(b) The MSO may exercise the Successor Designation Option set
forth in Section 5 upon its determination that it has located a
qualified successor to purchase all of the outstanding Capital Stock
of the applicable PC. The dentist owning the Capital Stock of each
PC hereby agrees that he will not attempt to transfer such Capital
Stock to any person other than the qualified successor to be
designated by the Castle Parties.
(c) The Purchase Price of the Capital Stock of the PC (as
defined in Section 10) shall be $100.00 in cash.
(d) The dentist owning the Capital Stock in the applicable PC
(other than M. Schechter) hereby agrees to continue to serve as the
dentist of record for such PC
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at all of its current locations until the later to occur of (i) the
date Castle West designates a successor and the Capital Stock of the
applicable PC is transferred to such successor and (ii) March 30,
2000. M. Schechter hereby agrees to continue to serve as the dentist
of record for Schechter, Inc. at its current location at 13220
Hawthorne Blvd., Hawthorne, California, until the earlier to occur
of (1) the date 90 days following the date he gives notice that he
desires that Castle West designate a successor owner of Schechter,
Inc., (2) the occurrence of any "Transfer Event" (as defined in
Section 5(a) of the Schechter Buy/Sell), (3) the date 30 days
following the date that Castle West gives notice that it desires to
designate a successor owner of Schechter, Inc. and (4) the second
anniversary of the Payment Date. In the event that Castle West
elects to cause M. Schechter to transfer the Capital Stock of
Schechter, Inc. pursuant to the provisions of section (3) of the
previous sentence, Castle West shall be obligated to pay, as a
condition of closing of such transfer of such Capital Stock, the
Ownership Fees that would have been paid to Schechter, Inc. between
the date of such transfer and the second anniversary of the Payment
Date. Upon the transfer of the Capital Stock of Schechter, Inc., M.
Schechter shall be reimbursed for any pension administration fees
for termination of his PC Pension/Profit Sharing Plan, in an amount
not to exceed $5,000 upon submission of invoices therefor to Kaye,
Scholer, Fierman, Hays & Handler, LLP which Kaye, Scholer, Fierman,
Hays & Handler, LLP shall be entitled to pay at its sole discretion
out of the funds delivered to Kaye, Scholer, Fierman, Hays &
Handler, LLP by Castle Dental pursuant to Section (E)3(c) above. M.
Schechter hereby agrees to indemnify and hold harmless the Castle
Parties from any and all Damages that they may incur as a result of
any violation of ERISA by Schechter, Inc. or M. Schechter in the
administration or termination of such PC Pension/Profit Sharing
Plan.
(e) The Castle Parties hereby agree to locate a qualified
successor to purchase all of the outstanding Capital Stock of each
PC (other than Schechter, Inc.) subject to a Buy/Sell Agreement and
to cause such purchaser to purchase the Capital Stock of each PC
(other than Schechter, Inc.) as soon a practicable but no later than
March 30, 2000, after which date the dentist owning such PC shall
have no further obligation to provide any further services to such
PC or to any Castle Party. The Castle Parties hereby agree to locate
a qualified successor to purchase all of the outstanding Capital
Stock of Schechter, Inc. and to cause such purchaser to purchase the
Capital Stock of Schechter, Inc. no later than the date M.
Schechter's obligation to serve as dentist of record for Schechter,
Inc. expires in accordance with the provisions of the last sentence
of Section (E)12(d) above, after which date M. Schechter shall have
no further obligation to provide any further services to Schechter,
Inc. or to any Castle Party. Following such date, the purchaser of
such
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Capital Stock shall become the dentist of record for all locations
of such PC. If M. Schechter so requests, following the purchase of
the Capital Stock of Schechter, Inc., he may, but shall not be
required to, continue to practice dentistry at the Hawthorne
location for a period ending on the third anniversary of the Closing
Date (unless such period is extended at the discretion of Castle
West), subject to the reasonable supervision of the dentist then
owning Schechter, Inc.
(f) If an existing patient requests to consult with a DCS
Member, the Castle Parties shall use good faith efforts to give such
information to the applicable DCS Party by telephonic and/or voice
message at a number designated by the applicable DCS Member with
such action to occur within 24 hours of the time such patient
request is received by a Castle Party or its representative or
employee. If such DCS Party cannot be reached to provide such
information, the Castle Parties shall reasonably attempt to provide
such patient with professional quality care and treatment by another
dentist. The Castle Parties hereby agree, that if a DCS Party who is
a dentist requests to see an existing patient of such DCS Party at
one of the offices managed by Castle West and reasonably asserts
that the reason for his request to provide services to such patient
is that he is required to provide such services under applicable
law, such DCS Party shall be allowed to provide such services to
such patient at such Castle West office but shall be entitled to no
remuneration for such services from such office.
(g) The Castle Parties agree to pay for and maintain
malpractice insurance coverage for dentists who are DCS members in a
manner which is substantially similar to such insurance presently in
effect, and further agree to pay for and maintain after the Payment
Date such malpractice insurance commonly referred to as a "tail" for
the dentists who are DCS Members covering the period they served as
dentists at a PC so that such dentists are continuously covered by
malpractice insurance without any gap in malpractice insurance
coverage. Such malpractice insurance coverage will be purchased for
each owner of a PC on or prior to the date the Capital Stock of such
PC is transferred to a qualified successor and the purchase of such
insurance will be a condition precedent to the closing of the sale
of such Capital Stock. J. Schechter shall purchase his own
malpractice insurance and shall submit an invoice therefor to Kaye,
Scholer, Fierman, Hays & Handler, LLP in an amount not to exceed
$4,493 which Kaye, Scholer, Fierman, Hays & Handler, LLP shall be
entitled to pay at its sole discretion out of the funds delivered to
Kaye, Scholer, Fierman, Hays & Handler, LLP by Castle Dental
pursuant to Section (E)3(c) above. Prior to such dates, the Castle
Parties agree to keep the malpractice insurance currently in force
at the PCs in effect.
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(h) Upon the closing of a transaction designating a successor
dentist for a PC, the name of the PC shall be changed so that its
new name is not substantially similar to its then existing name and
does not use the name of any DCS Party and the dentist transferring
the PC shall have the right to use his name in any other business or
entity. The Castle Parties shall reimburse such dentist for
reasonable legal and accounting fees incurred in connection with
such transfer in an amount not to exceed $5,000 for each such
transfer limited to one per PC. Payment of such reasonable legal and
accounting fees shall be payable at the closing of the transfer of
the Capital Stock of the PC, upon presentment of an invoice
itemizing such amounts.
(i) For 18 months following the Payment Date, J. Schechter and
M. Schechter shall be permitted to practice one day per month at
their choosing at either the Hawthorne or South Gate locations, on
any patients they choose. In addition, for a period of 24 months
following the Payment Date, J. Schechter and M. Schechter shall be
permitted to treat their family members at either the Hawthorne or
South Gate locations. In connection with dental services provided
pursuant to this subsection: (w) neither J. Schechter nor M.
Schechter will receive any compensation for dental services provided
or be charged for use of the Castle Parties' facilities; (x) J.
Schechter and M. Schechter shall not be entitled to the assistance
of any of the Castle Parties' staff; (y) J. Schechter and M.
Schechter shall reimburse the Castle Parties for any supplies used
or third-party costs incurred; and (z) J. Schechter and M. Schechter
shall indemnify and hold harmless the Castle Indemnitees for any
Damages they may incur as a result of any malpractice claims brought
in connection with such dental services. If M. Schechter provides
dental services to patients who are obligated to pay in accordance
with Castle West's then existing fee structure, M. Schechter shall
be compensated for such services in accordance with past practices
and, with respect to such services provided, he shall not be subject
to the provisions of the immediately preceding sentence.
(j) The Castle Parties acknowledge that Schechter, Inc. is
currently sponsoring four doctors in its office for U.S.
citizenship. The Castle Parties hereby agree, to the full extent
permitted by law, to continue sponsoring such individuals for U.S.
citizenship, provided that their continued employment with
Schechter, Inc. shall be dependent upon their job performance.
(k) Lane Schechter and Danny Gersh shall be entitled to
continue to receive orthodontic treatment at the Hawthorne office at
no cost or expense to them.
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(l) For a period of eighteen months following the Payment
Date, the Castle Parties shall provide COBRA health insurance
coverage to the DCS Members and their families who are currently
covered by health insurance through any Castle Party, at such DCS
Member's expense.
In addition, each of the Castle Parties, jointly and severally,
shall indemnify and hold each of the DCS Parties, and any affiliate or
related person thereof, harmless from and against any and all Damages
suffered by any DCS Party, and any affiliate or related person thereof, as
a result of, caused by, arising out of, or in any way relating to the
ownership, operation or conduct of a PC (other than a DCS Party's
liability for his own malpractice or for any violations of ERISA in
connection with the administration or termination of the PC Pension/Profit
Sharing Plan in place at Schechter, Inc.) or the operation of the business
of any Castle Party. Each owner of a PC hereby represents and warrants to
the Castle Parties that (i) the only business that is currently being
conducted by his PC (except as requested by a Castle Party or its
affiliate) or that will be conducted by his PC as long as he is the owner
thereof and the applicable Buy/Sell Agreement remains in effect is the
provision of dental services consistent with the terms of the applicable
MSO Agreement, (ii) other than the MSO Agreement with Castle West and
employment agreements with dentists employed by his PC, his PC is not a
party to any material agreement or contract other than those disclosed in
or contemplated by the Castle West Transaction Documents or any
replacement, renewal or similar substitution or extension thereof and
(iii) his PC has no debt obligations outstanding and will not incur any
debt as long as the applicable Buy/Sell Agreement remains in effect. The
Castle Parties hereby represent and warrant that all payments owed to the
PCs to date have been paid in full. The Castle Parties agree to indemnify
and hold harmless the owners of the PCs from any and all Damages any of
them may incur resulting from any obligation that any Castle Party causes
such PC to incur, directly or indirectly, which is not otherwise paid.
13. Following the Closing, the Limited Liability Agreement shall
remain in full force and effect provided that as of the Payment Date CDC
shall be the only party thereto; provided, however, that the provisions of
Articles 11 (with respect to any period as to which any DCS Party was a
Member of Castle West), 12 and 13 thereof shall continue for the benefit
of, and shall be enforceable by, each DCS Party as if each such DCS Party
was set forth in such agreement as a party thereto entitled to the
benefits thereof.
14. Following the Payment Date, the terms and provisions of the
Combination Agreement shall terminate other than the terms and provisions
of:
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(a) Section 15.2, (which shall also be deemed to refer to any
Books and Records (as defined in the Combination Agreement) of
Castle West related to the operation of Castle West and its
predecessors whether or not such Books and Records were transferred
to Castle West in connection with the consummation of the
transactions contemplated by the Castle West Transaction Documents)
which shall continue for a period of no less than six years from the
date of the Payment Date; and
(b) Section 17.1 items (b) and (c) and the other applicable
procedural provisions set forth in Article 17, which will survive
until the end of the statute of limitation with respect to any
applicable possible claim thereunder.
The Parties agree that the transactions contemplated hereby are being
entered into and consummated at the Payment Date in lieu of consummating
the B Mergers and the C Mergers contemplated by the Combination Agreement
and otherwise requiring the Castle Parties to pay the Outstanding Castle
Obligations.
15. Other than the obligations of the respective Parties under this
Agreement and those provisions of the Existing Documents specifically
preserved by this Agreement (including, without limitation, the
obligations of the Castle Parties to pay or deliver certain amounts and
securities to the DCS Parties with respect to the Outstanding Castle
Obligations), all of which shall remain for all purposes in full force and
effect in accordance with their respective terms and provision (as
modified, as applicable, by this Agreement), for and in consideration of
the releases and indemnities set forth herein and entry into this
Agreement and the delivery of the documents required hereby, effective as
of the Closing, each of the Castle Parties does hereby release, remise and
forever discharge each of the DCS Parties and their respective heirs,
successors, assigns, legal and personal representatives, estates,
devisees, legatees, past or present officers, directors, employees,
shareholders, stockholders, parent and subsidiary corporations, agents,
affiliates and their attorneys, and each of them, separately and
collectively ("DCS Indemnitees"), of and from any and all manner of
claims, demands, actions, causes of action, suits, proceedings,
controversies, rights, obligations, liabilities, disputes, amounts due,
debts, contracts, judgments, damages, counterclaims, defenses, set-offs,
credits, known or unknown, asserted or not asserted, of any nature
whatsoever, in law or in equity, whether pursuant to federal or state
securities laws or otherwise (herein collectively referred to as "Claims")
which it ever had, now has or which it or its heirs, representatives,
devisees, legatees, successors or assigns can, shall or may have for or by
any reason of any matter, cause or thing whatsoever relating to or in any
way connected with the Existing Documents, any transaction contemplated by
the Existing Documents or any breach thereof by any DCS Indemnitee prior
to the Closing, including, but not limited to, any services or employment
rendered or not rendered to the Castle Parties. For
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avoidance of doubt, following the Closing, the Castle Parties acknowledge
that they have no defenses, claims, or other offsets against payment of
the Original Notes, the Partial Settlement Amount, the Full Settlement
Amount, the C Merger Consideration or other amounts owing to the DCS
Parties under the Existing Documents (all of which shall be calculated and
paid in accordance with the terms of the Existing Documents or this
document, as applicable) arising from events occurring prior to the
Closing and agree that they shall not assert any such defense, claim or
offset; provided that the Original Notes remain subject to the
Subordination Agreements. Following the Payment Date, monies owed to, or
incurred in connection with, Dr. Leon Roisman (or his affiliates), if any,
shall be the sole obligation of the Castle Parties; provided, that
expenses incurred in connection with the foregoing during the fourth
quarter of 1999 will reduce, pro rata in accordance with their ownership
percentage in Castle West, the amount of Fourth Quarter Earnings payable
to the DCS Parties.
16. Other than the obligations of the respective Parties under this
Agreement and those provisions of the Existing Documents specifically
preserved by this Agreement, all of which shall remain for all purposes in
full force and effect in accordance with their respective terms and
provision (as modified, as applicable, by this Agreement), for and in
consideration of the releases and indemnities set forth herein and entry
into this Agreement and the delivery of the documents required hereby,
effective as of the Closing, each of the DCS Parties does hereby release,
remise and forever discharge each of the Castle Parties and their
respective heirs, successors, assigns, legal and personal representatives,
estates, devisees, legatees, past or present officers, directors,
employees, shareholders, stockholders, parent and subsidiary corporations,
agents, affiliates and their attorneys, and each of them, separately and
collectively ("Castle Indemnitees"), of and from any and all Claims which
it ever had, now has or which it or its heirs, representatives, devisees,
legatees, successors or assigns can, shall or may have for or by any
reason of any matter, cause or thing whatsoever relating to or in any way
connected with the Existing Documents, any transaction contemplated by the
Existing Documents or any breach thereof by any Castle Indemnitee prior to
the Closing. Effective as of the Payment Date, except as otherwise
specifically provided herein to the contrary, each of the DCS Parties does
hereby release, remise and forever discharge each of the Castle
Indemnities of and from any and all Claims which it ever had, now has or
which it or its heirs, representatives, devisees, legatees, successors or
assigns can, shall or may have for or by any reason of any matter, cause
or thing whatsoever relating to or in any way connected with any
obligation to pay the Acquisition Purchase Price Adjustment, the B Merger
Consideration, the C Merger Consideration or any other amounts payable
under the Combination Agreement, the Letter Agreement, the Limited
Liability Company Agreement (other than Fourth Quarter Earnings, which
shall remain payable), the Management
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Agreement, the Holdings Operating Agreement, the Consulting Agreement or
the Adjustment Obligations.
17. The DCS Parties hereby agree, jointly and severally, to
indemnify and hold harmless the Castle Indemnitees from any and all
Damages suffered by any Castle Indemnitee as a result of, caused by,
arising out of, or in any way relating to any allegations by D'Aguanno,
JUL-C Corporation or their respective heirs, representatives, devisees,
legatees, successors or assigns (the "D'Aguanno Affiliates") to the effect
that (a) any of the DCS Parties breached, misrepresented the contents of,
or violated any duty owed to any D'Aguanno Affiliate under any Existing
Document or applicable law or (b) any Castle Indemnitee acted in concert
with any DCS Party (in consummating the transactions contemplated by this
Agreement or otherwise) to deprive any D'Aguanno Affiliate of any rights
or value that she or it was entitled to receive under the Existing
Documents.
18. The Parties agree that the transactions contemplated herein
shall be treated for federal, state and local tax purposes as follows, and
agree to report to all tax authorities consistent with this Section 18:
(a) If the Payment Date occurs:
(i) The $300,000 payment made by the Castle Parties on
November 17, 1999 and the Full Settlement Amount shall be
considered payments (x) first, in consideration of the cash
and note portion of the Acquisition Purchase Price Adjustment
applicable to the sale of the Class A Membership Interest in
an amount equal to $336,530; (y) second, in consideration of
the sale of the Class B Membership Interest by DCS to CDC in
an amount equal to $3,663,470; and (z) third, in consideration
of the sale of the Class C Membership interest by Holdings to
CDC in an amount equal to $1,300,000. No amount shall be
considered a payment in connection with amounts described in
Section (D)5 or (D)6 or any other amounts that may otherwise
be due and owing to the DCS Parties under any of the
Outstanding Castle Obligations.
(ii) The amount of Castle West's taxable income
allocable to Holdings for the taxable period ending December
31, 1999 shall be an amount equal to the lesser of (x) twenty
percent of the total amount of Castle West's taxable income or
(y) $200,000. The amount of Castle West's taxable income
allocable to Holdings for the taxable period ending on the
Payment Date shall be zero. No other allocation of taxable
profits, losses or gains of
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Castle West shall be allocated to Holdings, DCS or any other
DCS Party for either taxable year. To the extent necessary to
give effect to this Section (E)18(a)(ii), this Section
(E)18(a)(ii) shall be considered an amendment to the Limited
Liability Company Agreement.
(iii) The payment of the Fourth Quarter Earnings shall
be treated as a distribution from Castle West to Holdings
under Article 8 of the Limited Liability Company Agreement.
Should the distribution occur after the transfer of the B
Membership Interests and C Membership interests, the parties
shall treat the payment as a payment pursuant to Section
736(b) of the Internal Revenue Code of 1986, as amended (the
"Code").
(b) If the Payment Date does not occur, and the Partial
Settlement Amount is paid on or before February 1, 2000:
(i) The $300,000 payment made by the Castle Parties on
November 17, 1999 and the cash portion of the Partial
Settlement Amount shall be considered a partial payment in
consideration of the cash and note portion of the Acquisition
Purchase Price Adjustment applicable to the sale of the Class
A Membership Interest. No amount shall be considered a payment
in connection with amounts described in Section (D)5 or (D)6
or any other amounts that may otherwise be due and owing to
the DCS Parties under any of the Outstanding Castle
Obligations.
(ii) The amount of Castle West's taxable income
allocable to Holdings for the taxable period ending December
31, 1999 shall be an amount equal to the lesser of (i) twenty
percent of the total amount of Castle West's taxable income or
(ii) $200,000 plus Fourth Quarter Earnings. No other
allocation of taxable profits, losses or gains of Castle West
shall be allocated to Holdings, DCS or any other DCS Party for
the taxable year ending on December 31, 1999. To the extent
necessary to give effect to this Section (E)18(b)(ii), this
Section(E)18(b)(ii) shall be considered an amendment to the
Limited Liability Company Agreement.
(iii) The payment of the Fourth Quarter Earnings shall
be treated as a distribution from Castle West to Holdings
under Article 8 of the Limited Liability Agreement.
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(c) If the Payment Date does not occur, and the Partial Settlement
Amount is not paid on or before February 1, 2000:
(i) The $300,000 payment made by the Castle Parties on
November 17, 1999 shall be considered a partial payment in
consideration of the cash and note portion of the Acquisition
Purchase Price Adjustment applicable to the sale of the Class
A Membership Interest. All other payments shall be
characterized in accordance with the Castle West Transaction
Documents.
(ii) The amount of Castle West's taxable income
allocable to Holdings for the taxable period ending December
31, 1999 shall be calculated in accordance with the Limited
Liability Company Agreement. Similarly, distributions shall be
calculated and timely made in accordance with the Limited
Liability Company Agreement.
(d) In all events:
(i) Castle West shall be responsible for all filings
required under Code Section 6050K (dealing with filing in
connection with the transfer of a partnership interest).
Castle Dental shall be responsible for the timely filing of
all of the Castle Parties' tax returns consistent with the
terms of this Agreement. Castle Dental shall ensure that the
DCS Parties are notified of any audit of the Castle West tax
returns and are treated as "notice partners" under Code
Section 6231 and Castle Dental shall supply such information
to the Internal Revenue Service as is necessary to assure
notice is given to the DCS Parties pursuant to Code Section
6223 et seq.
(ii) The Parties agree that Castle Dental shall not be
obligated to comply strictly with the tax positions required
by Section (E)18(a) or (b) above in the event that it is
advised by its auditors that such positions are inconsistent
with the positions that Castle Dental is required to make
under the Code; provided that Castle Dental shall take
positions as nearly identical as possible to those required
above that are consistent with its reporting obligations under
the Code and will give the DCS Parties notice of such
determination prior to the filing thereof.
19. Each Party to the Hawthorne Lease and the South Gate Lease
hereby agrees that following the Closing, the New Leases shall remain in
full force and effect as written
19
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and as further guaranteed by Castle Dental in accordance with Section
(E)2(c)(ii) above. Each Party to the Burbank Lease hereby agrees that
following the Closing, the Burbank Lease shall remain in full force and
effect as guaranteed by Castle Dental in accordance with Section
(E)2(c)(ii) above. Schlang and the Castle Parties agree to enter into a
new lease in due course on mutually acceptable terms replacing the Burbank
Lease.
20. Each Party hereto specifically waives the benefit of the
provisions of Section 1542 of the Civil Code of the State of California,
as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor."
21. All Parties hereto expressly understand and acknowledge that it
is possible that unknown losses or claims exist or that present losses may
have been underestimated in amount or severity or that losses or claims
may arise in the future, and such Parties explicitly took that into
account and assumed that risk in determining the amount of consideration
to be paid in connection with the execution of this Agreement, and a
portion of said consideration, having been bargained for between the
Parties with the knowledge of the possibility of such unknown claims, was
given in exchange for a full accord, satisfaction, discharge and release
of all such claims, whether asserted or not, and whether or not now known
or knowable.
22. Each Party hereto represents and warrants to the others that it
has full power and authority to enter into this Agreement on behalf of
itself, its members, managers, officers, directors, employees,
shareholders, stockholders, parent and subsidiary corporations, agents and
affiliates and to perform this Agreement and those provisions of the
Existing Documents specifically preserved by this Agreement in accordance
with their respective provisions, that the representatives executing this
Agreement are duly authorized to execute and deliver this Agreement, and
further represents and warrants that the claims subject to this Agreement
have not been assigned to any person not a Party hereto.
23. Each Party hereto represents and warrants to the others that
this Agreement and those provisions of the Existing Documents specifically
preserved by this Agreement each constitutes a valid and binding agreement
of such Party enforceable against such Party in accordance with its
respective 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.
20
<PAGE>
24. It is understood and agreed that this Agreement involves the
settlement and compromise of disputed claims, and that the consideration
exchanged is not to be deemed or construed as an admission of liability on
the part of any Party hereto herein released, all of whom deny all
liability and intend merely to avoid further legal action and to buy their
peace.
25. From time to time, whether at or after execution hereof, as and
when requested, the Parties hereto agree to execute, acknowledge and
deliver all such instruments or documents and take such other action as
may be reasonably necessary to effectuate the terms, conditions and
purposes of this Agreement. In addition, at the sole expense of the Castle
Parties, each DCS Party agrees to cooperate and render such assistance as
the Castle Parties reasonably request in connection with the Roisman
litigation and any other claims that may be made against any Castle Party
in connection with Castle West's business and operations occurring prior
to the Payment Date, including providing testimony where appropriate.
26. This Agreement shall be binding upon and inure to the benefit of
the Parties hereto and their respective agents, employees,
representatives, members, officers, directors, divisions, subsidiaries,
affiliates, successors in interest, assigns, heirs, shareholders and
stockholders.
27. This Agreement may be executed in any number of counterparts,
which taken together shall constitute one and the same instrument and each
of which shall be considered an original for all purposes. This Agreement
shall not be effective against any Party hereto unless and until all of
the Parties listed on the signature page hereof have executed and
delivered a copy of this Agreement.
28. Each Party hereto agrees to accept the facsimile signature of
the other Parties to this Agreement as evidence of the execution and
delivery of this Agreement. Such facsimile signature will be deemed to be
binding upon the Party sending such facsimile signature.
29. All Parties hereto represent and warrant that no promise,
inducement, representation, warranty or agreement not expressed herein has
been made to them in connection with this Agreement and that this
Agreement and the agreements contemplated hereby constitute the entire
agreement between the Parties hereto pertaining to the subject matter
hereof and supersede all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the Parties pertaining to the
subject matter hereof. No supplement, amendment, alteration, modification,
waiver or termination of this Agreement
21
<PAGE>
shall be binding unless executed in writing by the Party against whom such
change is being enforced. The Parties hereto agree that they will make no
claim that this Agreement has been orally altered or modified or otherwise
changed by oral communication of any kind or character.
30. The DCS Parties acknowledge that Castle Dental's existing credit
facilities may not be sufficient to finance Castle Dental's currently
planned level of expenditures for operations and growth and that Castle
Dental is currently in the process of attempting to secure up to an
additional $20 million in subordinated debt financing. In addition, the
DCS Parties acknowledge that management is committed to maximizing Castle
Dental's future shareholder value through whatever appropriate
alternatives may become known to them, including, without limitation, in
connection with the debt placement or otherwise.
31. In the case any one or more of the provisions contained in this
Agreement shall be invalid, illegal, or unenforceable, in any respect, the
validity, legality, and enforceability of the remaining provisions
contained herein and therein or any subsequent application of such
provision shall not in any way be affected thereby. In lieu of any such
invalid, illegal or unenforceable provision, the Parties intend that there
shall be added as part of this Agreement a provision as similar in terms
to such invalid, illegal or unenforceable provision as may be possible and
be valid, legal and enforceable.
32. This Agreement shall be deemed to have been executed and
delivered within California and shall be construed and enforced pursuant
to the laws of the State of California, without giving effect to the
conflicts of laws principles thereof. Any action to enforce, modify or
construe this Agreement shall be brought only in the State or Federal
Courts located in the County of Los Angeles, California and each Party
hereto hereby consents to the personal jurisdiction of such courts for the
purpose of any such action, and agrees that the service of process in any
such action may be made by certified mail to such Party's last known
address, or as otherwise authorized by law or by applicable court rule.
33. The Parties hereto have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party hereto by virtue of the authorship
of any of the provisions of this Agreement. Time is strictly of the
essence in the requirement of notice, performance and any other provision
of this Agreement.
22
<PAGE>
34. Each Party hereto has made such investigation of the facts
pertaining to this settlement and to this Agreement and all of the matters
pertaining thereto as it deems necessary.
35. All Parties hereto shall preserve the confidentiality of this
Agreement and shall not disclose the existence or terms hereof to anyone
not a Party to this Agreement, an attorney for such a Party or a Party's
accountants and lenders to the extent necessary to inform them of its
financial condition or to prepare tax returns, except to the extent that
such disclosure is required by law or court order.
36. This Agreement is entered into by all Parties hereto freely and
voluntarily, and with and upon the advice of counsel. All Parties hereto
represent and warrant that they have been fully advised by their attorneys
with respect to the advisability of executing this Agreement and with
respect to the meaning of California Civil Code Section 1542.
37. Each term of Section (E) of this Agreement is contractual and
not merely a recital.
38. In the event of any litigation relating to this Agreement, the
prevailing Party shall be entitled to reasonable attorneys' fees and
costs.
39. This Agreement is made and entered into as of the day first
above written in Los Angeles, California.
[THE REMAINDER OF THE PAGE LEFT BLANK]
23
<PAGE>
If the foregoing accurately reflects your understanding of the agreement
among the Parties hereto, please execute this letter in the space so provided
below, upon which execution this letter shall become a binding and enforceable
agreement of each of the signatories hereto.
CDC OF CALIFORNIA, INC.
By:______________________________________
John M. Slack, Vice President and Chief
Financial Officer
CASTLE DENTAL CENTERS OF CALIFORNIA,
L.L.C.
By:______________________________________
John M. Slack, Vice President and Chief
Financial Officer
CASTLE DENTAL CENTERS, INC.
By:______________________________________
John M. Slack, Vice President and Chief
Financial Officer
CASTLE WEST HOLDINGS, LLC
By:_______________________________________
Jeffrey D. Schechter, D.D.S., a Manager
DENTAL CONSULTING SERVICES, LLC
By:_______________________________________
Jeffrey D. Schechter, D.D.S., a Manager
24
<PAGE>
DENTAL ADVISORY GROUP, LLC
a Delaware limited liability company
By:______________________________________
Barry Brief, Managing Member
__________________________________________
Jeffrey D. Schechter, D.D.S., Individually
__________________________________________
S. Alexander Soleimani, D.M.D., Individually
__________________________________________
Martin Schechter, D.D.S., Individually
__________________________________________
Elliot Schlang, D.D.S., Individually
JDS-B CORPORATION
By:_______________________________________
Jeffrey D. Schechter, D.D.S., President
SAS-B CORPORATION
By:_______________________________________
S. Alexander Soleimani, D.M.D., President
MART-B CORPORATION
By:_______________________________________
Martin Schechter, D.D.S., President
25
<PAGE>
ES-B CORPORATION
By:_______________________________________
Elliot Schlang, D.D.S., President
DAG-B CORPORATION
By:_______________________________________
Barry Brief, President
JDS-C CORPORATION
By:_______________________________________
Jeffrey D. Schechter, D.D.S., President
SAS-C CORPORATION
By:_______________________________________
S. Alexander Soleimani, D.M.D., President
MART-C CORPORATION
By:_______________________________________
Martin Schechter, D.D.S., President
EL-S-C CORPORATION
By:_______________________________________
Elliot Schlang, D.D.S., President
26
<PAGE>
DAG-C CORPORATION
By:______________________________________
Barry Brief, President
S.A. SOLEIMANI, D.M.D., INC.
By:_______________________________________
S. Alexander Soleimani, D.M.D., President
MARTIN SCHECHTER, D.D.S., INC.
By:_______________________________________
Martin Schechter, D.D.S., President
ELLIOT SCHLANG, D.D.S., INC.
By:_______________________________________
Elliot Schlang, D.D.S., President
J & K PARTNERSHIP,
a California general partnership
By:_______________________________________
Jeffrey D. Schechter, D.D.S., Partner
By:_______________________________________
S. Alexander Soleimani, D.M.D., Partner
27
EXHIBIT 10.23
CASTLE DENTAL CENTERS, INC.
AND
HELLER FINANCIAL, INC.
AND
MIDWEST MEZZANINE FUND II, L.P.
-----------------------------------------------
SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT
-----------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Definitions and Accounting Matters.....................................1
Section 1.01 TERMS DEFINED ABOVE.......................................1
Section 1.02 CERTAIN DEFINED TERMS.....................................1
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS......................12
ARTICLE II
Purchase and Sale of Notes............................................12
Section 2.01 PURCHASE AND SALE OF NOTES...............................12
Section 2.02 FEES.....................................................13
Section 2.03 PREPAYMENTS..............................................13
ARTICLE III
Payments of Principal and Interest....................................14
Section 3.01 PAYMENT OF NOTES.........................................14
Section 3.02 INTEREST.................................................15
ARTICLE IV
Payments; Computations; Etc...........................................15
Section 4.01 PAYMENTS.................................................15
Section 4.02 COMPUTATIONS.............................................16
Section 4.03 INTENTIONALLY OMITTED....................................16
Section 4.04 TAXES....................................................16
ARTICLE V
Capital Adequacy......................................................17
Section 5.01 CAPITAL ADEQUACY; ADDITIONAL COSTS.......................17
Section 5.02 LIMITATION ON EURODOLLAR RATE............................18
Section 5.03 ILLEGALITY...............................................19
Section 5.04 INTEREST ON THE NOTES AT THE BASE RATE PURSUANT TO
SECTIONS 5.01, 5.02 AND 5.03.............................19
Section 5.05 COMPENSATION.............................................19
<PAGE>
ARTICLE VI
Conditions Precedent..................................................20
Section 6.01 INITIAL PURCHASE.........................................20
Section 6.02 NO WAIVER................................................22
ARTICLE VII
Representations and Warranties........................................22
Section 7.01 CORPORATE EXISTENCE......................................22
Section 7.02 FINANCIAL CONDITION......................................22
Section 7.03 LITIGATION...............................................23
Section 7.04 NO BREACH................................................23
Section 7.05 AUTHORITY................................................23
Section 7.06 APPROVALS................................................23
Section 7.07 USE OF NOTE PROCEEDS.....................................23
Section 7.08 ERISA....................................................24
Section 7.09 TAXES....................................................25
Section 7.10 TITLES, ETC..............................................25
Section 7.11 NO MATERIAL MISSTATEMENTS................................25
Section 7.12 INVESTMENT COMPANY ACT...................................26
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT.......................26
Section 7.14 SUBSIDIARIES.............................................26
Section 7.15 LOCATION OF BUSINESS AND OFFICES.........................26
Section 7.16 DEFAULTS.................................................26
Section 7.17 ENVIRONMENTAL MATTERS....................................26
Section 7.18 COMPLIANCE WITH THE LAW..................................26
Section 7.19 INSURANCE................................................26
Section 7.20 MANAGEMENT SERVICES AGREEMENTS AND
ACCOUNTS RECEIVABLE PURCHASE AGREEMENTS..................27
Section 7.21 RESTRICTION ON LIENS.....................................27
Section 7.22 MATERIAL AGREEMENTS......................................27
Section 7.23 HEDGING AGREEMENTS.......................................28
Section 7.24 YEAR 2000................................................28
Section 7.25 CAPITALIZATION...........................................28
ARTICLE VIII
Affirmative Covenants.................................................29
Section 8.01 REPORTING REQUIREMENTS...................................29
Section 8.02 LITIGATION...............................................31
Section 8.03 MAINTENANCE, ETC.........................................31
Section 8.04 ENVIRONMENTAL MATTERS....................................32
<PAGE>
Section 8.05 FURTHER ASSURANCES.......................................32
Section 8.06 PERFORMANCE OF OBLIGATIONS...............................33
Section 8.07 ERISA INFORMATION AND COMPLIANCE.........................33
Section 8.08 MANAGEMENT SERVICES AGREEMENTS AND
ACCOUNTS RECEIVABLE PURCHASE AGREEMENTS..................33
Section 8.09 GUARANTEE BY ACQUIRED ENTITIES...........................33
Section 8.10 YEAR 2000................................................34
Section 8.11 BOARD OBSERVATION........................................34
Section 8.12 CORRESPONDING AMENDMENT..................................34
ARTICLE IX
Negative Covenants....................................................35
Section 9.01 DEBT.....................................................35
Section 9.02 LIENS....................................................35
Section 9.03 INVESTMENTS, LOANS AND ADVANCES..........................36
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.................38
Section 9.05 SALES AND LEASEBACKS.....................................38
Section 9.06 NATURE OF BUSINESS.......................................38
Section 9.07 MERGERS, ETC.............................................38
Section 9.08 PROCEEDS OF NOTES........................................38
Section 9.09 ERISA COMPLIANCE.........................................38
Section 9.10 SALE OR DISCOUNT OF RECEIVABLES..........................40
Section 9.11 RATIO OF TOTAL FUNDED DEBT TO CAPITALIZATION.............40
Section 9.12 NET WORTH................................................40
Section 9.13 LEVERAGE RATIO...........................................40
Section 9.14 FIXED CHARGE COVERAGE RATIO..............................40
Section 9.15 RATIO OF TOTAL FUNDED DEBT TO EBITDA.....................41
Section 9.16 CAPITAL EXPENDITURES.....................................41
Section 9.17 ENVIRONMENTAL MATTERS....................................41
Section 9.18 TRANSACTIONS WITH AFFILIATES.............................41
Section 9.19 SUBSIDIARIES.............................................42
Section 9.20 NEGATIVE PLEDGE AGREEMENTS...............................42
Section 9.21 OTHER AGREEMENTS.........................................42
Section 9.22 ACQUIRED ENTITIES........................................42
Section 9.23 AMENDMENT OF CASTLE WEST LLC AGREEMENT...................42
Section 9.24 JUNIOR SUBORDINATION DEBT................................43
Section 9.25 RESTRICTION ON FUNDAMENTAL CHANGES.......................43
Section 9.26 DISPOSAL OF ASSETS OR SUBSIDIARY STOCK...................43
ARTICLE X
Events of Default; Remedies...........................................43
<PAGE>
Section 10.01 EVENTS OF DEFAULT.......................................43
Section 10.02 REMEDIES................................................45
ARTICLE XI
Holder Representations and Warranties.................................46
Section 11.01 ACCREDITED INVESTOR.....................................46
ARTICLE XII
Miscellaneous.........................................................46
Section 12.01 WAIVER..................................................46
Section 12.02 NOTICES.................................................47
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC...................47
Section 12.04 AMENDMENTS, ETC.........................................49
Section 12.05 SUCCESSORS AND ASSIGNS..................................49
Section 12.06 ASSIGNMENTS.............................................49
Section 12.07 INVALIDITY..............................................50
Section 12.08 COUNTERPARTS............................................50
Section 12.09 REFERENCES..............................................50
Section 12.10 SURVIVAL................................................50
Section 12.11 CAPTIONS................................................51
Section 12.12 NO ORAL AGREEMENTS......................................51
Section 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION...............51
Section 12.14 INTEREST................................................52
Section 12.15 CONFIDENTIALITY.........................................52
Section 12.16 EFFECTIVENESS...........................................53
Section 12.17 EXCULPATION PROVISIONS..................................53
Section 12.18 SUBORDINATION...........................................54
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A - Form of Subordinated Note
Exhibit B - Form of Convertible Note
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Officer's Certificate
Exhibit E - Due Diligence Items
Exhibit F - Form of Subordination Agreement for Junior Subordinated Debt
Schedule 1.1 - Acquired Entities
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.14 - Subsidiaries
Schedule 7.19 - Insurance
Schedule 7.20 - Management Services Agreements and Accounts Receivable
Purchase Agreements
Schedule 7.22 - Material Agreements
Schedule 7.23 - Hedging Agreements
Schedule 7.25 - Capitalization
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
<PAGE>
THIS SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT, dated as of
January 31, 2000, is among CASTLE DENTAL CENTERS, INC., a corporation formed
under the laws of the State of Delaware (the "COMPANY"), HELLER FINANCIAL, INC.,
a Delaware corporation ("HELLER") and MIDWEST MEZZANINE FUND II, L.P., a
Delaware limited partnership ("MIDWEST") (Heller and Midwest are sometimes
referred to individually as a "HOLDER" and together, as the "HOLDERS").
R E C I T A L S
A. The Company wishes to sell to Holders, and Holders wish to purchase
from the Company, senior subordinated promissory notes (collectively, the
"SUBORDINATED NOTES") due January 31, 2007, in the aggregate principal amount of
$13,621,536 and senior subordinated convertible promissory notes in the
aggregate principal amount of $1,378,464, convertible into 6% of the fully
diluted common equity ownership of the Company (collectively, the "CONVERTIBLE
NOTES") (the Convertible Notes and Subordinated Notes are collectively referred
to as the "NOTES"), upon the terms and subject to the conditions hereinafter set
forth;
B. In consideration of the mutual covenants and agreements herein
contained and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, 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
"COMPANY", "HELLER" , "MIDWEST" and "HOLDER" 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, if applicable, hereafter
entered into between an Acquired Entity, as seller, and Company or any
Subsidiary, as buyer, in form and substance satisfactory to Holders.
"ACQUIRED ENTITY" shall mean the entities identified on SCHEDULE 1.1
hereto and all entities (of whatever form) whose assets are acquired by the
Company 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 Company or any Subsidiary pursuant to New Acquisitions.
"ADDITIONAL COSTS" shall have the meaning assigned such term in Section
5.01(a).
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<PAGE>
"AFFECTED NOTES" shall have the meaning assigned such term in Section
5.04.
"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 Agreement, as the same may from time to time
be amended, restated, supplemented or otherwise modified from time to time.
"APPLICABLE MARGIN" shall mean (a) with respect to interest calculated by
reference to the Eurodollar Rate, four percent (4%) and (b) with respect to
interest calculated by reference to the Base Rate, two and three quarters
percent (2.75%).
"ASSET PURCHASE" shall mean the acquisition of all or substantially all of
the assets of any Acquired Entity by Company or any Subsidiary pursuant to an
Asset Purchase Agreement.
"ASSET PURCHASE AGREEMENTS" shall mean Asset Purchase Agreements entered
into by Company or any Subsidiary in form and substance satisfactory to Holders
in connection with New Acquisitions.
"BASE RATE" means a variable rate of interest per annum equal to the rate
of interest from time to time published by the Board of Governors of the Federal
Reserve System in Federal Reserve statistical release H.15 (519) entitled
"Selected Interest Rates" as the Bank prime loan rate. Base Rate also includes
rates published in any successor publications of the Federal Reserve System
reporting the Bank prime loan rate or its equivalent. The statistical release
generally sets forth a Bank prime loan rate for each business day. The
applicable Bank prime loan rate for any date not set forth shall be the rate set
forth for the last preceding date. In the event the Board of Governors of the
Federal Reserve System ceases to publish a Bank prime loan rate or equivalent,
the term "Base Rate" shall mean a variable rate of interest per annum equal to
the highest of the "prime rate," "reference rate," "base rate" or other similar
rate as determined by Agent announced from time to time by any of Bankers Trust
Company, The Chase Manhattan Bank or Citibank, N.A. (with the understanding that
any such rate may merely be a reference rate and may not necessarily represent
the lowest or best rate actually charged to any customer by such bank).
2
<PAGE>
"BUSINESS DAY" shall mean any day other than a day on which commercial
banks are authorized or required to close in Chicago, Illinois or in the
Commonwealth of Pennsylvania and, where such term is used in the definition of
"Quarterly Date" or if such day relates to a payment or prepayment of principal
of or interest on a Note, any day which is also a day on which dealings in
Dollar deposits are carried out in the London interbank market.
"CAPITALIZATION" shall mean shareholder's equity plus Total Funded Debt.
"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 Company
on the Closing Date) shall have "beneficial ownership" of more than 51% of the
outstanding common stock of the Company (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 Company 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 January 31, 2000.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time and any successor statute.
"COMMON STOCK" shall mean the common stock, $.001 par value, of the
Company.
"CONSOLIDATED NET INCOME" shall mean with respect to the Company and its
Consolidated Subsidiaries, for any period, the aggregate of the net income (or
loss) of the Company 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 Company 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 Company 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 Company 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 Holders
and any extraordinary gains or losses, including gains or losses attributable to
Property sales not in the ordinary course of business; and (v) the
3
<PAGE>
cumulative effect of 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 Company
(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 Company 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, amortization and the amount of the settlement of the lawsuit with
Joseph Bonola, D.D.S. up to but not to exceed $1,372,743 as reflected on
Schedule 1 to the Second Amendment to the Senior Credit Agreement, dated as of
September 30, 1999.
"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 Company or any Subsidiary is conducting or at any time has
conducted business, or where any Property of the Company 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,
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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 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 Company 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 Company 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
Company, 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 RATE" shall mean, for each Interest Period, a rate per annum
equal to: (a) the offered rate for deposits in U.S. dollars in an amount
comparable to the amount of the applicable Note in the London interbank market
which is published by the British Bankers' Association, and that currently
appears on Telerate Page 3750, as of 11:00 a.m. (London time) on the day which
is two (2) Business Days prior to the first day of such Interest Period for a
term comparable to such Interest Period; or if, for any reason, such a rate is
not published by the British Bankers' Association on Telerate or any other
source approved by Heller, the rate per annum equal to the average rate (rounded
upwards, if necessary, to the nearest 1/100 of 1%) at which Heller determines
that U.S. dollars in an amount comparable to the amount of the applicable Note
is being offered to prime banks at approximately 11:00 a.m. (London time) on the
day which is two (2) Business Days prior to the first day of such Interest
Period for a term comparable to such
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Interest Period for settlement in immediately available funds by leading banks
in the London interbank market selected by Heller; DIVIDED BY (b) a number equal
to 1.0 MINUS the aggregate (but without duplication) of the rates (expressed as
a decimal fraction) of reserve requirements in effect on the day which is two
(2) Business Days prior to the beginning of such Interest Period (including,
without limitation, basic, supplemental, marginal and emergency reserves under
any regulations of the Board of Governors of the Federal Reserve System or other
governmental authority having jurisdiction with respect thereto, as now and from
time to time in effect) for Eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) which are required to
be maintained by a member bank of the Federal Reserve System; such rate to be
rounded upward to the next whole multiple of one-sixteenth of one percent
(.0625%).
"EVENT OF DEFAULT" shall have the meaning assigned such term in Section
10.01.
"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 Company 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 Company
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 Company 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 Senior Credit Documents.
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"FINANCIAL STATEMENTS" shall mean the financial statement or statements of
the Company and its Consolidated Subsidiaries described or referred to in
Section 7.02.
"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
Company, its Subsidiaries or any of their Property or any Holder.
"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, or is required to,
execute a Subordinated Guaranty Agreement pursuant to Section 9.19.
"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 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 Holders 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
Company or any Subsidiary to Holders in connection with the Subordinated Note
Documents, now or hereafter entered into between or among the Company, any of
its Subsidiaries and any Holder, and all renewals, extensions and/or
rearrangements of any of the above.
"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
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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 PURCHASE" shall mean the initial purchase of the Notes upon
satisfaction of the conditions set forth in Sections 6.01 and 6.02.
"INTEREST PERIOD" shall mean each three-month period, with the first
period commencing on the Closing Date and ending on the numerically
corresponding day in the third calendar month thereafter, 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, 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).
"JUNIOR SUBORDINATED DEBT" shall mean Debt of the Company or any
Subsidiary that is subordinated to the Indebtedness pursuant to a subordination
agreement substantially in the form of EXHIBIT F and otherwise on terms and
conditions acceptable to Holders.
"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 Company 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.
"MAJORITY LENDERS" shall mean the "Majority Lenders" as defined in the
Senior Credit Agreement.
"MANAGEMENT SERVICES AGREEMENTS" shall mean Management Service Agreements
previously or hereafter entered into between an Acquired Entity and Company or
any Subsidiary, in form and substance satisfactory to Holders.
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"MATERIAL ADVERSE EFFECT" shall mean any material and adverse effect on
(i) the assets, liabilities, financial condition, business, operations or
affairs of the Company and its Subsidiaries taken as a whole different from
those reflected in the Financial Statements or from the facts represented or
warranted in any Subordinated Note Document, or (ii) the ability of the Company
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 Subordinated Note Documents on a timely basis.
"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
Company 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 Company, 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 as permitted by this Agreement.
"NOTES" shall mean the Notes provided for by Section 2.01, 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
4.04(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
"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 Company, 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 Company, any Subsidiary or an ERISA Affiliate.
"POST-DEFAULT RATE" shall mean, in respect of any principal of any Note or
any other amount payable by the Company under this Agreement or any other
Subordinated Note Document, a rate
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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 Eurodollar Rate or the Base Rate, as the
case may be, as in effect from time to time plus the Applicable Margin.
"PROPERTY" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"QUARTERLY DATE" shall mean the 15th day of each January, April, July and
October, commencing April 15, 2000; PROVIDED, HOWEVER, that if any such day is
not a Business Day, such Quarterly Date shall be the next succeeding Business
Day.
"REGISTRATION RIGHTS AGREEMENT" shall mean that certain Registration
Rights Agreement, dated as of January 31, 2000, by and among the Company and the
stockholders party thereto.
"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 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 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.
"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 Company.
"SEC" shall mean the Securities and Exchange Commission or any successor
Governmental Authority.
"SENIOR AGENT" shall mean Bank of America, N.A. (formerly known as
NationsBank of Texas, N.A.) (together with any duly appointed successor) for the
Senior Lenders.
"SENIOR CREDIT AGREEMENT" shall mean that certain Amended and Restated
Credit Agreement dated as of December 18, 1998, as amended by First Amendment to
Amended and Restated Credit Agreement dated as of July 20, 1999, Second
Amendment to Amended and Restated Credit Agreement dated as of September 30,
1999 and Third Amendment to Amended and Restated Credit Agreement dated as of
January 31, 2000, as the same may hereafter be amended, restated, supplemented
or otherwise modified from time to time as permitted herein and in the
Subordination Agreement.
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"SENIOR CREDIT DOCUMENTS" shall mean the Senior Credit Agreement and the
"Loan Documents" (as defined in the Senior Credit Agreement) in each instance as
in effect on the date hereof and as the same may be amended, modified or
supplemented from time to time as permitted herein.
"SENIOR INDEBTEDNESS" shall mean "Senior Debt" as such term is defined in
the Subordination Agreement.
"SENIOR FUNDED DEBT" shall mean, at any date and with respect to the
Company and its Subsidiaries, all Debt for borrowed money (excluding the
Indebtedness and other Debt expressly subordinated to the Indebtedness in form
and substance satisfactory to the Holders), any capital lease obligations and
any guaranty with respect to Senior Funded Debt of another person.
"SENIOR LENDERS" shall mean each Person that is or shall become a lender
under the Senior Credit Agreement for so long as such Person shall be a party to
that Agreement.
"SETTLEMENT AGREEMENT" shall mean that certain letter agreement dated
January 28, 2000 among the Company, Castle Dental Centers of California, L.L.C.,
CDC of California, Inc. and the Persons referred to therein as the "DCS
Parties".
"SHARES" shall mean the Common Stock issued and/or issuable upon
conversion of all or any part of the Convertible Notes.
"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 Company 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).
"STOCKHOLDERS AGREEMENT" shall mean that certain Stockholders Agreement,
dated as of January __, 2000, by and among the Company and the stockholders
party thereto.
"STOCK PURCHASE" shall mean any acquisition of all capital stock of any
Acquired Entity by Company or a Subsidiary pursuant to a Stock Purchase
Agreement.
"STOCK PURCHASE AGREEMENTS" shall mean each stock purchase agreement
entered into by Company or any Subsidiary in connection with New Acquisitions.
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"SUBORDINATED GUARANTY AGREEMENT" shall mean an agreement executed by the
Guarantors subordinated on terms substantially as provided in the Subordination
Agreement and otherwise in form and substance satisfactory to Holders
guaranteeing, unconditionally, payment of the Indebtedness, as the same may be
amended, modified or supplemented from time to time.
"SUBORDINATED NOTE DOCUMENTS" shall mean this Agreement, the Notes, the
Subordinated Guaranty Agreement, the Stockholders Agreement and the Registration
Rights Agreement.
"SUBORDINATION AGREEMENT" shall mean that certain Subordination and
Intercreditor Agreement of even date herewith among the Company, Holders,
Guarantors and the Senior Agent, as such Agreement may be amended from time to
time as provided therein.
"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 Company or one or more of its Subsidiaries or by the Company
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 Company.
"TAXES" shall have the meaning assigned such term in Section 4.06(a).
"TOTAL FUNDED DEBT" shall mean Senior Funded Debt, the Indebtedness plus
all other debt expressly subordinated to the Senior Indebtedness, including
without limitation, any contingent Debt resulting from the guaranty of a future
stock price of capital stock issued by the Company or an Affiliate of the
Company to a seller in consideration for an acquisition, all in form and
substance satisfactory to Holders.
"WHOLLY-OWNED SUBSIDIARY" shall mean, as to the Company, 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 Company or one or more of the
Wholly-Owned Subsidiaries or by the Company 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 Holders hereunder shall be prepared, in accordance
with GAAP, applied on a basis consistent with the audited financial statements
of the Company referred to in Section 7.02 (except for changes concurred with by
the Company's independent public accountants).
ARTICLE II
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PURCHASE AND SALE OF NOTES
Section 2.01 PURCHASE AND SALE OF NOTES.
(a) Subject to the terms and conditions herein set forth, the Company
agrees that it will issue and sell to each of Heller and Midwest, and each of
Heller and Midwest agrees that it will acquire from the Company on the Closing
Date, the Subordinated Notes in an original principal amount of $9,081,024 and
$4,540,512, respectively, in substantially the form attached hereto as EXHIBIT
A, appropriated completed in conformity herewith, the purchase price of which
shall be $9,081,024 and $4,540,512, respectively.
(b) Subject to the terms and conditions herein set forth, the Company
agrees that it will issue and sell to each of Heller and Midwest, and each of
Heller and Midwest agrees that it will acquire from the Company, on the Closing
Date, for the purchase price of $918,976 and $459,488, respectively, the
Convertible Notes in an original principal amount of $918,976 and $459,488,
respectively, in substantially the form attached hereto as EXHIBIT B, which
Convertible Notes shall be convertible into 295,253.33 and 147,626.67 shares of
Common Stock of the Company, respectively, constituting an aggregate of 6% of
the sum of the fully diluted Common Stock of the Company as of the date hereof.
The holders of Convertible Notes will be entitled to the benefits of the
Stockholders Agreement and the Registration Rights Agreement.
(c) The Company and each Holder acknowledge that the purchase prices set
forth above for each of the Notes represent their relative fair market values
and agree to be bound by this allocation for all tax purposes pursuant to
Treasury Regulation ss.1.1273-2(h).
Section 2.02 FEES.
(a) COMMITMENT FEE. The Company shall pay to each of Heller and Midwest on
the Closing Date the fees set forth in separate letter agreements executed
concurrently herewith.
Section 2.03 PREPAYMENTS.
(a) VOLUNTARY PREPAYMENTS. Subject to the terms of the Subordination
Agreement, the Company may prepay the outstanding principal of (together with
accrued interest on and, if applicable, the prepayment fee described below) the
Subordinated Notes in full or in part (in minimum amounts of $1,000,000), at any
time and from time to time on any Quarterly Date as applicable, upon not less
than three (3) Business Days' prior notice to Holders. The Company shall not be
permitted to prepay voluntarily the Convertible Notes.
(b) MANDATORY PREPAYMENTS. Subject to the terms of the Subordination
Agreement:
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(i) if the Company raises any cash proceeds by the offering of
equity, 20% of the net cash proceeds obtained from such equity offering
shall be used to prepay the outstanding principal of the Subordinated
Notes; and
(ii) concurrently with the consummation of a Change in Control,
Company shall pay the outstanding principal of the Subordinated Notes
(together with accrued interest and, if applicable, the prepayment fee
described below).
(c) PREPAYMENT FEES. If the Company should voluntarily prepay the
Subordinated Notes in their entirety, or shall prepay the Subordinated Notes in
their entirety due to a Change in Control, Company shall pay to Holders a
prepayment fee of 2.00% of the principal amount of the Subordinated Notes
prepaid if such prepayment occurs on or prior to the first anniversary of the
Closing Date and 1.00% of the principal amount of the Subordinated Notes prepaid
if such prepayment occurs after the first anniversary of the Closing Date but
prior to the second anniversary of the Closing Date.
(d) CONVERTIBLE NOTES. Subject to the terms of the Subordination
Agreement, the Convertible Notes may be subject to prepayment prior to their
maturity date pursuant to the terms and provisions of the Stockholders
Agreement.
(e) ALLOCATION. Any partial prepayment of Subordinated Notes shall be
allocated among the Subordinated Notes pro rata in accordance with the
respective outstanding principal balances thereof.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 PAYMENT OF NOTES. (a) Commencing on March 31, 2005, the
aggregate principal amount of the Subordinated Notes outstanding shall be
payable in eight (8) equal consecutive quarterly installments in the amounts and
at the times described below:
DATE AMOUNT
---- ------
March 31, 2005 $1,702,692
June 30, 2005 $1,702,692
September 30, 2005 $1,702,692
December 31, 2005 $1,702,692
March 31, 2006 $1,702,692
June 30, 2006 $1,702,692
September 30, 2006 $1,702,692
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December 31, 2006 $1,702,692 plus all remaining
accrued interest
(b) The aggregate outstanding principal balance of the Convertible Notes
shall be payable on January 31, 2009.
Section 3.02 INTEREST.
(a) INTEREST RATES. The Company will pay to Holders, interest on the
unpaid principal amount of the Notes for the period commencing on the Closing
Date to, but excluding, the date such Notes shall be paid in full, at the
Eurodollar Rate plus the Applicable Margin, except as provided in Section 5.04.
(b) POST-DEFAULT RATE. Notwithstanding the foregoing, the Company will pay
to Holders, interest at the applicable Post-Default Rate on any principal of any
Note, and (to the fullest extent permitted by law) on any other amount payable
by the Company hereunder or under any Subordinated Note Document, 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 the Notes shall be payable on each
Quarterly Date, except that interest payable at the Post-Default Rate shall be
payable from time to time on demand. In addition, accrued interest on
Convertible Notes shall be payable on the date of conversion of all or any part
of such Convertible Note.
(d) DETERMINATION OF RATES. Promptly after the determination of any
interest rate provided for herein or any change therein, the Company shall
promptly notify in writing each Holder thereof.
ARTICLE IV
PAYMENTS; 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 Company
under this Agreement and the Notes shall be made in Dollars, in immediately
available funds, to each Holder at such account as such Holder shall specify by
notice to the Company from time to time, not later than 11:00 a.m. Chicago 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. 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
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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.
Section 4.02 COMPUTATIONS. Interest 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 calculated at the Base Rate shall be computed on the basis
of a year or 365 days 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 4.03 INTENTIONALLY OMITTED.
Section 4.04 TAXES.
(a) PAYMENTS FREE AND CLEAR. Any and all payments by the Company 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 any Holder, taxes imposed on its income, and franchise or similar
taxes imposed on it, by (i) any jurisdiction (or political subdivision thereof)
of which such Holder is a citizen or resident, (ii) the jurisdiction (or any
political subdivision thereof) in which such Holder is organized, or (iii) any
jurisdiction (or political subdivision thereof) in which such Holder 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 Company shall be required by law to deduct any Taxes from or
in respect of any sum payable hereunder to any Holder (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 4.04) such Holder shall receive an amount equal to the sum it would
have received had no such deductions been made, (ii) the Company shall make such
deductions and (iii) the Company shall pay the full amount deducted to the
relevant taxing authority or other Governmental Authority in accordance with
applicable law and provide such Holder with a receipt thereof.
(b) OTHER TAXES. In addition, to the fullest extent permitted by
applicable law, the Company 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 of the Notes or Shares, or the Subordinated Guaranty Agreement
(hereinafter referred to as "OTHER TAXES").
(C) INDEMNIFICATION. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
THE COMPANY WILL INDEMNIFY EACH HOLDER FOR THE FULL AMOUNT OF TAXES AND OTHER
TAXES (INCLUDING, BUT NOT LIMITED
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TO, ANY TAXES OR OTHER TAXES IMPOSED BY ANY GOVERNMENTAL AUTHORITY ON AMOUNTS
PAYABLE UNDER THIS SECTION 4.04) PAID BY SUCH HOLDER 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 HOLDER'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 A HOLDER
MAKES WRITTEN DEMAND THEREFOR. IF A HOLDER RECEIVES A REFUND OR CREDIT IN
RESPECT OF ANY TAXES OR OTHER TAXES FOR WHICH SUCH HOLDER HAS RECEIVED PAYMENT
FROM THE COMPANY IT SHALL PROMPTLY NOTIFY THE COMPANY 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 COMPANY (OR PROMPTLY UPON RECEIPT, IF THE
COMPANY HAS REQUESTED APPLICATION FOR SUCH REFUND OR CREDIT PURSUANT HERETO),
PAY AN AMOUNT EQUAL TO SUCH REFUND OR CREDIT TO THE COMPANY WITHOUT INTEREST
(BUT WITH ANY INTEREST SO REFUNDED OR CREDITED), PROVIDED THAT THE COMPANY, UPON
THE REQUEST OF A HOLDER, AGREES TO RETURN SUCH REFUND OR CREDIT (PLUS PENALTIES,
INTEREST OR OTHER CHARGES) TO SUCH HOLDER IN THE EVENT SUCH HOLDER IS REQUIRED
TO REPAY SUCH REFUND OR CREDIT.
ARTICLE V
CAPITAL ADEQUACY
Section 5.01 CAPITAL ADEQUACY; ADDITIONAL COSTS.
(a) EURODOLLAR REGULATIONS, ETC. The Company shall pay directly to each
affected Holder from time to time such amounts as such Holder may determine to
be necessary to compensate itself for any costs which it determines are
attributable to its purchasing or maintaining of any Notes at the Eurodollar
Rate or any reduction in any amount receivable by such Holder hereunder in
respect of any Notes at the Eurodollar Rate (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 Holder under this Agreement or any Note in respect
of any of such Notes at the Eurodollar Rate (other than taxes imposed on the
overall net income of such Holder for any of such Notes at the Eurodollar Rate
by the jurisdiction in which such Holder has its principal 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
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assets of, or any deposits with or other liabilities of such Holder 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). The
affected Holder will notify the Company of any event occurring after the Closing
Date which will entitle it to compensation pursuant to this Section 5.01(a) as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation.
(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 Holder, (B) the Eurodollar interbank market or (C) such Holders position in
such market), the Eurodollar Rate, as determined in good faith by such Holder,
will not adequately and fairly reflect the cost to such Holder of funding at the
Eurodollar Rate, then, if such Holder so elects, by notice to the Company, the
obligation of such Holder to continue calculating interest on the Notes at the
Eurodollar Rate 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 Company shall pay
directly to each affected Holder from time to time on request such amounts as
such Holder may reasonably determine to be necessary to compensate itself or its
parent or holding company for any costs which it determines are attributable to
the maintenance by such Holder or its parent or holding company, pursuant to any
Governmental Requirement following any Regulatory Change, of capital in respect
of the Notes, such compensation to include, without limitation, an amount equal
to any reduction of the rate of return on assets or equity of such Holder or its
parent or holding company to a level below that which such Holder or its parent
or holding company could have achieved but for such Governmental Requirement.
Each affected Holder will notify the Company 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. Upon notifying the Company of the incurrence
of additional costs under this Section 5.01, the affected Holder shall in such
notice to the Company set forth in reasonable detail the basis and amount of its
request for compensation. Determinations and allocations by such Holder 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), on its costs or rate of return of maintaining Notes at the
Eurodollar Rate and of the amounts required to compensate such Holder 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 Company
within thirty (30) days of the receipt by the Company of the notice described in
this Section 5.01(d).
Section 5.02 LIMITATION ON EURODOLLAR RATE. Anything herein to the
contrary notwithstanding, if, on or prior to the determination of any Eurodollar
Rate for any Interest Period:
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(i) a Holder 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 at the Eurodollar
Rate as provided herein; or
(ii) a Holder 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 at the Eurodollar Rate for such Interest Period
is to be determined are not sufficient to adequately cover the cost to
such Holder of maintaining Notes at the Eurodollar Rate;
then such Holder shall give the Company prompt notice thereof, and so long as
such condition remains in effect, such Holder shall be under no obligation to
continue calculating interest on the Notes at the Eurodollar Rate.
Section 5.03 ILLEGALITY. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Holder to continue to
maintain Notes at the Eurodollar Rate hereunder, then such Holder shall promptly
notify the Company thereof and such Holder's obligation to continue to calculate
interest on the Notes at the Eurodollar Rate shall be suspended until such time
as such Holder may again maintain the Notes at the Eurodollar Rate (in which
case the provisions of Section 5.04 shall be applicable).
Section 5.04 INTEREST ON THE NOTES AT THE BASE RATE PURSUANT TO SECTIONS
5.01, 5.02 AND 5.03. If the obligation of any Holder to calculate interest on
its Notes at the Eurodollar Rate shall be suspended pursuant to Sections 5.01,
5.02 or 5.03 ("AFFECTED NOTES"), interest on all Affected Notes which would
otherwise be calculated at the Eurodollar Rate shall be calculated instead at
the Base Rate (and, if an event referred to in Section 5.01(b) or Section 5.03
has occurred and the affected Holder so requests by notice to the Company, all
Affected Notes then outstanding shall be calculated at the Base Rate commencing
on the date specified by such Holder in such notice).
Section 5.05 COMPENSATION. The Company shall pay to each affected Holder
within thirty (30) days of receipt of written request of such Holder (which
request shall set forth, in reasonable detail, the basis for requesting such
amounts and which shall be conclusive and binding for all purposes 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 Holder
determines are attributable to any payment, prepayment or conversion from a
Eurodollar Rate properly made by such Holder or the Company for any reason
(including, without limitation, the acceleration of the Notes pursuant to
Section 10.01) on a date other than the last day of the Interest Period; or
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 for the period from the
date of such payment to the last day of the Interest Period
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at the applicable rate of interest for such Note provided for herein over (ii)
the interest component of the amount such Holder 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 Holder).
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL PURCHASE.
The obligation of Holders to purchase the Notes is subject to the receipt
by Holders of all fees payable pursuant to Section 2.02 on or before the Closing
Date and the receipt by Holders of the following documents and satisfaction of
the other conditions provided in this Section 6.01, each of which shall be
reasonably satisfactory to Holders in form and substance:
(a) A certificate of the Secretary or an Assistant Secretary of the
Company setting forth (i) resolutions of its board of directors with respect to
the authorization of the Company to execute and deliver the Subordinated Note
Documents to which it is a party and to enter into the transactions contemplated
in those documents, (ii) the officers of the Company (y) who are authorized to
sign the Subordinated Note Documents to which Company 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 Company, certified as being true and complete. Holders may
conclusively rely on such certificate until it receives notice in writing from
the Company 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 Subordinated
Note 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 Subordinated Note 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. Holders 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 Company and its Subsidiaries.
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(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 Purchase.
(e) The Notes, duly completed, executed and delivered to each Holder, as
applicable.
(f) The Subordinated Guaranty Agreement duly completed, executed and
delivered to each Holder.
(g) Opinions of Boyer Ewing and Harris, counsel to the Company and
Guarantors, in form and substance satisfactory to Holders, as to such matters
incident to the transactions herein contemplated as Holders may reasonably
request.
(h) A certificate of insurance coverage of the Company evidencing that the
Company is carrying insurance in accordance with Section 7.19.
(i) Unaudited pro forma projected consolidated balance sheet of the
Company and its Consolidated Subsidiaries at the Closing Date (which pro forma
shall be based on the consolidated balance sheet of the Company and its
Consolidated Subsidiaries as of September 30, 1999), and the unaudited pro forma
projected consolidated statements of income of the Company and its Consolidated
Subsidiaries for five (5) years commencing as of the Closing Date, which
represent the Company's good faith estimate of the pro forma projected
consolidated financial condition of the Company and its Consolidated
Subsidiaries as at the Closing Date, after giving effect to the transactions
contemplated herein provided projections as to future performance should not be
construed as a guarantee of future performance.
(j) Certified copies of the Senior Debt Documents, the promissory notes
evidencing the Debt described on Schedule 9.01 and the subordination agreements
executed in connection therewith.
(k) Stockholder's Agreement and Registration Rights Agreement duly
completed, executed and delivered to Holders.
(l) the "Closing" (as defined in the Settlement Agreement) shall have
occurred and payment of the "Full Settlement Amount" (as defined in the
Settlement Agreement) shall occur concurrently herewith.
(m) evidence that the Company has authorized and reserved a sufficient
number of shares of common stock with respect to the conversion of the
Convertible Notes.
(n) payment of all legal fees of counsel to Holders.
(o) with respect to Midwest, duly executed and completed (i) SBA Form 480
(Size Status Declaration) and SBA Form 652 (Assurance of Compliance), (ii) SBA
Form 1031 (Portfolio
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Finance Report), Part A and B, and (iii) letter regarding SBA matters in form
and substance acceptable to Midwest.
(p) Such other documents as Holders or special counsel to Holders may
reasonably request.
Section 6.02 NO WAIVER. No waiver of any condition precedent shall
preclude Holders from thereafter declaring that the failure of the Company to
satisfy such condition precedent constitutes a Default.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Holder:
Section 7.01 CORPORATE EXISTENCE. Each of the Company 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 Company and its Consolidated Subsidiaries as at December 31, 1998 and the
related consolidated statement of income, stockholders' equity and cash flow of
the Company and its Consolidated Subsidiaries for the fiscal year ended on said
date, with the opinion thereon of Pricewaterhouse Coopers L.L.P. heretofore
furnished to Holders and the unaudited consolidated balance sheet of the Company
and its Consolidated Subsidiaries as at September 30, 1999 and their related
consolidated statements of income, stockholders' equity and cash flow of the
Company and its Consolidated Subsidiaries for the nine month period ended on
such date heretofore furnished to Holders, are complete and correct and fairly
present the consolidated financial condition of the Company and its Consolidated
Subsidiaries as at said dates and the results of its operations for the fiscal
year and the nine 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 Company 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
December 31, 1998, 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 Company 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,
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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 Company and its Consolidated Subsidiaries at
the Closing Date (which proforma shall be based on the consolidated balance
sheet of the Company and its Consolidated Subsidiaries as of September 30, 1999,
adjusted to reflect the transactions contemplated herein), and the unaudited pro
forma projected consolidated statement of income of the Company and its
Consolidated Subsidiaries as of the Closing Date, heretofore furnished to
Holders, represent Company's best estimate of the pro forma projected
consolidated financial condition of the Company and its Consolidated
Subsidiaries as at the Closing Date after giving effect to the transactions
contemplated herein provided projections as to future performance should not be
construed as a guarantee of future performance.
Section 7.03 LITIGATION. Except as set forth on Schedule 7.03, 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 Company threatened against or affecting the Company 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
Subordinated Note Documents, nor compliance with the terms and provisions hereof
or thereof 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 Company or any Subsidiary, or any Governmental Requirement or
any material agreement or instrument to which the Company 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 Company or any Subsidiary pursuant to the terms of any such material
agreement or instrument other than the Liens created by the Senior Credit
Documents.
Section 7.05 AUTHORITY. The Company and each Subsidiary have all necessary
corporate power and authority to execute, deliver and perform its respective
obligations under the Subordinated Note Documents to which it is a party. The
execution, delivery and performance by the Company and each Subsidiary of the
Subordinated Note Documents to which it is a party, have been duly authorized by
all necessary corporate action on its part. The Subordinated Note Documents
constitute the legal, valid and binding obligations of the Company 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 Company or any Subsidiary of the
Subordinated Note Documents to which it is a party or for the validity or
enforceability thereof.
Section 7.07 USE OF NOTE PROCEEDS. The proceeds of the Notes shall be used
to provide financing for (i) New Acquisitions or new store openings, (ii)
repayment of existing indebtedness, (iii) payment of costs and expenses
associated with this transaction, (iv) payment of the "Full
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Settlement Amount" (as defined in the Settlement Agreement) contemplated by the
Settlement Agreement and (v) payment of approximately $430,000 to DCA Limited
Partnership, LLP and related persons. The Company 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 Regulation T, U or X of the Board of Governors of
the Federal Reserve System) and no part of the proceeds of the Notes will be
used to buy or carry any margin stock.
Section 7.08 ERISA.
(a) The Company, 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 Company, 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 Company, any Subsidiary or any ERISA
Affiliate has been or is expected by the Company, 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 Company,
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 Company'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 Company, 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 Company, a Subsidiary or any ERISA Affiliate in its sole
discretion at any time without any material liability.
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(h) None of the Company, 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 Company, 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 Company 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 paid all material taxes due pursuant to
such returns or pursuant to any assessment received by the Company or any
Subsidiary. The charges, accruals and reserves on the books of the Company and
its Subsidiaries in respect of taxes and other governmental charges are, in the
opinion of the Company, adequate. No tax lien has been filed and, to the
knowledge of the Company, no claim is being asserted with respect to any such
tax, fee or other charge.
Section 7.10 TITLES, ETC.
(a) Each of the Company 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 Company 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 Company and its
Subsidiaries.
(c) The licenses, rights, Properties and other assets presently owned,
leased or licensed by the Company and its Subsidiaries and each Acquired Entity,
include all rights, Properties and other assets necessary to permit the Company
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 Company 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 Holders by the Company 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
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materially misleading in the light of the circumstances in which made and with
respect to the Company and its Subsidiaries taken as a whole.
Section 7.12 INVESTMENT COMPANY ACT. Neither the Company 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 Company 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
Company has no Subsidiaries. In the event that a new Subsidiary is formed or
acquired, Company will provide Holders with a new, updated SCHEDULE 7.14.
Section 7.15 LOCATION OF BUSINESS AND OFFICES. The Company'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 Company 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 agreement or instrument to which the Company or
any Subsidiary is a party or by which the Company or any Subsidiary is bound
which default would have a Material Adverse Effect. No Default hereunder or
under the Senior Credit Documents has occurred and is continuing.
Section 7.17 ENVIRONMENTAL MATTERS. Except as would not have a Material
Adverse Effect, neither any Property of the Company 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 Company 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 Company 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
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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
Company 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 Company 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 Company and its Subsidiaries and their
respective Board of Directors or officers have designated as being self insured.
Neither the Company 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 or acquired,
Company will provide Holders with a new, updated SCHEDULE 7.19.
Section 7.20 MANAGEMENT SERVICES AGREEMENTS AND ACCOUNTS RECEIVABLE
PURCHASE AGREEMENTS. The copies of Management Services Agreements and Account
Receivable Purchase Agreements listed on Schedule 7.20 hereto constitute all of
such agreements to which the Company or any of its Subsidiaries are a party. The
above Management Services Agreements and the Accounts Receivable Purchase
Agreements are valid, binding and enforceable against the parties thereto. The
Company and its Subsidiaries have 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 or acquired, 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 Company nor any of its
Subsidiaries is a party to any agreement or arrangement (other than the Senior
Credit Agreement and the Senior Credit Documents), 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 Company or any of its
Subsidiaries in excess of $250,000, and all obligations of the Company or any of
its Subsidiaries to issuers of surety or appeal bonds issued for account of the
Company 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
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such Debt or lease obligation. In the event that a new Subsidiary is formed or
acquired, Company will provide each Holder with a new, updated SCHEDULE 7.22.
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 Company,
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.
Section 7.24 YEAR 2000.
(a) The Company has analyzed the operations of the Company and its
Subsidiaries and Affiliates that could be adversely affected by failure to
become Year 2000 compliant (that is, that computer applications, imbedded
microchips and other systems will be able to perform date-sensitive
functions prior to and after December 31, 1999). The Company reasonably
believes that it is Year 2000 compliant for its operations and those of
its Subsidiaries and Affiliates except to the extent that a failure to do
so could not reasonably be expected to have a Material Adverse Effect upon
the financial condition of the Company.
(b) The Company reasonably believes any suppliers and vendors that
are material to the operations of Company or its Subsidiaries and
Affiliates are Year 2000 compliant for their own computer applications
except to the extent that a failure to do so could not reasonably be
expected to have a Material Adverse Effect upon the financial condition of
the Company.
Section 7.25 CAPITALIZATION. The authorized capital stock and other equity
securities of each of the Company and each of its Subsidiaries is as set forth
on Schedule 7.25. All issued and outstanding shares of capital stock and other
equity securities of each of the Company and each of its Subsidiaries are duly
authorized and validly issued, fully paid, non-assessable, free and clear of all
Liens other than those in favor of Senior Agent, and such shares were issued in
compliance with all applicable state and federal laws concerning the issuance of
securities. No shares of the capital stock of Company or any of its
Subsidiaries, other than those described above, are issued and outstanding.
Except as set forth on Schedule 7.25, all of the issued and outstanding capital
stock and other equity securities of Subsidiaries of the Company are owned by
the Company. Except as provided in the Stockholders Agreement and as set forth
on Schedule 7.25, there are no preemptive or other outstanding rights, options,
warrants, conversion rights or similar agreements or understandings for the
purchase or acquisition from Company or any of its Subsidiaries, of any shares
of capital stock or other securities of any such entity.
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ARTICLE VIII
AFFIRMATIVE COVENANTS
The Company covenants and agrees that, so long as any of the Subordinated
Notes are outstanding and, with respect to Sections 8.01(a), 8.01(b), 8.01(c),
8.03 and 8.11, so long as any of the Convertible Notes, or Common Stock issued
upon conversion of all or any portion of the Convertible Notes are outstanding:
Section 8.01 REPORTING REQUIREMENTS. The Company shall deliver, or shall
cause to be delivered, to each Holder:
(a) ANNUAL FINANCIAL STATEMENTS. As soon as available and in any event
within 120 days after the end of each fiscal year of the Company, the audited
consolidated and unaudited consolidating statements of operations, changes in
stockholders' equity, changes in financial position and cash flow of the Company
and its Consolidated Subsidiaries for such fiscal year, and the related
consolidated and consolidating balance sheets of the Company 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 Holders which opinion
shall state that said financial statements fairly present the consolidated
financial condition and results of operations of the Company 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 Company, consolidated and consolidating statements of
income, stockholders' equity, changes in financial position and cash flow of the
Company 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 Company and its
Consolidated Subsidiaries in accordance with GAAP, as at the end of, and for,
such period (subject to normal year-end audit adjustments).
(c) BUDGET. As soon as available and in any event within thirty (30) days
after the end of each fiscal year of the Company, a budget for the Company and
its Consolidated Subsidiaries, as approved by the board of directors of the
Company, for the following fiscal year setting forth in
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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 Company knows that any
Default or any Material Adverse Effect has occurred hereunder or under the
Senior Credit Documents, a notice of such Default or Material Adverse Effect,
describing the same in reasonable detail and the action the Company 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 Company or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Company and its Subsidiaries, and a copy of any
response by the Company or any Subsidiary of the Company, or the Board of
Directors of the Company or any Subsidiary of the Company, 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 Company 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 Company with or received by the Company in connection
therewith from any securities exchange or the SEC or any successor agency.
(g) NOTICES UNDER OTHER 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, including without limitation the Senior Credit Documents, other than
this Agreement and not otherwise required to be furnished to Holders pursuant to
any other provision of this Section 8.01.
(h) ANNUAL REVENUE REPORTS. As soon as available and in any event within
120 days after the end of each fiscal year of the Company, a report prepared by
the Company for each dental center setting forth the revenues, expenses and
contributions to profit of such dental center in form and substance acceptable
to Holders.
(i) QUARTERLY REVENUE REPORTS. 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 Company, a report by the Company for each dental
center setting forth the revenues, expenses and contributions to profit of such
dental center in form and substance acceptable to Holders.
(j) PLAN REPORT. From time to time such other information regarding the
business, affairs or financial condition of the Company or any Subsidiary
(including, without limitation, any Plan or Multiemployer Plan and any reports
or other information required to be filed under ERISA) as any Holder may
reasonably request.
(k) 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
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to Holders, setting forth as of the last Business Day of such calendar quarter a
true and complete list of all Hedging Agreements of the Company, 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.
(l) CAPITAL EXPENDITURES BUDGET. Promptly upon becoming available and in
any event within 30 days after the end of each fiscal year of the Company, a
capital expenditure budget for the next fiscal year setting forth all proposed
capital expenditures to be incurred during such fiscal year.
(m) MODIFICATIONS OF MANAGEMENT SERVICES AGREEMENTS, ETC. Promptly upon
the execution thereof, executed copies of any modification or amendment of any
Management Services Agreement, Accounts Receivable Purchase Agreement or Senior
Credit Document.
The Company shall furnish to each Holder, 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 Company's Total
Funded Debt, Senior Funded Debt and EBITDA and whether the Company is in
compliance with Sections 9.11, 9.12, 9.13, 9.14, 9.15 and 9.16 as of the end of
the respective fiscal quarter or fiscal year.
Section 8.02 LITIGATION. The Company shall promptly give to each Holder
notice of: (i) all legal or arbitral proceedings, and of all proceedings before
any Governmental Authority affecting the Company, 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 Company, 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 Company will, and will
cause each of its Subsidiaries to, promptly notify each Holder of any claim,
judgment, Lien or other encumbrance affecting any Property of the Company, 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 Company 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, individually or in the aggregate,
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 each Holder, 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 Holder; 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 Company will furnish or cause to be furnished to each Holder a certificate
of insurance coverage from the insurer in form and substance satisfactory to
Holders and, if requested, will furnish Holders copies of the applicable
policies.
(c) OPERATION OF PROPERTIES. The Company 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 Company 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
Company and its Subsidiaries and the operations conducted thereon and other
activities of the Company 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 Company will promptly notify each Holder in
writing of any threatened action, investigation or inquiry by any Governmental
Authority of which the Company has knowledge in connection with any
Environmental Laws, excluding routine testing and corrective action.
Section 8.05 FURTHER ASSURANCES. The Company 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 Subordinated Guaranty Agreement and
this Agreement. The Company at its expense will and will cause each Subsidiary
to promptly execute and deliver to each Holder upon request all such
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other documents, agreements and instruments to comply with or accomplish the
covenants and agreements of the Company or any Subsidiary, as the case may be,
in any of the Subordinated Note Documents, or to correct any omissions in any of
the Subordinated Note Documents, or to state more fully the security obligations
set out herein or in any of the other Subordinated Note Documents, 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 Company will pay the Notes
according to the reading, tenor and effect thereof; and the Company 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 Subordinated
Guaranty Agreement and this Agreement, at the time or times and in the manner
specified.
Section 8.07 ERISA INFORMATION AND COMPLIANCE. The Company will promptly
furnish and will cause the Subsidiaries and any ERISA Affiliate to promptly
furnish to each Holder (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 Company, 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 Company 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 Company 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 Company's
or any Subsidiary's purchase of all the outstanding stock of any Acquired Entity
pursuant to any Stock
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Purchase Agreement, upon the request of any Holder at any time thereafter, the
Company will cause such Acquired Entity to guarantee the Indebtedness upon terms
satisfactory to Holders, which guarantee shall be subordinated to the Senior
Indebtedness on terms substantially similar to the Subordinated Guaranty
Agreement.
Section 8.10 YEAR 2000. The Company will promptly notify each Holder in
the event the Company determines that any computer application which is material
to the operations of the Company, its Subsidiaries or any of its material
vendors or suppliers will not be fully Year 2000 compliant on a timely basis,
except to the extent that such failure could not reasonably be expected to have
a Material Adverse Effect upon the financial condition of the Company.
Section 8.11 BOARD OBSERVATION. Each Holder shall have the right to have
one individual (an "OBSERVER") attend any meeting of the Board of Directors of
the Company (the "BOARD") or any committee thereof. Each Observer shall not have
the right to vote on any matter presented to the Board or any committee thereof.
The Company shall give each Observer written notice of each meeting thereof at
the same time and in the same manner as the members of the Board or such
committee receive notice of such meetings, and the Company shall permit each
Observer to attend as an observer at all meetings thereof. Each Observer shall
be entitled to receive all written materials and other information given to the
directors in connection with such meetings at the same time such materials and
information are given to the directors, and each Observer shall keep such
materials and information confidential. If the Company proposes to take any
action by written consent in lieu of a meeting of the Board, the Company shall
give written notice thereof to each Observer prior to the effective date of such
consent describing the nature and substance of such action or including the
proposed text of such written consent.
If an issue is to be discussed or otherwise arises at any Board meeting
which, in the reasonable judgment of the Board, cannot be discussed in the
presence of the Observers in order to avoid a conflict of interest on the part
of the Observers or to preserve an attorney-client or accountant-client
privilege, then such issue may be discussed without the Observers being present
and may be deleted from any materials being distributed in connection with any
meeting at which such issues are to be discussed, so long as each Observer is
given notice of the occurrence of such meeting and the deletion of such
materials.
Section 8.12 CORRESPONDING AMENDMENT. Company agrees that, in the event
any change or amendment is made to the Senior Credit Documents in consideration
of a waiver of an actual or contemplated default or event of default thereunder,
a corresponding change or amendment shall automatically and simultaneously be
deemed to have been made to this Agreement without further action; provided
Company agrees to execute such documents as any Holder may reasonably request to
further memorialize such change or amendments.
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ARTICLE IX
NEGATIVE COVENANTS
The Company covenants and agrees that, so long as any of the Subordinated
Notes are outstanding and, with respect to Section 9.25, so long as any of the
Convertible Notes are outstanding:
Section 9.01 DEBT. Neither the Company nor any Subsidiary will incur,
create, assume or permit to exist any Debt, except:
(a) the Notes, the Indebtedness or any guaranty of or suretyship
arrangement for the Notes or the 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
and 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 Company pursuant to GAAP) not to exceed
$2,500,000 in the aggregate;
(d) Debt of the Company under Hedging Agreements with a Senior Lender or
otherwise approved by Holders;
(e) purchase money Debt not to exceed $2,500,000 in the aggregate;
(f) Debt described on SCHEDULE 9.01;
(g) Junior Subordinated Debt in connection with New Acquisitions; and
(h) Senior Indebtedness.
Section 9.02 LIENS. Neither the Company 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 Senior Indebtedness;
(b) Excepted Liens;
(c) Liens disclosed on SCHEDULE 9.02.
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(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 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 Company 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 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 Senior 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 Senior
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
Company delivers to each Holder a duly completed Officer's
Certificate substantially in the form of EXHIBIT D and further
provided that:
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(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 Company or a Subsidiary, and such Subsidiary
(if the surviving entity) shall have executed a Guaranty Agreement
pursuant to Section 9.19 hereof in favor of Holders in form and
substance satisfactory to Holders;
(ii) (A) any investment of $5,000,000.00 or more 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 Company throughout the relevant pre-
purchase 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 Holders; provided,
however, so long as the Senior Credit Agreement is in effect,
Holders shall have no approval rights with respect to such
investment or purchase provided (I) the Majority Lenders have
approved such investment or purchase, (II) no Default or Event of
Default has occurred and is continuing and (III) such investment and
purchase complies with the terms and conditions set forth in the
Senior Credit Agreement as in effect on the date hereof. The Company
shall deliver to each Holder 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
Company's consolidated enterprise, (2) completed due diligence
consisting of the information listed on EXHIBIT E, as approved by
Holders, (3) due diligence review conducted by Claymore Partners,
Ltd. if such dental practice is in a region in which neither the
Company nor any Subsidiary owns a dental practice as of the date
hereof and the investment in such practice exceeds $5,000,000.00,
(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
Holders, (5) any additional information and/or documentation
reasonably requested by any Holder;
(iii) for any investment of $2,000,000 or more but less than
$5,000,000, and which is not a dental practice described in clause
(ii)(B) or (ii)(C) above, the Company shall deliver to each Holder
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 Company's consolidated enterprise,
(2) completed due diligence consisting of the information listed on
EXHIBIT E, as approved by Holders, (3) 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
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Holders, and (4) any additional information and/or documentation
reasonably requested by any Holder.
(iv) for any investment of less than $2,000,000, and which is not a
dental practice described in clause (ii)(B) or (ii)(C) above, the
Company shall deliver to each Holder within ten (10) Business Days
after closing the purchase of any such dental practice, copies of
the tax returns of the target dental practice for the last three
years.
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. The Company will
not declare or pay any dividend, purchase, redeem or otherwise acquire for value
any of its stock, or options or warrants to acquire such stock, now or hereafter
outstanding, return any capital to its stockholders or make any distribution of
its assets to its stockholders, other than the repurchase and/or redemption of
the Convertible Note as permitted or required herein or therein or of the
Shares.
Section 9.05 SALES AND LEASEBACKS. Neither the Company nor any Subsidiary
will enter into any arrangement, directly or indirectly, with any Person whereby
the Company or any Subsidiary shall sell or transfer any of its Property,
whether now owned or hereafter acquired, and whereby the Company or any
Subsidiary shall then or thereafter rent or lease as lessee such Property or any
part thereof or other Property which the Company or any Subsidiary intends to
use for substantially the same purpose or purposes as the Property sold or
transferred; provided, however, so long as the Senior Credit Agreement is in
effect, this provision shall not prohibit any such transaction to the extent
approved by the Majority Lenders and provided no Default or Event of Default
exists.
Section 9.06 NATURE OF BUSINESS. Neither the Company nor any Subsidiary
will allow any material change to be made in the character of its business.
Section 9.07 MERGERS, ETC. Neither the Company 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 Company or into any Wholly-Owned Subsidiary so long as the
surviving Wholly- Owned Subsidiary is a Guarantor.
Section 9.08 PROCEEDS OF NOTES. The Company will not permit the proceeds
of the Notes to be used for any purpose other than those permitted by Section
7.07. Neither the Company nor any Person acting on behalf of the Company has
taken or will take any action which might cause any of the Subordinated Note
Documents to violate Regulation 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 Company will not at any time:
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(a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in,
any transaction in connection with which the Company, 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 material liability to the Company, 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 Company, 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 Company, 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;
(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 Company, 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
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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 Company, 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 Company nor any
Subsidiary will discount or sell (with or without recourse) any of its notes
receivable or accounts receivable; provided, however, so long as the Senior
Credit Agreement is in effect, this provision shall not prohibit any such
transaction to the extent approved by the Majority Lenders and provided no
Default or Event of Default exists.
Section 9.11 RATIO OF TOTAL FUNDED DEBT TO CAPITALIZATION. The Company
will not permit its ratio of Total Funded Debt to Capitalization as of the end
of any fiscal quarter to be greater than .65 to 1.0.
Section 9.12 NET WORTH. The Company will not permit its Net Worth to be
less than $33,049,000 at any time, with such minimum amount being permanently
increased by an amount equal to 67.5% of positive net income of the Company
during each fiscal quarter beginning with the fiscal quarter ended September 30,
1999, and 100% of equity capital raised by the Company 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 Company will not permit its Leverage
Ratio as of the end of any fiscal quarter (calculated on a rolling four quarter
basis) to be greater than 3.25 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, as approved by Holders, adjusted to reflect costs and expenses which
such Acquired Entity would have included had the Management Services Agreements
between Company 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), in each instance, as approved by Holders. As used in this
Section 9.13, "LEVERAGE RATIO" shall mean the ratio of (i) Senior Funded Debt to
(ii) EBITDA.
Section 9.14 FIXED CHARGE COVERAGE RATIO. The Company will not permit its
Fixed Charge Coverage Ratio as of the end of any fiscal quarter (calculated on a
rolling four quarter basis) to be less than the ratio for the relevant periods
set forth below.
RATIO PERIOD
--------------------- -----------------------------
1.00 to 1.00 from the Closing Date through
and including 3/31/2001
--------------------- -----------------------------
1.05 to 1.00 from 4/1/2001 and thereafter
--------------------- -----------------------------
<PAGE>
For purposes of this Section 9.14, "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 the extent deducted in computing net income to (ii)
lease and rental expense, PLUS interest, PLUS, during the Revolving Credit
Period (as defined in the Senior Credit Agreement), one-seventh (1/7) of the
then- outstanding principal balance of the Senior Loans, PLUS, without
duplication, current maturities of long-term debt, PLUS capital leases PLUS,
from and after Revolving Credit Period scheduled payments of principal on Debt
of the Company and its Subsidiaries. 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 as approved by Holders, adjusted to reflect costs and expenses which
such Acquired Entity would have included had the Management Services Agreements
between Company 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), in each instance, as approved by Holders.
Section 9.15 RATIO OF TOTAL FUNDED DEBT TO EBITDA. The Company will not
permit its ratio of Total Funded Debt as of the end of any fiscal quarter to
EBITDA for the four fiscal quarters ending on such date to be greater than 4.25
to 1.0. For purposes hereof, EBITDA shall be calculated as provided in Section
9.13 above.
Section 9.16 CAPITAL EXPENDITURES. The Company will not make any
expenditures for fixed or capital assets if, after giving effect thereto, the
aggregate of all such expenditures would, in the case of the 12 month periods
ending on the last day of the fiscal quarters ending on December 31, 1999, March
31, 2000 and June 30, 2000, respectively, exceed $11,000,000, and in the case of
each 12 month period ending on the last day of each fiscal quarter thereafter,
exceed $10,000,000.
Section 9.17 ENVIRONMENTAL MATTERS. Neither the Company 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 9.18 TRANSACTIONS WITH AFFILIATES. Except pursuant to Management
Services Agreements and the Accounts Receivable Purchase Agreements, neither the
Company 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.
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Section 9.19 SUBSIDIARIES. In each case in which the Company or any of its
Subsidiaries creates or acquires any additional Subsidiaries, each new
Subsidiary shall forthwith execute and deliver a Subordinated Guaranty Agreement
in favor of Holders. The Company 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 Company shall not permit any Subsidiary to issue any stock except to
the Company or any Guarantors and except in compliance with Section 9.03.
Section 9.20 NEGATIVE PLEDGE AGREEMENTS. Neither the Company nor any
Subsidiary will create, incur, assume or suffer to exist any contract, agreement
or understanding (other than the Senior Credit Documents and the Subordinated
Note Documents) 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 Company, or which requires the consent
of or notice to other Persons in connection therewith.
Section 9.21 OTHER AGREEMENTS. Neither the Company 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
(i) those amendments or modifications required to comply with Government
Requirements and (ii) those amendments or modifications which would not have an
adverse effect on Borrower or any of its Subsidiaries. The Company will not and
will not permit any of its Subsidiaries directly or indirectly to change or
amend the terms of any of the Senior Credit Documents if the effect of such
amendment is to: (a) increase the principal amount of Senior Indebtedness to an
amount in excess of that permitted in the definition of "Senior Debt" in the
Subordination Agreement or increase the interest rate on such Senior
Indebtedness by more than 200 basis points of the maximum rate of interest set
forth in the Senior Credit Agreement; (b) extend the final maturity of the
Senior Indebtedness by more than two (2) years; (c) shorten the final maturity
of the Senior Indebtedness by more than one (1) year; (d) except as permitted in
clause (c), shorten the dates upon which scheduled payments of principal or
interest are due on such Senior Indebtedness; or (e) change in any manner
adverse to the Company or add any event of default or add or make more
restrictive any covenant with respect to such Senior Indebtedness other than in
consideration for a waiver of an actual or contemplated default or event of
default under the Senior Credit Documents.
Section 9.22 ACQUIRED ENTITIES. Notwithstanding anything to the contrary
contained herein, the Company will not permit any Acquired Entity to create,
incur, assume or permit to exist any Debt (other than the Senior Indebtedness
and the Indebtedness) or Lien, 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 Company and Liens permitted
by Section 9.02.
Section 9.23 AMENDMENT OF CASTLE WEST LLC AGREEMENT. Neither the Company
nor any Subsidiary shall make or permit any material amendment or modification
of the Limited Liability Company Agreement of Castle Dental Centers of
California, L.L.C., a Delaware limited liability company, without the prior
written consent of Holders.
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Section 9.24 JUNIOR SUBORDINATION DEBT. The Company will not, and will not
permit any of is Subsidiaries, to make any payment of principal or interest on
Junior Subordinated Debt except to the extent permitted under, and subject to
the terms and conditions set forth in, the subordination agreement or other such
agreement executed in connection therewith.
Section 9.25 RESTRICTION ON FUNDAMENTAL CHANGES. The Company will not and
will not permit any of its Subsidiaries directly or indirectly to amend, modify
or waive any term or provision of its organizational documents, including
without limitation its articles of incorporation, certificates of designations
pertaining to preferred stock, by-laws, partnership agreement or members'
agreement.
Section 9.26 DISPOSAL OF ASSETS OR SUBSIDIARY STOCK. The Company will not
and will not permit any of its Subsidiaries directly or indirectly to: convey,
sell, lease, sublease, transfer or otherwise dispose of, or grant any Person an
option to acquire, in one transaction or a series of transactions, any of its
property, business or assets, or the capital stock of or other equity interests
in any of its Subsidiaries, whether now owned or hereafter acquired, except for
(a) bona fide sales of inventory to customers for fair value in the ordinary
course of business and dispositions of obsolete equipment not used or useful in
the business and (b) asset dispositions if all of the following conditions are
met: (i) the market value of assets sold or otherwise disposed of in any fiscal
year of the Company does not exceed $2,500,000; (ii) the consideration received
is at least equal to the fair market value of such assets; and (iii) no Default
or Event of Default then exists or shall result from such asset disposition.
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 Company shall default in the payment or prepayment when due of any
principal of or interest on any Note, or any fees or other amount payable by it
hereunder or under the Subordinated Guaranty Agreement; provided, however, if
such default is a default in the payment of fees (other than fees under Section
2.03(c)), such default shall continue unremedied for a period of 30 days; or
(b) the Company or any Subsidiary shall default in the payment when due of
any principal of or interest on any of its other Debt (other than Senior 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
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an 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 of the other Subordinated Note Documents by the Company or any
Subsidiary, or any certificate furnished to any Holder pursuant to the
provisions hereof or the other Subordinated Note Documents, shall prove to have
been materially false or misleading as of the time made or furnished in any
material respect; or
(d) the Company 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 Company shall default in the performance of any of its obligations
under Article VIII or the Subordinated Guaranty Agreement (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 Company by any Holder or (ii) the
Company otherwise becoming aware of such default; or
(e) the Company shall admit in writing its inability to, or be generally
unable to, pay its debts as such debts become due; or
(f) the Company 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 Company, 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 Company of all or any substantial part
of its assets, or (iii) similar relief in respect of the Company 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 Company 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 Company or any
Subsidiary and the same shall
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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 Company 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 Company 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 Subordinated Guaranty Agreement 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, except to the extent permitted by the terms of this Agreement, or
the Company shall so state in writing; or
(j) the Company discontinues its usual business; or
(k) any Guarantor 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 any Guarantor or if any Guarantor 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 (other than the Management Services
Agreement with Ner H. Azaula, D.D.S.) or any Accounts Receivable Purchase
Agreement terminates or a default by the Company occurs thereunder; or
(n) any modification or amendment of any Management Services Agreement
(other than the Management Services Agreement with Ner H. Azaula, D.D.S.) or any
Accounts Receivable Purchase Agreement is made that could result in a monetary
impact to the Company without the prior written consent of Holders; or
(o) a Change of Control occurs; or
(p) the Company shall default in the payment or performance of any
obligations in the Senior Credit Documents after any applicable cure period
provided for in the such document and as a result any Senior Lender causes the
Senior Indebtedness to be accelerated or the Company shall default in the
repayment of such Senior Indebtedness at final maturity.
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), each Holder may, by notice to the
Company, declare the principal amount then outstanding of, and the
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accrued interest on, the Subordinated Notes and/or Convertible Notes held by it
and all other amounts payable to it by the Company hereunder and under the
Subordinated Notes and Convertible Notes 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
Company.
(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 principal amount then outstanding
of, and the accrued interest on, the Notes and all other amounts payable by the
Company hereunder and under the Notes 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 Company.
(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 Subordinated Guaranty
Agreement; second to accrued interest on the Notes; third to fees; fourth pro
rata to principal outstanding on the Notes and other Indebtedness; and any
excess shall be paid to the Company or as otherwise required by any Governmental
Requirement.
(d) Upon the occurrence and during the continuance of any one or more
Events of Default, any Holder may proceed to protect and enforce its rights
hereunder by suit in equity, action at law or by other appropriate proceeding,
whether for the specific performance of any covenant or agreement contained in
this Agreements, the Notes or the other Subordinated Note Documents or in aid of
the exercise of any power granted in this Agreement or the Notes, or may proceed
to enforce the payment of the Notes, or to enforce any other of its legal or
equitable rights.
ARTICLE XI
HOLDER REPRESENTATIONS AND WARRANTIES
Section 11.0 ACCREDITED INVESTOR. Each Holder represents, as to itself,
that it is an "accredited investor" within the meaning of Regulation D
promulgated under the Securities Act.
ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER. No failure on the part of a Holder to exercise and
no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any of the Subordinated Note Documents shall operate as
a waiver thereof, nor shall any single or partial
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exercise of any right, power or privilege under any of the Subordinated Note
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 Subordinated Note Documents (including, without
limitation, any modifications of, or waivers or consents under, this Agreement
or the other Subordinated Note 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 Subordinated Note Documents;
or, as to any party, at such other address as shall be designated by such party
in a notice to each other party. Except as otherwise provided in this Agreement
or in the other Subordinated Note 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 Company agrees:
(i) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of Holders in the
administration (both before and after the execution hereof and including
advice of counsel as to the rights and duties of a Holder 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 Subordinated Note Documents and any
amendment, waiver or consent relating thereto (including, without
limitation, travel, photocopy, mailing, courier, telephone and other
similar expenses of Holders, the cost of environmental audits, surveys and
appraisals at reasonable intervals, the reasonable fees and disbursements
of counsel and other outside consultants for Holders and, in the case of
enforcement (including, without limitation, bankruptcy and workout
matters), the reasonable fees and disbursements of counsel for Holders;
and promptly reimburse a Holder for all amounts expended, advanced or
incurred by such Holder to satisfy any obligation of the Company under
this Agreement or the Subordinated Guaranty Agreement;
(II) TO INDEMNIFY EACH HOLDER AND EACH OF ITS AFFILIATES AND EACH OF
ITS 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
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THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY
ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY OF THE NOTES,
(II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE SUBORDINATED NOTE
DOCUMENTS, (III) THE OPERATIONS OF THE BUSINESS OF THE COMPANY AND ITS
SUBSIDIARIES, (IV) THE FAILURE OF THE COMPANY OR ANY SUBSIDIARY TO COMPLY
WITH THE TERMS OF THE SUBORDINATED GUARANTY AGREEMENT OR THIS AGREEMENT,
OR WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF ANY
REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF THE COMPANY OR ANY
GUARANTOR SET FORTH IN ANY OF THE SUBORDINATED NOTE DOCUMENTS, (VI) ANY
ASSERTION THAT ANY HOLDER WAS NOT ENTITLED TO RECEIVE THE PROCEEDS
RECEIVED PURSUANT TO THE SUBORDINATED GUARANTY AGREEMENT OR (VII) ANY
OTHER ASPECT OF THE SUBORDINATED NOTE 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 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 COMPANY 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 COMPANY OR ANY SUBSIDIARY WITH ANY
ENVIRONMENTAL LAW APPLICABLE TO THE COMPANY OR ANY SUBSIDIARY, (III) DUE
TO PAST OWNERSHIP BY THE COMPANY 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 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 COMPANY OR ANY SUBSIDIARY, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH
OR SAFETY CONDITION IN CONNECTION WITH THE SUBORDINATED NOTE DOCUMENTS.
(b) No Indemnified Party may settle any claim to be indemnified without
the consent of the indemnitor, such consent not to be unreasonably withheld.
(c) In the case of any indemnification hereunder, the Indemnified Party
shall give notice to the Company of any such claim or demand being made against
the Indemnified Party and the Company shall have the non-exclusive right to join
in the defense against any such claim or demand
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provided that if the Company provides a defense, the Indemnified Party shall
bear its own cost of defense unless there is a conflict between the Company 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 Company's obligations under this Section 12.03 shall survive any
termination of this Agreement, conversion of the Convertible Notes and the
payment of the Notes and shall continue thereafter in full force and effect.
(f) The Company shall pay any amounts due under this Section 12.03 within
thirty (30) days of the receipt by the Company of notice of the amount due.
Section 12.04 AMENDMENTS, ETC. Any provision of this Agreement or the
Subordinated Guaranty Agreement may be amended, modified or waived with the
Company's and Holders' prior written consent.
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.
(a) The Company may not assign its rights or obligations hereunder or
under the Notes without the prior consent of Holders.
(b) Subject to applicable securities laws, in the case of the Notes, and
to the terms and conditions of the Stockholders Agreement, in the case of the
Convertible Notes, Holders (and its permitted assigns) may assign to one or more
assignees all or a portion of its rights and obligations under this Agreement
and the other Subordinated Note Documents to any Person, and any such assignee
may further assign such rights and obligations to any Person. Any such
assignment will become effective upon the execution and delivery to the
assigning Holder of the assignment. Upon the assigning Holder's request, the
Company, 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), all
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<PAGE>
references to "Holders" or a "Holder" in this Agreement, the Notes and the other
Subordinated Note Documents shall mean and include each such assignee, each such
assignee shall be deemed a party to this Agreement and bound by all the
agreements and covenants of Holders (other than the covenant to purchase a Note)
contained herein and all actions which are to be taken, and all consents or
waivers to be granted or consents, amendments, waivers and other writings
required to be signed by Holders or a party (other than the Company) to this
Agreement shall be, in each case, effective only if taken or executed or
delivered by Holders and all such assignees.
(c) A Holder may furnish any information concerning the Company in its
possession from time to time to assignees (including prospective assignees);
provided that, such Persons agree to be bound by the provisions of Section
12.15.
(d) Notwithstanding any other provisions of this Section 12.06, no
transfer or assignment of the interests or obligations of a Holder or any grant
of participations therein shall be permitted if such transfer, assignment or
grant would require the Company to file a registration statement with the SEC or
to qualify the Notes 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 Subordinated Note Documents 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 the Subordinated Guaranty Agreement.
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 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, other than under,
but subject to the introductory statement to, Article VIII and Article IX, shall
survive the repayment of the Notes and the conversion of the Convertible Notes.
To the extent that any payments on the Indebtedness 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 Holders' rights, powers and remedies under
this Agreement and the Subordinated Guaranty Agreement shall continue in full
force and effect. In such event, the Subordinated Guaranty Agreement shall be
automatically reinstated and
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<PAGE>
the Company shall take such action as may be reasonably requested by Holder 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 SUBORDINATED NOTE 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 SUBORDINATED NOTE 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 ILLINOIS.
(B) SUBJECT TO SECTION 12.17, ANY LEGAL ACTION OR PROCEEDING WITH RESPECT
TO THE SUBORDINATED NOTE DOCUMENTS SHALL BE BROUGHT IN THE COURTS OF THE STATE
OF ILLINOIS OR OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF
ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY
AND EACH HOLDER 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 COMPANY AND EACH HOLDER HEREBY IRREVOCABLY
WAIVES ANY 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 ANY HOLDER TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW.
(D) THE COMPANY AND EACH HOLDER 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 THE SUBORDINATED GUARANTY AGREEMENT
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
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<PAGE>
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
SUBORDINATED GUARANTY AGREEMENT 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
Holders shall conform strictly to usury laws applicable to it. Accordingly, if
the transactions contemplated hereby would be usurious as to Holders under laws
applicable to it (including the laws of the United States of America and the
State of Illinois or any other jurisdiction whose laws may be mandatorily
applicable to Holders notwithstanding the other provisions of this Agreement),
then, in that event, notwithstanding anything to the contrary in any of the
Subordinated Note 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 Holders that is
contracted for, taken, reserved, charged or received by Holders under any of the
Subordinated Note 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 Holders 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 Holders to the
Company); 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 Holders 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 Holders as of the date of such
acceleration or prepayment and, if theretofore paid, shall be credited by
Holders 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 Holders to the Company). All sums paid or agreed to be paid to
Holders for the use, forbearance or detention of sums due hereunder shall, to
the extent permitted by law applicable to Holders, be amortized, prorated,
allocated and spread throughout the full term of the Notes until payment in full
so that the rate or amount of interest on account of any Notes 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 Holders on any date
shall be computed at the Highest Lawful Rate applicable to Holders pursuant to
this Section 12.14 and (ii) in respect of any subsequent interest computation
period the amount of interest otherwise payable to Holders would be less than
the amount of interest payable to Holders computed at the Highest Lawful Rate
applicable to Holders, then the amount of interest payable to Holders in respect
of such subsequent interest computation period shall continue to be computed at
the Highest Lawful Rate applicable to Holders until the total amount of interest
payable to Holders shall equal the total amount of interest which would have
been payable to Holders if the total amount of interest had been computed
without giving effect to this Section 12.14.
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Section 12.15 CONFIDENTIALITY. In the event that the Company provides to a
Holder written confidential information belonging to the Company, if the Company
shall denominate such information in writing as "confidential", such Holder
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 a Holder breaching its obligation of
confidence to the Company, (iii) are previously known by a Holder from some
source other than the Company, (iv) are hereafter developed by a Holder without
using the Company's information, (v) are hereafter obtained by or available to a
Holder from a third party who owes no obligation of confidence to the Company
with respect to such information or through any other means other than through
disclosure by the Company, (vi) are disclosed with the Company's consent, (vii)
must be disclosed either pursuant to any Governmental Requirement or to Persons
regulating the activities of a Holder, or (viii) as may be required by law or
regulation or order of any Governmental Authority in any judicial, arbitration
or governmental proceeding. Further, a Holder may disclose any such information
to any independent consultants, any independent certified public accountants,
any legal counsel employed by such Person in connection with this Agreement or
the Subordinated Guaranty Agreement, including without limitation, the
enforcement or exercise of all rights and remedies thereunder, or any assignee
(including prospective assignees) in the Notes; PROVIDED, HOWEVER, that such
Holder 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 such Holder
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 Company 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
Company waives any and all other rights it may have to confidentiality as
against a Holder arising by contract, agreement, statute or law except as
expressly stated in this Section 12.15.
Section 12.16 EFFECTIVENESS. This Agreement shall be effective on the
Closing Date.
Section 12.17 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE
SUBORDINATED GUARANTY AGREEMENT AND AGREES THAT IT IS CHARGED WITH NOTICE AND
KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE SUBORDINATED GUARANTY
AGREEMENT; 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 SUBORDINATED GUARANTY AGREEMENT; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY
IN ENTERING INTO THIS AGREEMENT AND THE SUBORDINATED GUARANTY AGREEMENT; AND
THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE
SUBORDINATED GUARANTY AGREEMENT 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
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HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR
ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND THE
SUBORDINATED GUARANTY AGREEMENT ON THE BASIS THAT THE PARTY HAD NO NOTICE OR
KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 12.18 SUBORDINATION. Each of the Company, the Guarantors and
Holders, by their acceptance of this Agreement, agree that all of the
Indebtedness, all payments in respect thereof (prior to the payment in full of
the Senior Indebtedness) and any renewals, refinancings or extensions thereof
shall be subordinate and junior in right to all Senior Indebtedness as set forth
and subject to the terms of the Subordination Agreement.
[SIGNATURES BEGIN ON NEXT PAGE]
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The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
Company: 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.
Senior Subordinated Note Purchase Agreement
<PAGE>
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
Heller: HELLER FINANCIAL, INC.
By: _______________________________
Name: _______________________________
Title:_______________________________
If to Heller:
HELLER FINANCIAL, INC.
500 West Monroe Street
Chicago, Illinois 60661
ATTN: Account Manager
Corporate Finance
Telecopy: (312) 441-7367
with a copy to:
HELLER FINANCIAL, INC.
500 West Monroe Street
Chicago, Illinois 60661
ATTN: Legal Services
Corporate Finance
Telecopy: (312) 441-6876
Senior Subordinated Note Purchase Agreement
<PAGE>
The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
Midwest: MIDWEST MEZZANINE FUND II, L.P.
By: ABN AMRO Mezzanine Management
II, L.P., its general partner
By: ABN AMRO Mezzanine Management
II, Inc., its general partner
By:__________________________________
J. Allan Kayler, Senior Vice President
Notices to:
Midwest Mezzanine Fund II, L.P.
208 South LaSalle Street, 10th floor
Chicago, Illinois 60604-1003
ATTN: J. Allan Kayler
Telecopy: (312) 553-6647
Senior Subordinated Note Purchase Agreement
EXHIBIT 10.24
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED, NOR THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY NOT BE
SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME, EXCEPT UPON
(1) SUCH REGISTRATION, OR (2) DELIVERY TO THE ISSUER OF THIS NOTE OF AN OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
FOR SUCH TRANSFER, OR (3) THE SUBMISSION TO THE ISSUER OF THIS NOTE OF OTHER
EVIDENCE, REASONABLY ACCEPTABLE TO THE ISSUER, TO THE EFFECT THAT ANY SUCH SALE,
PLEDGE, HYPOTHECATION OR TRANSFER WILL NOT BE IN VIOLATION OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED, OR OTHER APPLICABLE SECURITIES LAWS OF ANY
STATE, OR ANY RULES OR REGULATIONS PROMULGATED THEREUNDER.
THE PAYMENT OF THE PRINCIPAL OF, AND INTEREST ON, AND ALL OTHER AMOUNTS OWING IN
RESPECT OF THE INDEBTEDNESS EVIDENCED BY, THIS NOTE, IS AND SHALL BE EXPRESSLY
SUBORDINATED, TO THE EXTENT AND IN THE MANNER SET FORTH HEREIN AND, IF
APPLICABLE, IN THAT CERTAIN SUBORDINATION AGREEMENT, OR ANY OTHER SUBORDINATION
AGREEMENT NOW OR HEREAFTER EXECUTED, AMONG THE ISSUER OF THE NOTE, THE HOLDER,
BANK OF AMERICA, N.A., FORMERLY KNOWN AS NATIONSBANK OF TEXAS, N.A., ITS
SUCCESSORS OR ASSIGNS, OR ANY OTHER HOLDER OF SENIOR DEBT (COLLECTIVELY, "SENIOR
CREDITOR"), (IN ANY SUCH EVENT, THE "SUBORDINATION AGREEMENT").
SENIOR SUBORDINATED PROMISSORY NOTE
$13,621,536.00 JANUARY 31, 2000
CHICAGO, ILLINOIS
FOR VALUE RECEIVED, the undersigned, CASTLE DENTAL CENTERS, INC., a
Delaware corporation ("Company"), hereby unconditionally promises to pay to the
order of ________________________________ ("Holder"), at Holder's office at
_____________________ or at such other place as Holder may from time to time
designate in writing, in lawful money of the United States of America and in
immediately available funds, the principal sum of THIRTEEN MILLION SIX HUNDRED
TWENTY ONE THOUSAND FIVE HUNDRED THIRTY SIX AND NO/100 DOLLARS ($13,621,536.00),
or, if less, the aggregate unpaid principal amount hereof, at such times as are
specified in, and in accordance with the provisions of, the Senior Note Purchase
Agreement (or hereinafter defined). This Senior Subordinated Promissory Note is
referred to in and was executed and delivered pursuant to that certain Senior
Subordinated Note Purchase Agreement of even date herewith (the "Note Purchase
Agreement") among the Company, Holder and ________________________________, to
which reference is hereby made for a statement of the terms and conditions under
which the senior subordinated loan evidenced hereby was made and is to be
repaid. All terms which are capitalized and used herein (which are not otherwise
specifically defined herein) and which are defined in the Note Purchase
Agreement shall be used in this Senior Subordinated Promissory Note as defined
in the Note Purchase Agreement.
<PAGE>
The Company further promises to pay interest on the outstanding unpaid
principal amount hereof, as provided in the Note Purchase Agreement, from the
date hereof until payment in full hereof at the applicable rate specified in
subsection 3.02(a) of the Note Purchase Agreement; provided, however, that if
Holder so elects, following the occurrence and during the continuance of an
Event of Default, the Company promises to pay to Holder interest on the unpaid
principal amount hereof at the applicable rate specified in subsection 3.02(b)
of the Note Purchase Agreement. Interest shall be payable in accordance with the
provisions specified in subsection 3.02(c) of the Note Purchase Agreement, which
specifies that accrued interest on the subordinated Notes shall be payable on
each Quarterly Date, except that interest payable at the Post-Default Rate shall
be payable from time to time on demand.
If a payment hereunder becomes due and payable on a day that is not a
Business Day, the payment may be made on the next succeeding Business Day, and
such extension of time shall be included in the computation of the amount of
interest due on such succeeding Business Day. Checks, drafts or similar items of
payment received by Holder shall not constitute payment, but credit therefor
shall, solely for the purpose of computing interest earned by Holder, be given
in accordance with the Note Purchase Agreement. In no contingency or event
whatsoever shall interest charged hereunder, however such interest may be
characterized or computed, exceed the highest rate permissible under any law
which a court of competent jurisdiction determines is applicable hereto. In the
event of any such determination, the provisions of subsection 5.03 of the Note
Purchase Agreement shall govern and control.
If any suit or action is instituted or attorneys are employed to collect
this Senior Subordinated Promissory Note or any part thereof, the Company hereby
promises and agrees to pay all costs of collection, including attorneys' fees
and court costs.
The Company and each endorser, guarantor and surety of this Senior
Subordinated Promissory Note hereby waives presentment for payment, protest and
demand, and notice of demand, protest, dishonor and nonpayment of this Senior
Subordinated Promissory Note.
THIS SENIOR SUBORDINATED PROMISSORY NOTE HAS BEEN DELIVERED AT AND SHALL
BE DEEMED TO HAVE BEEN MADE AT CHICAGO, ILLINOIS AND SHALL BE INTERPRETED AND
THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO SHALL BE DETERMINED IN
ACCORDANCE WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS WITHOUT
REGARD TO CONFLICTS OF LAW PROVISIONS. Whenever possible each provision of this
Senior Subordinated Promissory Note shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Senior
Subordinated Promissory Note shall be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Senior Subordinated Promissory Note. Whenever in
this Senior Subordinated Promissory Note reference is made to Holder or the
Company, such reference shall be deemed to include, as applicable, a reference
to their respective successors and assigns. The provisions of this Senior
Subordinated Promissory Note shall be binding upon and shall inure to the
benefit of such successors and assigns. The Company's successors and assigns
shall include, without limitation, a receiver, trustee or debtor in possession
of or for the Company.
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[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Senior Subordinated
Promissory Note as of the day and year first written above.
CASTLE DENTAL CENTERS, INC., a Delaware
corporation
By: _______________________________
Name: Jack H. Castle, Jr.
Title: Chairman and Chief Executive
Officer
Exhibit 10.25
THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THIS NOTE, THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE AND ANY
INTEREST THEREIN MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS OR (ii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE ARE SUBJECT
TO CERTAIN RESTRICTIONS SET FORTH IN A STOCKHOLDERS AGREEMENT, DATED AS OF
JANUARY 31, 2000 (THE "STOCKHOLDERS AGREEMENT"). A COPY OF SUCH AGREEMENT MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS
WITHOUT CHARGE.
THE PAYMENT OF THE PRINCIPAL OF, AND INTEREST ON, AND ALL OTHER AMOUNTS OWING IN
RESPECT OF THE INDEBTEDNESS EVIDENCED BY, THIS NOTE, IS AND SHALL BE EXPRESSLY
SUBORDINATED, TO THE EXTENT AND IN THE MANNER SET FORTH HEREIN AND, IF
APPLICABLE, IN THAT CERTAIN SUBORDINATION AGREEMENT, OR ANY OTHER SUBORDINATION
AGREEMENT NOW OR HEREAFTER EXECUTED, AMONG THE COMPANY, THE HOLDER, BANK OF
AMERICA, N.A., FORMERLY KNOWN AS NATIONSBANK OF TEXAS, N.A., ITS SUCCESSORS OR
ASSIGNS, OR ANY OTHER HOLDER OF SENIOR DEBT (COLLECTIVELY, "SENIOR CREDITOR"),
(IN ANY SUCH EVENT, THE "SUBORDINATION AGREEMENT").
CONVERTIBLE SUBORDINATED NOTE
JANUARY 31, 2000 $1,378,464
FOR VALUE RECEIVED, CASTLE DENTAL CENTERS, INC., a Delaware corporation
(the "COMPANY"), hereby promises to pay to the order of
________________________________________or registered assigns ("HOLDER") the
principal amount of ONE MILLION THREE HUNDRED SEVENTY EIGHT THOUSAND FOUR
HUNDRED SIXTY FOUR AND NO/00 DOLLARS ($1,378,464.00), on January 31, 2009 (the
"MATURITY DATE"). The Company further promises to pay interest on the
outstanding unpaid principal amount hereof, as provided in the Purchase
Agreement (as defined below), from the date hereof until payment in full hereof
at the applicable rate specified in subsection 3.02(a) of the Purchase
Agreement; provided, however, that if Holder so elects, following the occurrence
and during the continuance of an Event of Default, the Company promises to pay
to Holder interest on the unpaid principal amount hereof at the applicable rate
specified in subsection 3.02(b) of the Purchase Agreement. Interest shall be
payable in accordance with the provisions specified in subsection 3.02(c) of the
Purchase Agreement.
This Convertible Subordinated Note (hereinafter referred to as the "NOTE")
is being issued by the Company pursuant to the terms of the Senior Subordinated
Note Purchase Agreement, dated January 31, 2000 (the "PURCHASE AGREEMENT"),
executed by and among the Company, the Holder and certain other parties thereto.
All terms which are capitalized and used herein
<PAGE>
(which are not otherwise specifically defined herein) and which are defined in
the Purchase Agreement shall have the meanings set forth in the Purchase
Agreement.
1. PAYMENTS OF PRINCIPAL AND INTEREST. The principal amount hereof, to the
extent that it has not been converted into shares of Common Stock pursuant to
Section 2 hereof, shall be payable in full on the Maturity Date. All payments of
principal and interest on this Note shall be made in lawful money of the United
States of America by wire transfer of immediately available funds to such
account as the Holder may from time to time designate by written notice in
accordance with the provisions of this Note. If a payment hereunder becomes due
and payable on a day that is not a Business Day, the payment may be made on the
next succeeding Business Day, and such extension of time shall be included in
the computation of the amount of interest due on such succeeding Business Day.
Checks, drafts or similar items of payment received by Holder shall not
constitute payment, but credit therefor shall, solely for the purpose of
computing interest earned by Holder, be given in accordance with the Purchase
Agreement. In no contingency or event whatsoever shall interest charged
hereunder, however such interest may be characterized or computed, exceed the
highest rate permissible under any law which a court of competent jurisdiction
determines is applicable hereto. In the event of any such determination, the
provisions of subsection 5.03 of the Purchase Agreement shall govern and
control.
2. CONVERSION OF NOTES. This Note shall be convertible into shares of the
Company's common stock, $.001 par value per share (the "COMMON STOCK"), on the
terms and conditions set forth in this Section 2.
(a) HOLDER'S CONVERSION RIGHT; MANDATORY CONVERSION. Subject to the
provisions of Section 2(c), at any time or times on or after the Issuance
Date, the Holder shall be entitled to convert all or any part of the
outstanding and unpaid principal of this Note (in each case, the
"CONVERSION AMOUNT") into fully paid and nonassessable shares of Common
Stock in accordance with Section 2(d), at the Conversion Rate (as defined
below).
(b) CONVERSION RATE. The number of shares of Common Stock issuable
upon conversion of a Conversion Amount of this Note pursuant to Section
2(a) shall be determined according to the following formula (the
"CONVERSION RATE"):
CONVERSION AMOUNT
Conversion Price
(c) REGULATORY PROBLEM. In the event Holder determines that it has a
Regulatory Problem (as defined below), Holder shall have the right to
transfer its entire interest in the Company without regard to any
restriction on transfer set forth in this Note (other than securities laws
restrictions) and the Company agrees to take all such actions as are
reasonably requested by Holder in order to (i) effectuate and facilitate
any transfer by Holder of its
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<PAGE>
interests to any person designated by Holder (subject to compliance with
applicable federal and state securities) or (ii) to permit Holder (or any
affiliate thereof) to exchange all or any portion of the Common Stock then
held by, or issuable to, it on a "share-for-share" basis for interests of
a class of non-voting stock of the Company, which non-voting stock shall
be identical in all respects to such Common Stock, except such stock shall
be non-voting and shall be convertible into voting stock on such terms as
are requested by such holder in light of regulatory considerations then
prevailing. Company agrees to enter into such additional agreements, adopt
such amendments hereto and to the Certificate of Incorporation of the
Company and to take such additional actions as are reasonably requested by
Holder in order to effectuate the intent of the foregoing. For purposes
hereof, a "Regulatory Problem" means any set of facts or circumstances
wherein Holder reasonably believes it is not entitled to hold, or exercise
any significant right with respect to, the Common Stock.
(d) MECHANICS OF CONVERSION. Any conversion of this Note at the
option of the Holder shall be conducted in the following manner:
(i) HOLDER'S DELIVERY REQUIREMENTS. To convert this Note into
shares of Common Stock on any date set forth in the Conversion
Notice by the Holder (the "CONVERSION DATE"), the Holder hereof
shall (A) transmit by facsimile (or otherwise deliver), for receipt
on such date, a fully executed notice of conversion in the form
attached hereto as Exhibit A (the "CONVERSION NOTICE") to the
Company with a copy thereof to the Company's designated transfer
agent (the "TRANSFER AGENT") and (B) if required by Section
2(d)(vi), surrender to a common carrier for delivery to the Company
as soon as practicable following such date the original Note being
converted (or an indemnification undertaking with respect to such
Note in the case of its loss, theft or destruction).
(ii) COMPANY'S RESPONSE. Upon receipt by the Company of a
Conversion Notice, the Company shall (A) promptly, and in no event
later than one business day after receipt, immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to
such Holder and the Transfer Agent, which confirmation shall
constitute an instruction to the Transfer Agent to process such
Conversion Notice in accordance with the terms herein, and (B) on or
before the second Business Day following the date of receipt by the
Company of such Conversion Notice (the "SHARE DELIVERY DATE"): (i)
issue and deliver to the address as specified in the Conversion
Notice, a certificate, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the
Holder shall be entitled, or (ii) provided the Transfer Agent is
participating in The Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, upon the request of the Holder, credit
such aggregate number of shares of Common Stock to which the Holder
shall be entitled to the Holder's or its designee's balance account
with DTC through its Deposit Withdrawal Agent Commission system.
Subject to Section 2(d)(vi), if less than all of the Conversion
Amount of this Note is submitted for conversion, then the Company
shall, as soon as practicable and in no event later than three
Business Days
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<PAGE>
after receipt of the Note (the "NOTE DELIVERY DATE") and at its own
expense, issue and deliver to the Holder a new Note for the
outstanding principal amount not converted.
(iii) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Current Market Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct the
Transfer Agent to issue to the Holder the number of shares of Common
Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the Holder via
facsimile within five Business Days of receipt of such Holder's
Conversion Notice.
(iv) RECORD HOLDER. The person or persons entitled to receive
the shares of Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.
(v) COMPANY'S FAILURE TO TIMELY CONVERT.
(A) CASH DAMAGES. If within ten Business Days after the
Company's receipt of the Conversion Notice the Company shall
fail to issue a certificate to the Holder or its designee or
credit the Holder's or its designee's balance account with DTC
for the number of shares of Common Stock to which such Holder
or its designee is entitled upon such Holder's conversion of
this Note or, subject to Section 2(d)(vi), the Company shall
fail to issue a new Note representing the principal amount to
which such Holder is entitled, if any, pursuant to Section
2(d)(ii), in addition to all other available remedies which
such Holder may pursue hereunder and under the Purchase
Agreement (including indemnification thereunder), the Company
shall pay additional damages to such Holder for each date
after the Share Delivery Date such conversion is not timely
effected and/or each date after the Note Delivery Date such
new Note is not delivered in an amount equal to 0.5% of the
product of (I) the sum of the number of shares of Common Stock
not issued to the Holder or its designee on or prior to the
Share Delivery Date and to which such Holder or its designee
is entitled and, in the event the Company has failed to
deliver a new Note to the Holder on or prior to the Note
Delivery Date, the number of shares of Common Stock issuable
upon conversion of the Conversion Amount represented by new
Note, as of the Note Delivery Date and (II) the Current Market
Price of the Common Stock on the Share Delivery Date, in the
case of the failure to deliver Common Stock, or the Note
Delivery Date, in the case of failure to deliver a new Note.
If the Company fails to pay the additional damages set forth
in this Section 2(d)(v) within five Business Days of the date
incurred, then the Holder entitled to such payments shall have
the right at any time, so long as the Company continues to
fail to make such payments, to require the Company, upon
written notice, to immediately issue, in lieu of such cash
damages, the number of shares of Common Stock equal to the
quotient of (X) the aggregate amount of the damages payments
described
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<PAGE>
herein divided by (Y) the Conversion Price in effect on such
Conversion Date as specified by the Holder in the Conversion
Notice.
(B) VOID CONVERSION NOTICE; ADJUSTMENT TO CONVERSION
PRICE. If for any reason the Holder has not received all of
the shares of Common Stock prior to the tenth Business Day
after the expiration of the Share Delivery Date with respect
to a conversion of this Note, then the Holder, upon written
notice to the Company, may void its Conversion Notice with
respect to, and retain or have returned or restored as of the
Conversion Date, as the case may be, any principal amount of
this Note that has not been converted pursuant to such
Holder's Conversion Notice; PROVIDED that the voiding of a
Holder's Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to
the date of such notice pursuant to Section 2(d)(v)(A) or
otherwise. Thereafter, the Conversion Price of the principal
amount of this Note retained by, or returned or restored in
favor of, the Holder for failure to timely convert shall be
adjusted to the lesser of (I) the Conversion Price as in
effect on the date on which the Holder voided the Conversion
Notice and (II) the lowest Closing Sale Price during the
period beginning on the Conversion Date and ending on the date
such Holder voided the Conversion Notice, subject to further
adjustment as provided in this Note.
(vi) BOOK-ENTRY. Notwithstanding anything to the contrary set
forth herein, upon conversion of any portion of this Note in
accordance with the terms hereof, the Holder thereof shall not be
required to physically surrender this Note to the Company unless the
full Conversion Amount then outstanding is being converted. The
Company shall maintain records showing the Conversion Amount so
converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder, so as not to require
physical surrender of this Note upon each such conversion.
Notwithstanding the foregoing, if any portion of this Note is
converted as aforesaid, thereafter, the Holder may not transfer this
Note unless the Holder first physically surrenders this Note to the
Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new Note of like tenor, registered as the
Holder may request, representing in the aggregate the remaining
Conversion Amount represented by this Note. The Holder and any
assignee, by acceptance of this Note or such new Note, acknowledge
and agree that, by reason of the provisions of this paragraph,
following conversion of any portion of this Note, the Conversion
Amount represented by this Note may be less than the principal
amount set forth on the face hereof.
(vii) FRACTIONAL SHARES. No fractional shares of Common Stock
or scrip shall be issued to any Holder in connection with the
conversion of this Note. Instead of any fractional shares of Common
Stock that would otherwise be issuable to such Holder, the Company
will pay to such Holder a cash adjustment in respect of such
fractional interest in an amount equal to that fractional interest
of the then Current Market Price per share of Common Stock.
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<PAGE>
(e) TAXES. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Stock upon the
conversion of Notes; provided, however, that the Holder shall be required
to pay any and all taxes that may be payable in respect of any transfer
involved in the issuance and delivery of Common Stock in a name other than
that of the then Holder as reflected upon the books of the Company.
(f) CERTAIN ADJUSTMENTS. In addition to any other adjustments
provided herein, the terms of this Note will be subject to adjustment from
time to time as provided in this Section 2(f).
(i) STOCK DIVIDENDS, SUBDIVISION, COMBINATION OR
RECLASSIFICATION OF COMMON STOCK. If at any time after the Issuance
Date the Company shall (A) declare a stock dividend on the Common
Stock payable in shares of its capital stock (including Common
Stock), (B) increase the number of shares of Common Stock
outstanding by a subdivision or split-up of shares of Common Stock,
(C) decrease the number of shares of Common Stock outstanding by a
combination of shares of Common Stock or (D) issue any shares of its
capital stock in a reclassification of the Common Stock, then, on
the record date for such dividend or the effective date of such
subdivision or split-up, combination or reclassification, as the
case may be, the Conversion Price will be adjusted so that the
Holder will be entitled to receive the number and kind of shares of
Common Stock that such Holder would have owned or been entitled to
receive upon or by reason of such event had this Note been converted
immediately prior thereto, and the Conversion Price will be adjusted
as provided below in paragraph (vii) in this Section 2(f).
(ii) REORGANIZATION, ETC. If at any time after the Issuance
Date any consolidation of the Company with or merger of the Company
with or into any other Person (other than a merger or consolidation
in which the Company, is the surviving or continuing corporation and
which does not result in any reclassification of, or change (other
than a change in par value or from par value to no par value or from
no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of Common Stock) or any sale,
lease or other transfer of all or substantially all of the assets of
the Company to any other person (each, a "REORGANIZATION EVENT"),
shall be effected in such a way that the holders of Common Stock
shall be entitled to receive cash, stock, other securities or assets
(whether such cash, stock, other securities or assets are issued or
distributed by the Company or another Person) with respect to or in
exchange for Common Stock, then, upon conversion of this Note, the
Holder shall have the right to receive the kind and amount of cash,
stock, other securities or assets receivable upon such
Reorganization Event by a holder of the number of shares of Common
Stock that such Holder would have been entitled to receive upon
conversion of this Note had this Note been converted immediately
before such Reorganization Event, subject to adjustments that shall
be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 2(f).
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<PAGE>
(iii) CERTAIN ISSUANCES OF COMMON STOCK. If at any time after
the Issuance Date the Company shall issue or sell, or fix a record
date for the issuance of, (A) Common Stock (or securities
convertible into or exchangeable or exercisable for Common Stock)
(other than Excluded Securities) or (B) rights, options or warrants
entitling the holders thereof to subscribe for or purchase Common
Stock (or securities convertible into or exchangeable or exercisable
for Common Stock) (other than Excluded Securities), in any such
case, at a price per share (treating the price per share of the
securities convertible into or exchangeable or exercisable for
Common Stock as equal to (x) the sum of (i) the price for a unit of
the security convertible into or exchangeable or exercisable for
Common Stock, plus (ii) any additional consideration initially
payable upon the conversion of such security into Common Stock or
the exchange or exercise of such security for Common Stock divided
by (y) the number of shares of Common Stock initially underlying
such convertible, exchangeable or exercisable security) that is less
than the Measuring Price on the date of such issuance or such record
date, then, immediately after the date of such issuance or sale or
on such record date, the number of shares of Common Stock to be
delivered upon conversion of this Note shall be increased so that
the Holder thereafter shall be entitled to receive the number of
shares of Common Stock determined by multiplying the number of
shares of Common Stock such Holder would have been entitled to
receive immediately before the date of such issuance or sale or such
record date by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding (calculated to include
the shares of Common Stock underlying the Note and all then
currently convertible and exchangeable securities that are "in the
money") on such date plus the number of shares of Common Stock that
the aggregate offering price of the total number of shares so
offered for subscription or purchase (or the aggregate purchase
price of the convertible, exchangeable or exercisable securities so
offered plus the aggregate of amount of any additional consideration
initially payable upon conversion into Common Stock or exchange or
exercise for Common Stock) would purchase at the Measuring Price and
the numerator of which shall be the number of shares of Common Stock
outstanding (calculated to include the shares of Common Stock
underlying the Notes and all then currently exercisable, convertible
and exchangeable securities that are "in the money") on such date
plus the number of additional shares of Common Stock offered for
subscription or purchase (or into or for which the convertible or
exchangeable securities or rights, options or warrants so offered
are initially convertible or exchangeable or exercisable, as the
case may be), and the Conversion Price shall be adjusted as provided
below in paragraph (vii) in this Section 2(f). For purposes of this
Section 2(f)(iii), any shares of Common Stock issued as
consideration in any Acquisition shall be deemed to have been issued
at a "price per share" equal to the Current Market Value thereof on
the date of such issuance.
(iv) EXTRAORDINARY DISTRIBUTIONS. If at any time after the
Issuance Date, the Company shall distribute to all holders of its
Common Stock (including any such distribution made in connection
with a consolidation or merger in which the Company is the
continuing or surviving corporation and the Common Stock is not
changed or
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<PAGE>
exchanged) cash, evidences of indebtedness, securities or other
assets (excluding (A) ordinary course cash dividends to the extent
such dividends exceed the Company's retained earnings and (B)
dividends payable in shares of capital stock for which adjustment is
made under Section 2(f)(i)) or rights, options or warrants to
subscribe for or purchase securities of the Company (excluding those
for which adjustment is made under Section 2(f)(iii)), then the
number of shares of Common Stock to be delivered to such Holder upon
conversion of this Note shall be increased so that the Holder
thereafter shall be entitled to receive the number of shares of
Common Stock determined by multiplying the number of shares such
Holder would have been entitled to receive immediately before such
record date by a fraction, the denominator of which shall be the
Current Market Price per share of Common Stock on such record date
minus the then fair market value (as reasonably determined by the
Board of Directors of the Company in good faith) of the portion of
the cash, evidences of indebtedness, securities or other assets so
distributed or of such rights or warrants applicable to one share of
Common Stock (provided that such denominator shall in no event be
less than $.0l) and the numerator of which shall be the Current
Market Price per share of the Common Stock, and the Conversion Price
shall be adjusted as provided below in paragraph (vii) in this
Section 2(f).
(v) PRO RATA REPURCHASES. If at any time after the Issuance
Date, the Company or any subsidiary thereof shall make a Pro Rata
Repurchase, then the number of shares of Common Stock to be
delivered to such Holder upon conversion of this Note shall be
increased so that the Holder thereafter shall be entitled to receive
the number of shares of Common Stock determined by multiplying the
number of shares of Common Stock such Holder would have been
entitled to receive immediately before such Pro Rata Repurchase by a
fraction (which in no event shall be less than one) the denominator
of which shall be (i) the product of (x) the number of shares of
Common Stock outstanding immediately before such Pro Rata Repurchase
and (y) the Current Market Price of the Common Stock as of the day
immediately preceding the first public announcement by the Company
of the intent to effect such Pro Rata Repurchase minus (ii) the
aggregate purchase price of the Pro Rata Repurchase (provided that
such denominator shall never be less than $.0l), and the numerator
of which shall be the product of (i) the number of shares of Common
Stock outstanding immediately before such Pro Rata Repurchase minus
the number of shares of Common Stock repurchased in such Pro Rata
Repurchase and (ii) the Current Market Price of the Common Stock as
of the day immediately preceding the first public announcement by
the Company of the intent to effect such Pro Rata Repurchase.
(vi) CARRYOVER. Notwithstanding any other provision of this
Section 2(f), no adjustment shall be made to the number of shares of
Common Stock to be delivered to the Holder (or to the Conversion
Price) if such adjustment represents less than .05% of the number of
shares to be so delivered, but any lesser adjustment shall be
carried forward and shall be made at the time and together with the
next subsequent adjustment that together with any adjustments so
carried forward shall amount to .05% or more of the number of shares
to be so delivered.
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<PAGE>
(vii) CONVERSION PRICE ADJUSTMENT. Whenever the number of
shares of Common Stock purchasable upon the conversion of the Note
is adjusted as provided pursuant to this Section 2(f), the
Conversion Price per share payable upon the conversion of this Note
shall be adjusted by multiplying such Conversion Price immediately
prior to such adjustment by a fraction, of which the numerator shall
be the number of shares of Common Stock purchasable upon the
conversion of the Note immediately prior to such adjustment, and of
which the denominator shall be the number of shares of Common Stock
purchasable immediately thereafter; PROVIDED, HOWEVER, that the
Conversion Price for each share of Common Stock shall in no event be
less than the par value of such share.
(viii) MULTIPLE ADJUSTMENTS. If any action or transaction
would require adjustment of the number of shares of Common Stock to
be delivered to the Holder upon conversion of this Note pursuant to
more than one paragraph of this Section 2(f), only one adjustment
shall be made and each such adjustment shall be the amount of
adjustment that has the highest absolute value.
(g) NOTICE OF ADJUSTMENT. Whenever the number of shares of Common
Stock or the Conversion Price of such shares of Common Stock is adjusted,
as herein provided, the Company shall deliver to the Holder in writing a
notice of such adjustment or adjustments and a certificate of a firm of
independent public accountants of recognized national standing selected by
the Board of Directors of the Company (who shall be appointed at the
Company's expense and who may be the independent public accountants
regularly employed by the Company) setting forth the number of shares of
Common Stock and the Conversion Price of such shares after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was
made.
3. RESERVATION OF SHARES. The Company covenants and agrees as follows:
(a) All shares of Common Stock that are issued upon the conversion
of this Note will, upon issuance, be validly issued, fully paid and
nonassessable, not subject to any preemptive rights, and free from all
taxes, liens, security interests, charges, and other encumbrances with
respect to the issuance thereof, other than taxes in respect of any
transfer occurring contemporaneously with such issue.
(b) During the period within which this Note may be converted, the
Company will at all times have authorized and reserved, and keep available
free from preemptive rights, a sufficient number of shares of Common Stock
to provide for the exercise of the rights represented by this Note.
4. VOTING RIGHTS. Prior to conversion of all or any portion of this Note,
Holders shall have no voting rights, except as required by law, including but
not limited to the General Corporation Law of the State of Delaware, and as
expressly provided in this Note.
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<PAGE>
5. NOTICE OF CORPORATE ACTION. So long as this Note has not been converted
or redeemed in full, in the event of:
(a) any consolidation or merger involving the Company and any other
party or any transfer of all or substantially all the assets of the
Company to any other party, or
(b) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
the Company will notify the Holder in writing of the date or expected date on
which a reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding- up is to take place and
the time, if any such time is to be fixed, as of which the holders of record of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for the securities or other property
deliverable upon such reorganization, reclassification, recapitalization,
consolidation, merger, transfer, dissolution, liquidation or winding- up. Such
notice shall be delivered as soon as practicable and if possible at least twenty
days prior to the date therein specified in the case of any date referred to in
the foregoing sentence. Failure to give the notice specified hereunder shall
have no effect on the status or effectiveness of the action to which the
required notice relates.
6. REISSUANCE OF NOTES. Subject to Section 2(d)(vi), in the event of a
conversion or redemption pursuant to this Note of less than all of the
Conversion Amount represented by this Note, the Company shall promptly cause to
be issued and delivered to the Holder, upon tender by the Holder of the Note
converted or redeemed, a new note of like tenor representing the remaining
principal amount of this Note which has not been so converted or redeemed.
7. DEFINITIONS. As used herein, unless the context otherwise requires, the
following terms have the following meanings:
"ACQUISITION" means any acquisition of another Person by the Company
by merger, purchase of shares of capital stock or purchase of all or
substantially all of such other Person's assets.
"AFFILIATE" means, as applied to any Person, (i) any other Person
directly or indirectly controlling, controlled by or under common control
with, that Person, (ii) any other Person that owns or controls 5% or more
of any class of equity securities (including any equity securities
issuable upon the exercise of any option or convertible security) of that
Person or any of its Affiliates, or (iii) any director, partner, officer,
agent, employee or relative of such Person. For the purposes of this
definition, "control" (including with correlative meanings, the terms
"controlling", "controlled by", and "under common control with") as
applied to any Person, means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies
of that Person whether through ownership of voting securities or by
contract or otherwise.
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<PAGE>
"CONVERSION PRICE" means THREE AND 11.25/00 DOLLARS ($3.1125),
subject to adjustment as provided herein.
"CURRENT MARKET PRICE" means, with respect to each share of Common
Stock as of any date, the dollar volume-weighted average trading price per
share of Common Stock (as reported by Bloomberg through its "Volume at
Price" function) for the ten consecutive trading days prior to such date;
provided that if on any such date the shares of Common Stock are not
listed or admitted for trading on any national securities exchange or
quoted by NASDAQ or a similar service, the Current Market Price for a
share of Common Stock shall be the fair market value of such share as
determined in good faith by the Board of Directors of the Company. If the
Board of Directors is unable to determine the fair market value, or if the
holders of a majority of the Notes issued pursuant to the Purchase
Agreement disagree with the Board's determination of fair market value by
written notice delivered to the Company within five Business Days after
the Board's determination thereof is communicated in writing to such
holders, then the Company and a majority-in-interest of such holders shall
select an Independent Financial Expert which shall determine such fair
market value. If the Company and such holders are unable to agree upon an
Independent Financial Expert within fifteen Business Days after the notice
by such holders, each of the Company and such holders shall select an
Independent Financial Expert within five Business Days following the
expiration of such fifteen Business Day period, and these Independent
Financial Experts shall select a third Independent Financial Expert, and
the third Independent Financial Expert shall determine such fair market
value. The determination of fair market value by such Independent
Financial Expert shall be final, binding and conclusive on the Company and
all Holders. All costs and fees of any of this Independent Financial
Expert(s) retained in accordance with the foregoing shall be borne by the
Company.
"EXCLUDED SECURITIES" means (i) shares of Common Stock issued upon
conversion or exercise of convertible securities, warrants and options of
the Company, outstanding on the Issuance Date, (ii) shares of Common
Stock, and options to purchase such shares, issued to officers, directors,
employees or former employees of, or consultants to, the Company or any of
its subsidiaries pursuant to any equity incentive plan, agreement or other
arrangement which has been approved by a vote of at least two-thirds of
the Board of Directors of the Company, provided that the total number of
shares of Common Stock which may be Excluded Securities under this clause
(ii) shall not exceed 1,250,000 shares (subject to equitable adjustment
with respect to any stock split, stock dividend, reclassification or other
similar event described in Section 2(f)(i) hereof), and (iii) shares of
Common Stock issued upon conversion of the Note.
"GAAP" means generally accepted accounting principles, consistently
applied.
"INDEPENDENT FINANCIAL EXPERT" means an independent nationally
recognized investment banking firm.
"ISSUANCE DATE" means the date of issuance of the Note.
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"MEASURING PRICE" means, as of any date of determination, (i) with
respect to any issuance of securities as consideration for any Acquisition
by the Company, the Conversion Price as of such date, and (ii) with
respect to any other issuance of securities by the Company, the greater of
the Current Market Price of the Common Stock and the Conversion Price as
of such date.
"PERSON" means any individual, limited liability company,
partnership, joint venture, association, joint-stock company, corporation,
trust, unincorporated organization, estate and other entity or government
or any department or agency thereof.
"PRO RATA REPURCHASE" means any purchase of shares of Common Stock
by the Company or by any of its subsidiaries whether for cash, shares of
capital stock of the Company, other securities of the Company, evidences
of indebtedness of the Company or any other Person or any other property
(including, without limitation, shares of capital stock, other securities
or evidences of indebtedness of a subsidiary of the Company), or any
combination thereof, which purchase is subject to Section 13(e) of the
Securities Exchange Act of 1934, as amended, or is made pursuant to an
offer made available to all holders of Common Stock.
8. LOST OR STOLEN NOTES. Promptly upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Note, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the Holder to the Company in a form reasonably acceptable to the
Company and, in the case of mutilation, upon surrender and cancellation of the
Notes, the Company shall execute and deliver new notes of like tenor and date;
provided, however, the Company shall not be obligated to re-issue notes if the
Holder contemporaneously requests the Company to convert such remaining
principal amount into Common Stock.
9. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If any suit or
action is instituted or attorneys are employed to collect or enforce this Note
or any part thereof, the Company hereby promises and agrees to pay all costs of
collection, including attorneys' fees and court costs.
10. CANCELLATION. After all principal and accrued interest at any time
owed on this Note has been paid in full, this Note shall automatically be deemed
canceled, shall be surrendered to the Company for cancellation and shall not be
reissued.
11. WAIVER OF NOTICE. To the extent permitted by law, the Company hereby
waives demand, notice, protest and all other demands and notices in connection
with the delivery, acceptance, performance, default or enforcement of this Note
and the Purchase Agreement.
12. GOVERNING LAW. This Note shall be construed and enforced in accordance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the laws of the State of
Illinois, without giving effect to provisions thereof regarding conflict of
laws.
-12-
<PAGE>
13. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note, at law or in equity
(including a decree of specific performance and/or other injunctive relief), no
remedy contained herein shall be deemed a waiver of compliance with the
provisions giving rise to such remedy and nothing herein shall limit a holder's
right to pursue actual damages for any failure by the Company to comply with the
terms of this Note. The Company covenants to each Holder of Notes that there
shall be no characterization concerning this instrument other than as expressly
provided herein. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the Notes
and that the remedy at law for any such breach may be inadequate. The Company
therefore agrees that, in the event of any such breach or threatened breach, the
holders of the Notes shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.
14. SPECIFIC SHALL NOT LIMIT GENERAL; CONSTRUCTION. No specific provision
contained in this Note shall limit or modify any more general provision
contained herein. This Note shall be deemed to be jointly drafted by the Company
and all holders and shall not be construed against any person as the drafter
hereof.
15. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
this Note in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.
16. NOTICES. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
the notice provisions in the Purchase Agreement. Any party may by notice given
in accordance with this Section 17 designate another address or person for
receipt of notices hereunder.
-13-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed by Jack
H. Castle, Jr., its Chairman and Chief Executive Officer, as of day and year
first written above.
CASTLE DENTAL CENTERS, INC.
By: __________________________________
Name: Jack H. Castle, Jr.
Its: Chairman and Chief Executive Officer
Senior Subordinated Convertible Note
-14-
<PAGE>
EXHIBIT A
CASTLE DENTAL CENTERS, INC.
CONVERSION NOTICE
Reference is made to the Note issued by Castle Dental Centers, Inc. (the
"COMPANY"). In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note,
indicated below into shares of Common Stock, par value $.001 per share (the
"COMMON STOCK"), of the Company as of the date specified below.
Date of Conversion:_______________________________________________________
Aggregate Conversion Amount to be converted:______________________________
Note no(s). of Note to be converted:______________________________________
Please confirm the following information:_______________________________________
Conversion Price:_________________________________________________________
Number of shares of Common Stock to be issued:____________________________
Please issue the Common Stock into which the Note is being converted and, if
applicable, any check drawn on an account of the Company in the following name
and to the following address:
Issue to:_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Facsimile Number:_________________________________________________________
Authorization:____________________________________________________________
By:_________________________________________
Title:______________________________________
Dated:____________________________________________________________________
Account Number:
(if electronic book-entry transfer):____________________________________
Transaction Code Number
(if electronic book-entry transfer):____________________________________
Senior Subordinated Convertible Note
-15-
<PAGE>
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated ___________ ___, _____
from the Company and acknowledged and agreed to by [TRANSFER AGENT].
CASTLE DENTAL CENTERS, INC.
By:_________________________________________
Name:_______________________________________
Title:______________________________________
Senior Subordinated Convertible Note
-16-
EXHIBIT 10.26
FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This FOURTH AMENDMENT to AMENDED AND RESTATED CREDIT AGREEMENT (this
"FOURTH AMENDMENT") effective as of December 31, 1999 (the "EFFECTIVE DATE" and
to continue to be effective to and including December 31, 2000 as provided in
Section 15 below), is by and among CASTLE DENTAL CENTERS, INC., a Delaware
corporation ("BORROWER"), and BANK OF AMERICA, N.A. (formerly known as
NationsBank, N.A.), a national banking association (in its individual capacity,
"BANK OF AMERICA"), as agent (in such capacity, "AGENT") for each of the lenders
that is a signatory hereto (individually, together with its successors and
assigns, "LENDER" and collectively, "LENDERS") and such Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Lenders are parties to that
certain Amended and Restated Credit Agreement dated as of December 18, 1998, as
amended by First Amendment to Amended and Restated Credit Agreement dated as of
July 20, 1999, as amended by Second Amendment to Amended and Restated Credit
Agreement dated as of September 30, 1999, as Amended by Third Amendment to
Amended and Restated Credit Agreement dated as of January 31, 2000 (such Amended
and Restated Credit Agreement as amended and as the same may be further amended
from time to time, the "AGREEMENT"), pursuant to which the Lenders agreed to
make loans to and extensions of credit on behalf of the Borrower; and
WHEREAS, the Borrower has requested that the Agent and the Lenders amend
the Agreement, and the Agent and the Lenders have agreed to amend the 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:
1. TERMS DEFINED ABOVE. As used in this Fourth Amendment, each of the terms
"Agent," "Bank of America," "Borrower," "Agreement," "Effective Date,"
"Lenders," and "Fourth Amendment" shall have the meaning assigned to such term
herein above.
2. TERMS DEFINED IN AGREEMENT. Each term defined in the Agreement and used
herein without definition shall have the meaning assigned to such term in the
Agreement, unless expressly provided to the contrary.
3. OTHER DEFINITIONAL PROVISIONS. The words "hereby," "herein," "hereinafter,"
"hereof," "hereto," and "hereunder" when used in this Fourth Amendment shall
refer to this Fourth Amendment as a whole and not to any particular paragraph or
provision of this Fourth Amendment.
4. AMENDMENTS AND SUPPLEMENTS TO DEFINITIONS.
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<PAGE>
(1) The following terms, which are defined in Section 1.02 of the
Agreement, are hereby amended in their entirety to read as follows:
"APPLICABLE MARGIN" effective as of April 1, 2000, the applicable
per annum percentage set forth at the appropriate intersection in the
table shown below, based on the ratio of Total Funded Debt to EBITDA,
determined as of the end of the most recent fiscal quarter (beginning with
the fiscal quarter ended March 31, 2000) of the Borrower:
------------------------------------------------------------
APPLICABLE APPLICABLE MARGIN
TOTAL FUNDED DEBT TO MARGIN ALTERNATE BASE
EBITDA EURODOLLAR RATE
------------------------------------------------------------
Less than 1.0 2.25% 0.00%
------------------------------------------------------------
Greater than or equal to
1.0 but less than 1.5 2.5% .25%
------------------------------------------------------------
Greater than or equal to
1.5 but less than 2.0 2.75% .25%
------------------------------------------------------------
Greater than or equal to
2.0 but less than 2.5 3.0% .50%
------------------------------------------------------------
Greater than or equal to
2.5 but less than 4.0 3.5% 1.00%
------------------------------------------------------------
Greater than or
equal to 4.0 4.5% 2.00%
------------------------------------------------------------
Each change in the Applicable Margin resulting from a change in the ratio
of Total Funded Debt to EBITDA shall take effect as of the date of
determination of the ratio of Total Funded Debt to EBITDA. For clarity
purposes it is understood and agreed that Total Funded Debt includes,
without limitation, any and all deferred interest under any Subordinated
Debt.
"BORROWING BASE" shall mean (i) for the period from December 31,
1999 through January 31, 2000, the amount equal to three and three
quarters (3.75) times EBITDA as of the end of the most recent fiscal
quarter of the Borrower (calculated on a rolling four quarter basis), (ii)
for the period from February 1, 2000 through December 30, 2000, the amount
equal to three and four tenths (3.40) times EBITDA as of the end of the
most recent fiscal quarter of the Borrower (calculated on a rolling four
quarter basis), (iii) and (iii) on December 31, 2000, three (3.00) times
EBITDA as of the end of the most recent fiscal quarter of the Borrower
(calculated on a rolling four quarter 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 occurring
during the quarter, the "rolling four quarters" shall include the "pro
forma" EBITDA of the applicable Acquired Entity for such prior periods
adjusted to reflect the costs and expenses which such Acquired Entity
would have incurred had the Management Services Agreements between the
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).
"CLOSING DATE" shall mean the date that this Fourth Amendment shall
be executed by the Lenders and the Borrower.
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<PAGE>
"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, amortization, the amount of the settlement
of the lawsuit with Joseph Bonola, D.D.S. up but not to exceed $1,372,743
as reflected on Schedule 1 to the Second Amendment, and the amount of
legal fees and expenses related to the arbitration with Dr. Leon Roisman,
D.M.D. that was expensed in Fiscal year 1999, up to but not to exceed
$541,000.
(2) Section 1.02 of the Agreement is hereby further amended and
supplemented by adding the following new definitions where alphabetically
appropriate, which read in their entirety as follows:
"FOURTH AMENDMENT" shall mean that certain Fourth Amendment to
Amended and Restated Credit Agreement dated effective as of the December
31, 1999, by and among the Borrower, the Agent and Lenders.
5. AMENDMENT TO SECTION 8.01. Section 8.01 of the Agreement is hereby amended
by adding the following to the end of Section 8.01(a):
"As soon as available, and in any event on or before two weeks after the
Closing Date, Borrower shall deliver to the Agent the audited annual
financial statements for fiscal year 1999 prepared in accordance with this
Section 8.01(a) accompanied by the related opinion of independent public
accountants as called for in this Section 8.01(a)."
6. AMENDMENT TO SECTION 8.01. Section 8.01 of the Agreement is hereby amended
by deleting the paragraph after Section 8.01(o) in its entirety and replacing it
with the following:
The Borrower shall furnish to the Lenders, at the time it furnishes
financial statements pursuant to paragraph (a) above and within 45 days of
the end of each of the first three fiscal quarters of the Borrower, 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 is reasonable detail),
and (ii) setting forth in reasonable detail the computations necessary to
determine the Borrower's Total Funded Debt, Senior Funded Debt and EBITDA
and whether the Borrower is in compliance with Sections 9.11, 9.12, 9.13,
9.14, 9.15, 9.16, and 9.24 as of the end of the respective fiscal quarter
or fiscal year.
7. AMENDMENT TO SECTION 8.01. Section 8.01 of the Agreement is hereby amended
by adding the following new subsections:
(p) MONTHLY FINANCIAL STATEMENTS. As soon as available and in any
event within 45 days after the end of each calendar month, the
Borrower-prepared consolidated and consolidating statements of income,
cash flow of the Borrower and its Consolidated Subsidiaries for such
period and for the period from the beginning
Page 3
<PAGE>
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).
(q) MANAGEMENT LETTER. As soon as available and in any event by no
later than two weeks after the Closing Date, an auditor-prepared Fiscal
1999 management letter.
(r) ACCOUNTS RECEIVABLE. As soon as available and in any event
within 45 days after the end of each calendar month, (i) a report in form
reasonably satisfactory to the Agent reflecting the aging and collection
of the receivables of the Borrower and its Subsidiaries, each such aging
report to show in reasonable detail, calculations reflecting compliance
with Section 9.24 and (ii) such other reports as deemed necessary by the
Agent.
8. AMENDMENT TO SECTION 8. Section 8 of the Agreement is hereby amended by
adding a new Section 8.13 to read as follows:
Section 8.13 FIELD EXAM. The Borrower and its Subsidiaries shall
permit the Agent and its representatives to have access, during normal
business hours, to their records of accounts and appropriate personnel for
purpose of conducting an examination of accounts receivable. Such field
exam shall be completed and a report provided to the Agent within 45 days
after the Closing Date.
9. AMENDMENT TO SECTION 9.13. Section 9.13 of the Agreement is hereby amended
in its entirety to read as follows:
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) to be greater than the ratio indicated in the chart below. 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). As used in this Section 9.13, "Leverage Ratio" shall mean
the ratio of (i) Senior Funded Debt to (ii) EBITDA.
Page 4
<PAGE>
-------------------------------------------------
PERIOD (QUARTER END DATE) RATIO
-------------------------------------------------
December 31, 1999 3.75 to 1.0
-------------------------------------------------
March 31, 2000 3.40 to 1.0
-------------------------------------------------
-------------------------------------------------
June 30, 2000 3.40 to 1.0
-------------------------------------------------
-------------------------------------------------
September 30, 2000 3.40 to 1.0
-------------------------------------------------
-------------------------------------------------
3.00 to
December 31, 2000 1.0
-------------------------------------------------
10. AMENDMENT TO SECTION 9.14. Section 9.14 of the Agreement is hereby amended
in its entirety to read as follows:
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) to be less than the ratio for
the relevant periods set forth below.
-------------------------------------------------
PERIOD RATIO
-------------------------------------------------
December 31, 1999 through
December 31, 2000 1.30 to 1.0
-------------------------------------------------
For purposes of this Section 9.14, "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 cash and deferred interest, plus senior and subordinate principal
payments scheduled during the period, plus actual capital lease payments.
The ratio will be determined quarterly on a rolling twelve-month 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 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).
11. AMENDMENT TO SECTION 9.15. Section 9.15 of the Agreement is hereby amended
in its entirety to read as follows:
Section 9.15. RATIO OF TOTAL FUNDED DEBT TO EBITDA. The Borrower
will not permit its ratio of Total Funded Debt as of the end of any fiscal
quarter to EBITDA for the four fiscal quarters ending on such date to be
greater than the ratio indicated in the chart below. For purposes hereof,
EBITDA shall be calculated as provided in Section 9.13 above. For clarity
purposes it is understood and agreed that Total Funded Debt includes,
without limitation, any and all deferred interest under any Subordinated
Debt.
-------------------------------------------------
PERIOD (QUARTER END DATE) RATIO
-------------------------------------------------
December 31, 1999 4.25 to 1.0
-------------------------------------------------
March 31, 2000 4.75 to 1.0
-------------------------------------------------
June 30, 2000 4.75 to 1.0
-------------------------------------------------
September 30, 2000 4.60 to 1.0
-------------------------------------------------
December 31, 2000 4.15 to 1.0
-------------------------------------------------
Page 5
<PAGE>
12. AMENDMENT TO SECTION 9.16. Section 9.16 of the Agreement is hereby amended
in its entirety to read as follows:
Section 9.16. CAPITAL EXPENDITURES. Without the prior written
consent of the Majority Lenders, 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 $3,500,000 during
fiscal year 2000 (January 1, 2000 through December 31, 2000), as outlined
in SCHEDULE 9.16.
13. AMENDMENT TO SECTION 9. Section 9 of the Agreement is hereby amended by
adding the following new Sections:
Section 9.24 ACCOUNTS RECEIVABLE. Neither the Borrower nor any
Subsidiary will permit its Average Accounts Receivable Days [at the end of
any calendar month] to exceed 80 days. For purposes of this Section 9.24,
"Average Accounts Receivable Days" shall mean the (i) net patient
receivables plus net unbilled patient receivables, divided by (ii) net
patient revenues for the 12-month period ending on such date, multiplied
by (iii) 365 days.
Section 9.25 ACQUISITIONS. Neither the Borrower nor any Subsidiary
will, during fiscal year 2000, make any New Acquisition (whether or not
proceeds of any Loans are utilized therefor), unless such New Acquisition
is approved of in advance by all of the Lenders.
Section 9.26 ADVANCES. Unless the Borrower or its Subsidiary
receives prior written consent from all of the Lenders, neither the
Borrower nor any Subsidiary will, during fiscal year 2000, use the
proceeds of any Loan to settle any lawsuit or arbitration if any such
settlement exceeds $100,000, or the aggregate of all settlements for
fiscal year 2000 exceeds $250,000.
14. AMENDMENT TO SECTION 10.01. The period at the end of clause (o) in Section
10.01 is changed to "; or" and a new clause (p) is hereby added to Section 10.01
to read as follows:
"(p) the field exam conducted pursuant to Section 8.13 is determined
by the Majority Lenders in their sole reasonable discretion to be less
than satisfactory.
15. EFFECTIVENESS OF THIS FOURTH AMENDMENT. Except for the definition of
"Applicable Margin", which shall be effective as of December 31, 1999 and
continuing until the Final Maturity Date, this Fourth Amendment shall be
effective as of December 31, 1999 through December 31, 2000. Thereafter, the
terms and conditions of the Agreement as in effect prior to the execution of
this Fourth Amendment shall govern as if this Fourth Amendment had not been
executed.
16. TEMPORARY WAIVER. Borrower's covenant in Section 8.11 is hereby temporarily
waived. This temporary waiver shall terminate 30 days after the Closing Date and
shall not be deemed to be a consent to, or waiver or modification or, any other
term or condition of the Agreement, the Security Agreement, the Guarantee
Agreement, or any other Loan Document.
Page 6
<PAGE>
17. AMENDMENT FEE. The Borrower shall pay to the Agent for the account of each
Lender an amendment fee equal to .5% of the Aggregate Maximum Commitment Amounts
(the "AMENDMENT FEE"). Borrower shall pay (i) 33.34 % of the Amendment Fee on
Borrower's execution hereof, (ii) 33.33% of the Amendment Fee on September 29,
2000, and (iii) 33.33% of the Amendment Fee on December 29, 2000. If the Loans
are completely paid prior to December 29, 2000, then the balance of the
Amendment Fee shall be due and payable at such time the loans are completely
paid.
18. CONDITIONS. The effectiveness of this Fourth Amendment against the Agent and
the Lenders is subject to the following conditions precedent:
(1) the Agent's receipt of Borrower-prepared financial statements (in form
of the financial statements called for in Section 8.01(b)), at least two
days prior to the Closing Date, for the period ending March 31, 2000;
(2) the Agent's receipt of the reports reflecting compliance (as waived by
the letter dated May 19, 2000 from Agent to Borower) with all financial
covenants as of September 30, 1999, December 31, 1999 and March 31, 2000
applying the terms and conditions of the Agreement as amended by this
Fourth Amendment;
(3) the Agent's receipt of multiple original counterparts, as requested by
the Agent, of this Fourth Amendment, executed and delivered by a duly
authorized officer of the Borrower, the Agent, and each Lender, as
applicable and ratified by the Guarantors; and,
(4) the Agent's receipt of such other instruments or documents as the
Agent may reasonably request.
19. REPRESENTATIONS AND WARRANTIES. Except as affected by the transactions
contemplated in the Agreement and this Fourth Amendment, each of the
representations and warranties made by the Borrower in or pursuant to the
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).
20. ADOPTION, RATIFICATION AND CONFIRMATION OF AGREEMENT. Each of the Borrower,
the Agent, and the Lenders does hereby adopt, ratify and confirm the Agreement,
as amended hereby, and acknowledges and agrees that the Agreement, as amended
hereby, is and remains in full force and effect.
21. SUCCESSORS AND ASSIGNS. This Fourth Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns permitted pursuant to the Agreement.
22. COUNTERPARTS. This Fourth 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 Agent and the Lenders.
In this regard, each of the parties hereto acknowledges that a counterpart of
this Fourth Amendment containing a set of counterpart execution pages reflecting
the execution of each party hereto shall be
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<PAGE>
sufficient to reflect the execution of this Fourth Amendment by each necessary
party hereto and shall constitute one instrument.
23. ENTIRE AGREEMENT. This Fourth 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 Fourth Amendment.
24. GOVERNING LAW. This Fourth 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 FOURTH AMENDMENT, THE 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]
Page 8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth 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: _____________________________________
LENDER AND AGENT: BANK OF AMERICA, N.A. (FORMERLY KNOWN AS
NATIONSBANK, N.A.)
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
LENDERS: FLEET NATIONAL BANK (FORMERLY KNOWN AS
BANK BOSTON, N.A.)
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
AMSOUTH BANK
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
HELLER FINANCIAL, INC.
By: ________________________________________
Name: ______________________________________
Title: _____________________________________
Page 9
<PAGE>
RATIFICATION
Each of the Guarantors hereby expressly (i) acknowledges the terms of this
Fourth Amendment, (ii) ratifies and affirms its obligations under its Guaranty
Agreement, 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.
GUARANTORS: CASTLE DENTAL CENTERS OF FLORIDA, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE DENTAL CENTERS OF TENNESSEE, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE DENTAL CENTERS OF TEXAS, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CDC OF CALIFORNIA, INC.
By: _____________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
Page 10
<PAGE>
CASTLE DENTAL CENTERS OF CALIFORNIA,
L.L.C.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
DENTAL WORLD, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE DENTAL CENTERS OF AUSTIN, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
DENTCOR, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
CASTLE TEXAS HOLDINGS, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
ACADEMY FOR DENTAL ASSISTANTS, INC.
By: ______________________________________
Jack H. Castle, Jr.
Chairman & Chief Executive Officer
Page 11
<PAGE>
SCHEDULE 9.16
Schedule 9.16, Page 1
EXHIBIT 10.27
FIRST AMENDMENT TO SENIOR SUBORDINATED
NOTE PURCHASE AGREEMENT
This FIRST AMENDMENT TO SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT
("AMENDMENT") is dated as of May 19, 2000, and is entered into by and among
CASTLE DENTAL CENTERS, INC., a corporation formed under the laws of Delaware
(the "COMPANY"), HELLER FINANCIAL, INC., a Delaware corporation ("HELLER") and
MIDWEST MEZZANINE FUND II, L.P., a Delaware limited partnership ("Midwest")
(Heller and Midwest are sometimes referred to individually as a "HOLDER" and
together as the "HOLDERS").
WHEREAS, the Company and the Holders are parties to a certain Senior
Subordinated Note Purchase Agreement dated January 31, 2000 (as such agreement
has from time to time been amended, supplemented or otherwise modified, the
"AGREEMENT"); and
WHEREAS, the parties desire to amend the Agreement as hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment, unless otherwise
defined herein, shall have the meaning ascribed to such terms in the Agreement.
2. AMENDMENTS. Subject to the conditions set forth below, the Agreement is
hereby amended as follows:
(a) Subsection 1.02 is amended by deleting the definition of
"Applicable Margin" in its entirety and inserting the following in lieu
thereof:
"APPLICABLE MARGIN" shall mean (a) with respect to interest
calculated by reference to the Eurodollar Rate, (i) from January 31,
2000 through April 30, 2000, four percent (4.0%) and (ii) from May
1, 2000 and thereafter, five and one half percent (5.5%) and (b)
with respect to interest calculated by reference to the Base Rate,
(i) from January 31, 2000 through April 30, 2000, two and three
quarters percent (2.75%) and (ii) from May 1, 2000 and thereafter,
four and one quarter percent (4.25%).
(b) Subsection 1.02 is further amended by deleting the definition of
"EBITDA" in its entirety and inserting the following in lieu thereof:
"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, amortization, the amount
of the settlement of the lawsuit with Joseph Bonola, D.D.S. up to
but not to exceed $1,372,743 as reflected on
<PAGE>
Schedule 1 to the Second Amendment to the Senior Credit Agreement,
dated as of September 30, 1999 and the amount of the unreimbursed
(whether by insurance or otherwise) legal feesand expenses related
to the arbitration with Dr. Leon Roisman, D.M.D. that was expensed
in Fiscal year 1999, up to but not to exceed $541,000.
(c) Subsection 1.02 is further amended by inserting the definition
of "Payment Rate" in its entirety and in the proper alphabetical order:
"PAYMENT RATE" shall mean the Eurodollar or Base Rate, as
applicable, PLUS appropriate Applicable Margin in effect from time
to time, LESS, in any case, from May 1, 2000 through December 31,
2000, one and one half percent (1.5%).
(d) Subsection 1.02 is further amended by inserting the definition
of "PIK Interest" in its entirety and in the proper alphabetical order:
"PIK INTEREST" shall mean that interest computed on the unpaid
principal amount of the Notes at one and one-half percent (1.5%)
from May 1, 2000 through December 31, 2000.
(e) Subsection 2.03(a) is hereby amended in its entirety to
hereafter read as follows:
" (a) VOLUNTARY PREPAYMENTS. Subject to the terms of the
Subordination Agreement, the Company may prepay the outstanding
principal of (together with accrued interest on and, if applicable,
the prepayment fee described below) the Subordinated Notes in full
or in part (in minimum amounts of $1,000,000), at any time and from
time to time on any Quarterly Date as applicable, upon not less than
three (3) Business Days' prior notice to Holders. The Company shall
not be permitted to prepay voluntarily the Convertible Notes. Any
prepayment in full of the Subordinated Notes shall be accompanied by
all PIK Interest accrued to date."
(f) Subsection 2.03(b)(ii) is hereby amended in its entirety to
hereafter read as follows:
" (ii) concurrently with the consummation of a Change in Control,
Company shall pay the outstanding principal of the Subordinated
Notes (together with accrued interest and, if applicable, the
prepayment fee described below). Any prepayment in full of the
subordinated Notes shall be accompanied by all PIK Interest accrued
to date."
(g) Subsection 3.02(c) is hereby amended in its entirety to
hereafter read as follows:
" DUE DATES. Accrued interest on the Notes shall be payable at the
Payment Rate on each Quarterly Date, except that interest payable at
the Post-Default Rate shall be payable from time to time on demand.
The PIK Interest shall accrue from
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May 1, 2000 through December 31, 2000 and shall be payable in full
on the first Quarterly Date in the year 2001 and shall also be
payable on demand upon the occurrence of an Event of Default. In
addition, accrued interest on Convertible Notes shall be payable on
the date of conversion of all or any part of such Convertible Note."
(h) Section 9.13 is amended by deleting the first sentence thereof
and inserting the following in lieu thereof:
"The Company will not permit its Leverage Ratio as of the end of any
fiscal quarter (calculated on a rolling four quarter basis) to be
greater than the ratio on the relevant dates set forth below:
DATE RATIO
------------------------------------------------------------
March 31, 2000 3.65 to 1.00
June 30, 2000 3.65 to 1.00
September 30, 2000 3.50 to 1.00
December 31, 2000 and thereafter 3.25 to 1.00."
(i) Section 9.14 is amended in its entirety to hereafter read as
follows:
"Section 9.14 FIXED CHARGE COVERAGE RATIO . The Company will
not permit its Fixed Charge Coverage Ratio as of the end of any
fiscal quarter (calculated on a rolling four quarter basis) to be
less than the ratio on the relevant dates set forth below.
DATE RATIO
------------------------------------------------------------
March 31, 2000 1.15 to 1.00
June 30, 2000 1.15 to 1.00
September 30, 2000 1.15 to 1.00
December 31, 2000 1.15 to 1.00
March 31, 2001 1.00 to 1.00
June 30, 2001 and thereafter 1.05 to 1.00
For purposes of this Section 9.14, "FIXED CHARGE COVERAGE RATIO"
shall mean (a) with respect to all calculations of Fixed Charge
Coverage Ratio through and including December 31, 2000, the ratio
for the relevant period of (i) EBITDA, LESS taxes payable in cash,
PLUS lease and rental expense to the extent deducted in computing
net income to (ii) lease and rental expense, PLUS interest expense,
PLUS, scheduled senior and subordinate principal payments including
Senior Funded Debt, capital leases, the Indebtedness, Junior
Subordinated Debt, Debt described on Schedule 9.01 and other Debt
subordinated or required to be subordinated to the Indebtedness and
(b) with respect to all calculations of Fixed Charge Coverage Ratio
on January 1, 2001 and thereafter, the ratio for the relevant period
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<PAGE>
of (i) EBITDA, LESS taxes payable in cash, PLUS lease and rental
expense to the extent deducted in computing net income to (ii) lease
and rental expense, PLUS interest, PLUS, during the Revolving Credit
Period (as defined in the Senior Credit Agreement), one-seventh
(1/7) of the then-outstanding principal balance of the Senior Loans,
PLUS, without duplication, current maturities of long-term debt,
PLUS capital leases PLUS, from and after Revolving Credit Period
scheduled payments of principal on Debt of the Company and its
Subsidiaries. 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 as approved by Holders,
adjusted to reflect costs and expenses which such Acquired Entity
would have included had the Management Services Agreements between
Company 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), in each instance, as
approved by Holders."
(j) Section 9.15 is amended in its entirety to hereafter read as
follows:
"9.15 RATIO OF TOTAL FUNDED DEBT TO EBITDA. The Company will not
permit its ratio of Total Funded Debt as of the end of any fiscal
quarter to EBITDA for the four fiscal quarters ending on such date
to be greater than the ratio for the relevant periods set forth
below:
PERIOD ENDING RATIO
--------------------------------------------------------------
March 31, 2000 5.00 to 1.00
June 30, 2000 5.00 to 1.00
September 30, 2000 4.75 to 1.00
December 31, 2000 and thereafter 4.25 to 1.00.
For purposes hereof, EBITDA shall be calculated as provided in
section 9.13. For clarity purposes, it is understood and agreed that
Total Funded Debt includes, without limitation, any and all deferred
interest under all Total Funded Indebtedness."
3. AMENDMENT FEES. In connection with the execution of this Amendment, the
Company shall pay to Holders, for their ratable benefit, a fee of $37,500
("AMENDMENT FEE"), which Amendment Fee shall be deemed to be earned on the
Effective Date and shall be due and payable on the following dates in the
following amounts:
DATE AMOUNT
----------------------------------------
Effective Date $12,502.50
September 29, 2000 $12,498.75
December 29, 2000 $12,498.75
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;provided, however, in the event the Company pays to Holders the entire
principal balance of the Subordinated Notes prior to December 29, 2000, the
entire unpaid amount of the Amendment Fee shall become immediately due and
payable.
4. CONDITIONS. The effectiveness of this Amendment (the date on which this
Amendment becomes effective shall referred to as the "EFFECTIVE DATE") is
subject to the following conditions precedent (unless specifically waived in
writing by the Holders):
(a) The Company shall have executed and delivered this Amendment,
and such other documents and instruments as the Holders may reasonably
require shall have been executed and/or delivered to the Holders;
(b) All proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other
legal matters incident thereto shall be satisfactory to the Holders and
their legal counsel;
(c) Holders shall have received all deliquent payments due
under the Agreement;
(d) After giving effect to this Amendment, no Default or Event
of Default shall have occurred and be continuing;
(e) Each of the Holders shall have received (and the Company
covenants and agrees to deliver to Holders), by May __, 2000 [TWO WEEKS
FROM EFFECTIVE DATE], the documents referred to in Section 8.01(a) of the
Agreement for the fiscal year ended December 31, 1999 and Section 8.01(b)
for the fiscal quarter ended March 31, 2000;
(f) Each of the Holders shall have received consolidated and
consolidating statements of income, stockholders' equity, changes in
financial position and cash flow of the Company and its Consolidated
Subsidiaries for the months ending January 31, 2000 and February 29, 2000,
in each case prepared by the Company and accompanied by the certificate of
a Responsible Officer stating that such financial statements fairly
present the consolidated and consolidating financial condition of the
Company and its Consolidated Subsidiaries in accordance with GAAP, as at
the end of, and for, each such month;
(g) Each of the Holders shall have received evidence that the
requisite number of Senior Lenders have consented to the execution of this
Amendment; and
(h) The Senior Credit Documents shall have been amended in a manner
satisfactory to Holders and such amendment shall have become effective.
5. REPRESENTATIONS AND WARRANTIES. To induce Holders to enter into this
Amendment, the Company represents and warrants to Holders:
5
<PAGE>
(a) that the execution, delivery and performance of this Amendment
has been duly authorized by all requisite corporate action on the part of
the Company and that this Amendment has been duly executed and delivered
by the Company;
(b) that each of the representations and warranties set forth in
Article VII of the Agreement (other than those which, by their terms,
specifically are made as of certain date prior to the date hereof) are
true and correct in all material respects as of the date hereof; and
6. SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
7. REFERENCES. Any reference to the Agreement contained in any document,
instrument or agreement executed in connection with the Agreement shall be
deemed to be a reference to the Agreement as modified by this Amendment.
8. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, but all of which taken
together shall be one and the same instrument.
9. RATIFICATION. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions of the
Agreement and shall not be deemed to be a consent to the modification or waiver
of any other term or condition of the Agreement. Except as expressly modified
and superseded by this Amendment, the terms and provisions of the Agreement are
ratified and confirmed and shall continue in full force and effect.
10. WAIVER. The Company and the Holders hereby acknowledge and agree that
prior to the effectiveness hereof, the Company was in default for the months of
January, February, March, April and May 2000 under Sections 3.02, 8.01(a) and
(b), 9.13, 9.14 and 9.15 of the Agreement. Provided that no other defaults by
the Company currently exist and are continuing under the Agreement, and provided
further, the conditions precedent set forth in Section 4 hereof are satisfied,
then the defaults listed above which occurred on or before the date hereof are
hereby waived by the Holders and the Holders' remedies with respect thereto are
hereby waived. Notwithstanding the foregoing, or any other election by the
Holders to date in forgiving any default by the Company or in waiving any
remedies with respect thereto, no such forgiveness or waiver shall affect or be
deemed to affect any default by the Company or any remedy by the Holders
existing after the date hereof, and the Holders shall not be obligated in any
manner to forgive any such defaults, or waive any such remedies. The Holders
hereby reserve, and the Company hereby acknowledges and agrees that the Holders
have effectively preserved, all of their rights, remedies and recourses with
respect to any default under the Agreement except with respect to the defaults
expressly set forth above.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed under seal and delivered by their respective duly authorized
officers on the date first written above.
HELLER FINANCIAL, INC., CASTLE DENTAL CENTERS, INC.,
a Delaware corporation a Delaware corporation
By: ________________________ By: ________________________
Name: ________________________ Name: Jack H. Castle, Jr.
Title:________________________ Title: Chief Executive Officer
ATTEST:
MIDWEST MEZZANINE FUND II, L.P., ______________________________
a Delaware limited partnership [ASSISTANT] SECRETARY
[CORPORATE SEAL]
By: ________________________
Name: ________________________
Title:________________________
7
<PAGE>
CONSENT AND REAFFIRMATION
Each of the undersigned (each a "GUARANTOR", collectively the
"GUARANTORS") hereby (i) acknowledges receipt of a copy of the foregoing First
Amendment to Senior Subordinated Note Purchase Agreement; (ii) consents to the
Company's execution and delivery thereof; (iii) agrees to be bound thereby; and
(iv) affirms that nothing contained therein shall modify in any respect
whatsoever its guaranty of the obligations of Company to Heller and Midwest
pursuant to the terms of that certain Subordinated Guaranty Agreement dated
January 31, 2000 (the "GUARANTY") and reaffirms that the Guaranty is and shall
continue to remain in full force and effect. Although each Guarantor has been
informed of the matters set forth herein and has acknowledged and agreed to
same, each Guarantor understands that the Holders have no obligation to inform
any Guarantor of such matters in the future or to seek any Guarantor's
acknowledgment or agreement to future amendments or waivers, and nothing herein
shall create such a duty.
IN WITNESS WHEREOF, each of the undersigned has executed this Consent and
Reaffirmation on and as of the date of such Amendment.
ACADEMY FOR DENTAL ASSISTANTS, INC.
CASTLE TEXAS HOLDINGS, INC.
CASTLE DENTAL CENTERS OF
CALIFORNIA, L.L.C.
CASTLE DENTAL CENTERS OF TEXAS, INC.
DENTAL WORLD, INC.
CDC OF CALIFORNIA, INC.
CASTLE DENTAL CENTERS OF AUSTIN, INC.
CASTLE DENTAL CENTERS OF FLORIDA, INC.
CASTLE DENTAL CENTERS OF
TENNESSEE, INC., AND
DENTCOR, INC.
By: ________________________________
Name: Jack H. Castle, Jr.
Title: Chief Executive Officer
8
EXHIBIT 21
SCHEDULE 21
SUBSIDIARIES
SUBSIDIARY PCT. OWNERSHIP STATE OF INCORPORATION
Castle Dental Centers of Texas, Inc. 100% Texas
Castle Texas Holdings, Inc. 100% Delaware
Castle Dental Centers of Austin, Inc. 100% Texas
Dental World, Inc. (of Castle Dental 100% Texas
of Texas, Inc.)
Castle Dental Centers of Tennessee, Inc. 100% Tennessee
Castle Dental Centers of Florida, Inc. 100% Florida
Dentcor, Inc. (of Castle Dental Centers 100% Florida
of Florida, Inc.)
CDC of California, Inc. 100% Delaware
Castle Dental Centers of California, L.L.C. 80% Delaware
(of CDC of California, Inc.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS, FOR THE YEAR ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 59
<SECURITIES> 0
<RECEIVABLES> 36,087
<ALLOWANCES> 14,492
<INVENTORY> 0
<CURRENT-ASSETS> 28,341
<PP&E> 28,263
<DEPRECIATION> 7,902
<TOTAL-ASSETS> 114,982
<CURRENT-LIABILITIES> 12,573
<BONDS> 53,996
0
0
<COMMON> 6
<OTHER-SE> 37,157
<TOTAL-LIABILITY-AND-EQUITY> 114,982
<SALES> 102,701
<TOTAL-REVENUES> 102,701
<CGS> 0
<TOTAL-COSTS> 95,050
<OTHER-EXPENSES> 1,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,220
<INCOME-PRETAX> 2,031
<INCOME-TAX> 835
<INCOME-CONTINUING> 1,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,196
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
