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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________ to ___________
COMMISSION FILE NUMBER: 0-23363
AMERICAN DENTAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3297858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
AMERICAN DENTAL PARTNERS, INC.
301 Edgewater Place, Suite 320
WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (781) 224-0880 / (781) 224-
4216 (FAX)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
Title of each class ON WHICH REGISTERED
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
----- _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the registrant's voting common stock held by non-
affiliates of the registrant was approximately $35,104,000 on March 1, 1999,
based on the closing price of such stock, as reported on the Nasdaq National
Market System.
The number of shares of Common Stock, $0.01 par value, outstanding as of March
1, 1999 was 7,466,880
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive 1999 Proxy Statement for its 1999 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated
by reference in Part III of this Annual Report on Form 10-K.
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AMERICAN DENTAL PARTNERS, INC.
INDEX
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<TABLE>
<CAPTION>
Page
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<S> <C>
Information Regarding Forward-looking Statements........................ 3
PART I.
Item 1. Business ..................................................... 3
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 16
Item 6. Selected Financial Data....................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 24
Item 8. Financial Statements and Supplementary Data................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 46
PART III.
Item 10. Directors and Executive Officers of the Registrant............ 46
Item 11. Executive Compensation........................................ 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 46
Item 13. Certain Relationships and Related Transactions................ 46
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................... 46
</TABLE>
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Report on Form 10-K contains "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The words "believe," expect," anticipate," "project," and
similar expressions, among others, identify forward-looking statements. Forward-
looking statements speak only as of the date the statement was made. Such
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from those projected,
anticipated or implied. Certain factors that might cause such a difference
include, among others, the Company's risks associated with its acquisition and
affiliation strategy, management of rapid growth, dependence upon affiliated
dental groups, dependence upon service agreements, government regulation of the
dental industry and year 2000 compliance issues. Additional risks, uncertainties
and other factors are set forth in the "Risk Factors" section of the Company's
Registration Statement on Form S-4 (File No. 333-56941).
PART I
ITEM 1. BUSINESS
OVERVIEW
American Dental Partners, Inc. (the "Company") is a leading provider of
dental practice management services to multi-disciplinary dental group practices
in selected markets in the United States. The Company seeks to affiliate with
leading dental groups that provide a comprehensive range of dental care
services, have outstanding reputations for quality and have proven records of
financial performance. From November 1996 (the date of its first affiliation)
through December 31, 1998, the Company completed affiliations with 19 dental
group practices, and as of December 31, 1998, operated 103 dental facilities
with 830 operatories in eight states. The Company's growth has resulted
primarily from these affiliations, which consisted of three dental group
practice affiliations completed in 1996, six dental group practice affiliations
completed in 1997 and ten dental group practice affiliations completed in 1998.
The Company's affiliation model is designed to create a partnership in
management between the Company and the affiliated dental group practice that
allows each party to maximize its strengths and retain its autonomy. When
affiliating with a dental group practice, the Company acquires substantially all
of its non-clinical assets and enters into a long-term service agreement to
manage the non-clinical aspects of the dental operations. The Company supports
its affiliated dental group practices with a broad range of services designed to
enhance practice revenue, improve operating efficiencies and expand operating
margins. The Company shares the best practices of its network with each
affiliate and provides assistance with information systems, budgeting, financial
reporting, facilities management, third-party payor contracting, supplies and
equipment procurement, quality assurance initiatives, billing and collecting
accounts receivable, marketing and recruiting, hiring and training support
staff.
The Company's objective is to be the leading dental practice management
company in the United States. The Company's strategy for achieving this
objective is to: (i) expand into carefully selected and diverse geographic
markets which have favorable demographics and projected economic growth; (ii)
affiliate with leading dental group practices which have reputations for quality
care and proven records of financial performance; (iii) increase market
penetration in each of its markets through additional affiliations, recruitment
of dentists and new facility development; (iv) add value to each affiliated
dental group practice by assisting the practice in improving operating
performance; and (v) pursue various initiatives to ensure the highest quality of
care and service.
DENTAL CARE INDUSTRY
The market for dental care is large, growing and highly fragmented. The
United States Health Care Financing Administration estimates that expenditures
for dental care were approximately $50.6 billion in 1997 and will reach
approximately $83.4 billion by 2005, representing a compound annual growth rate
of approximately 6.4%. The Company believes that the growth in expenditures for
dental care will continue to be driven by both increases in costs and increases
in demand for services due to: (i) improved dental benefits offered by
employers; (ii) increased availability and use of dental insurance, including
preferred provider organization ("PPO") plans and capitated managed care
plans; (iii) increased demand for dental care from an aging population; and (iv)
increased demand for cosmetic and preventative procedures. The Company believes
that this growth will benefit not only dentists, but companies that provide
services to the dental care industry, such as dental practice management
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companies. However, the failure of any of the foregoing factors to materialize
could offset increases in demand for dental care, and any such increases may not
correlate with growth in the Company's business.
Unlike many other sectors of the health care services industry, the dental
care industry is in the early stages of consolidation. Although dental care is
typically offered by solo practitioners, the trend towards group practice is
growing. According to the American Dental Association ("ADA"), in 1995, 11.8%
of the approximately 153,300 dentists in the United States were practicing in
groups of three or more, up from 4.1% in 1991. The Company believes this
consolidation trend will continue.
Most dental care performed in the United States is categorized as general
dentistry. Based upon a 1990 survey by the ADA, general dentistry was estimated
to represent approximately 83% of all dental services performed in the United
States. General dentistry includes preventative care, diagnosis and treatment
planning, as well as procedures such as fillings, crowns, bridges, dentures and
extractions. Specialty dentistry, which includes orthodontics, periodontics,
endodontics, prosthodontics and pediatric dentistry, represented the remaining
17% of dental care services.
Historically, dental care was not covered by insurers and consequently was
paid for by patients on a fee-for-service basis. An increasing number of
employers have responded to the desire of employees for enhanced benefits by
providing coverage from third party payors for dental care. These third party
payors offer indemnity insurance, PPO plans and capitated managed care plans.
Under an indemnity insurance plan, the dental provider charges a fee for each
service provided to the insured patient, which is typically the same as that
charged to a patient not covered by any type of dental insurance. The Company
categorizes indemnity insurance plans as fee-for-service plans. Under a PPO
plan, the dentist charges a discounted fee for each service provided based on a
schedule negotiated with the PPO. Under a capitated managed care plan, the
dentist receives a fixed monthly fee from the managed care organization for each
member covered under the plan who selects that dentist as his or her provider.
Capitated managed care plans also typically require a co-payment by the patient.
The National Association of Dental Plans ("NADP") estimated that
approximately 147 million people, or approximately 55% of the population of the
United States, were covered by some form of dental care plan in 1997. This
compares with approximately 117 million people, or approximately 46% of the
population of the United States, in 1995 and approximately 96 million people, or
approximately 41% of the population of the United States, in 1990. Of the 147
million people with coverage, approximately 65% were covered by indemnity
insurance, approximately 18% were covered by capitated managed care plans and
approximately 17% were covered by PPO plans. The remaining approximately 120
million people, or approximately 45% of the population of the United States in
1997, did not have dental benefit coverage. The Company believes that the number
of people with dental benefits will continue to increase and that the majority
of this growth will be in PPO and capitated managed care plans. For instance,
according to the NADP, the number of people covered by capitated managed care
plans increased from 7.8 million in 1990 to 26.5 million in 1997, representing a
19.1% compound annual growth rate. Also, according to the NADP, the number of
people covered by PPO plans increased from 11.7 million in 1994 to 24.5 million
in 1997, representing a 27.9% compound annual growth rate.
The Company believes that the increased prevalence of dental benefits and
the shift of those benefits from traditional fee-for-service to non-fee-for-
service plans has increased the complexity of operating a dental practice and
has led dental practices to begin to affiliate or consolidate with entities,
such as the Company, that: (i) allow dentists to focus on the clinical aspects
of dentistry by providing management resources to conduct the business and
administrative aspects of dentistry; (ii) provide information and operating
systems that are required to effectively manage in an increasingly complex
reimbursement environment; (iii) assist with third-party payor contracting; (iv)
realize economies of scale in purchasing and provide access to capital; and (v)
provide dentists the opportunity to realize value for their practices.
BUSINESS STRATEGY
The Company's objective is to be the leading dental practice management
company in the United States. In order to achieve this objective, the Company's
business strategy is to:
Expand into carefully selected markets. The Company plans to expand
its network of affiliated dental group practices into carefully selected
and diverse geographic markets. The Company focuses on markets that: (i)
offer the opportunity to gain market share leadership; (ii) have a
prevalence of dental group practices; (iii) have favorable demographics and
projected economic growth; and (iv) have access to dental schools. To date,
the Company has identified approximately 125 markets that currently meet
its market selection criteria. The Company believes that operating in
multiple markets increases the attractiveness of the Company and its
affiliated dental group practices to third party payors who seek to
contract with
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dental providers that are strategically located in attractive markets and
that offer a comprehensive range of multi-disciplinary dental care
services.
Affiliate with leading dental group practices. In entering a new
market, the Company seeks to affiliate with a leading dental group practice
in that market as a platform for expansion. A "platform" dental group
practice is one which has a reputation for quality care, provides a
comprehensive range of dental services, has a significant market presence
and has a proven record of financial performance. The Company believes that
by affiliating with leading dental group practices it will become more
attractive to other practices, dentists and payors.
Increase market penetration. The Company seeks to be the market share
leader in each market in which it operates. After affiliating with a
leading dental group practice, the Company seeks to increase its market
share by assisting the affiliate in recruiting new general and specialty
dentists, expanding its patient base and opening new facilities.
Additionally, the Company may affiliate with other dental practices or with
specialty group practices that complement the platform dental group
practice.
Add value to each affiliated dental group practice. The Company
supports its affiliated dental group practices with a broad range of
services designed to enhance their practice revenue, improve operating
efficiencies and expand operating margins. The Company shares the best
practices of its network with each affiliate and assists each affiliate
with an analysis of its revenue and payor mix, capacity, utilization,
staffing, scheduling and productivity. The Company also provides its
affiliates assistance with information systems, budgeting, financial
reporting, facilities management, third-party payor contracting, supplies
and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and
training support staff.
Focus on quality care. The Company pursues various initiatives to help
its affiliates provide the highest quality of care and service. The
Company's goal is to have each affiliated dental group practice become
accredited by the Accreditation Association of Ambulatory Health Care, Inc.
("AAAHC"). Through its National Professional Advisory Forum, the Company
provides its affiliated dental group practices with the opportunity to
share clinical knowledge and best clinical practices. The Company also
implements comprehensive patient satisfaction surveys administered by
independent third parties. The Company believes that its focus on quality
care enhances: (i) its affiliates' relationships with patients; (ii) its
affiliates' ability to recruit dentists; (iii) the Company's ability to
attract new dental groups as affiliates; and (iv) the Company's
attractiveness to third party payors.
AFFILIATION PHILOSOPHY
The Company believes that dental care is an important part of an
individual's overall health care. Because the practitioner is best qualified to
manage the clinical aspects of dentistry, the provision of dental care must be
centered around the dentist. However, current market trends in health care are
increasing the complexity of operating a dental practice. Consequently, dentists
are affiliating with professional practice managers who can manage the non-
clinical aspects of dentistry and provide the business skills that can improve
practice operating performance.
The Company believes that, similar to other sectors of the health care
delivery system, the delivery of dental care is fundamentally a local business.
Therefore, the Company operates its business in a decentralized manner and
maintains the identity of the local affiliated practice. In each affiliation,
the Company strives to maintain the local culture of the affiliated group and
encourages it to retain the name of the practice, continue its presence in
community events, maintain its relationship with patients and local third party
payors and, to the extent possible, maintain the existing management
organization.
The Company's affiliation model is designed to create a partnership in
management between the Company and the affiliated dental group practice that
allows each party to maximize its strengths and retain its autonomy. Under the
Company's affiliation model, the affiliated dental group continues to own its
practice and has sole purview over the clinical aspects of the practice while
the Company manages the business aspects of the practice. This affiliation model
is consistent across practices and, even where permitted by law, the Company
does not employ practicing dentists.
The Company believes that the core values of a business partnership are
shared governance and shared financial objectives and has structured its
affiliation model to achieve these goals. Shared governance is achieved by the
formation of a joint policy board for each affiliated dental group practice
which is comprised of an equal number of representatives from the Company and
the affiliated dental group practice. Together, members of the policy board
develop strategies and decide on major business initiatives for the practice.
Shared financial objectives are achieved through the joint implementation of a
budgeting process that establishes the financial performance standards for the
dental practice.
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The organizational structure of a dental group practice before and after
its affiliation with the Company is generally as follows:
BEFORE AFFILIATION AFTER AFFILIATION
- ---------------------------- --------------------------------------------------
Joint Policy
Board
Dentist-owned Service ADP-owned
Dental Professional Agreement Management Sevice
Group Corporation (40 year) Organization
(PC) (MSO)
MARKET AND GROUP SELECTION
Market Selection
The Company has well-defined market selection criteria. The Company defines
potential markets with reference to one or more Metropolitan Statistical Areas
("MSAs"). An MSA is generally a geographic area consisting of a city of at
least 50,000 people, together with adjacent communities that have a high degree
of economic and social integration with the population center. In 1996, there
were 316 MSAs in the United States. The Company typically focuses on markets
with a population of at least 250,000 people that: (i) offer the opportunity to
gain market share leadership; (ii) have a prevalence of dental group practices;
(iii) have favorable demographics and projected economic growth; and (iv) have
access to dental schools. The Company has identified approximately 125 MSAs that
currently meet its market selection criteria.
Group Selection
The Company seeks to affiliate with leading dental group practices in each
selected market. The Company focuses on group practices because they have
greater potential to be market share leaders. Group practices are also more
likely to have implemented quality assurance and peer review policies and
procedures and are better positioned to operate in an increasingly complex
reimbursement environment. When entering a new market, the Company seeks to
affiliate with a platform dental group with a: (i) reputation for quality care;
(ii) comprehensive range of dental care services; (iii) significant market
presence; and (iv) proven record of financial performance. The Company believes
that, although a limited number of platform dental group practices exist within
any given market, there are a significant number of such groups nationwide.
Affiliation Process
Once the Company has identified a potential affiliate within a market, the
Company's management seeks to determine whether the group practice and the
Company share a common philosophy about the dental industry and common strategic
goals and objectives. To this end, the Company conducts a series of meetings,
site visits and presentations with the potential affiliate about the industry,
the Company and its affiliation model. The Company believes that the existence
of shared philosophical values is a critical element of the affiliation's
ultimate success.
If the Company and a potential affiliate determine that they share common
values, goals and objectives, the Company then undertakes a preliminary due
diligence review of clinical, operating and financial information. Based upon
this review, the Company formulates an offer outlining the basic terms and
conditions of the affiliation which, if accepted by the dental group practice,
is generally embodied in a letter of intent between the parties.
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Upon signing a letter of intent, the Company and its representatives begin a
thorough review of the potential affiliate's clinical systems, processes,
facilities and compliance with licensing and credentialing requirements, as well
as performing legal and accounting due diligence. Acquisition, service and other
agreements are then prepared and the transaction is closed. Generally, the
process of identifying an acceptable affiliation candidate to closing the
transaction takes approximately twelve months.
Potential Affiliations
The Company is constantly discussing potential affiliations with dental group
practices that meet the Company's group selection criteria, which may be at
various stages at any point in time. There can be no assurance that the Company
will consummate any of these potential affiliations.
AFFILIATED NETWORK
From November 1996 (the date of its first affiliation) through December 31,
1998, the Company has affiliated with 19 dental practices in eight states. The
following table lists the affiliations completed by the Company as of December
31, 1998:
<TABLE>
<CAPTION>
Dental
State/Affiliation Facilities Operatories (1) Market(s) Affiliation Date
- ------------------------------------------ ---------- --------------- --------- ----------------
<S> <C> <C> <C> <C>
ARIZONA
Associated Dental Care Providers........ 6 51 Phoenix and Tucson January 1998
LOUISIANA
Lakeside Dental Care.................... 1 28 Metairie March 1997
Leroy S. Crapanzano, D.D.S.............. 1 5 Hammond April 1998
MARYLAND
Mintz & Pincus Dental Group............. 2 35 Oxon Hill and Waldorf September 1998
MINNESOTA
Park Dental............................. 30 220 Minneapolis / St. Paul November 1996
Orthocare Group......................... 17 85 Minneapolis / St. Paul October 1997
PENNSYLVANIA
Soster Dental Group..................... 4 29 Pittsburgh May 1997
Indiana Dental Group.................... 2 9 Indiana July 1998
Westmore Dental Group................... 1 13 Mt. Pleasant September 1998
TEXAS
Longhorn Dental......................... 8 47 Austin and Killeen December 1996
Malcolm R. Scott, D.D.S................. 1 6 San Marcos March 1997
TSC Dental Centers...................... 3 28 Houston June 1998
VIRGINIA
Reston Dental Group..................... 1 39 Reston June 1998
WISCONSIN
Smileage Dental Care.................... 13 126 Appleton, Green Bay, Kenosha
Madison and Milwuakee December 1996
Northpoint Dental Group................. 2 28 Milwaukee July 1997
Wilkens Dental Group.................... 4 30 Milwaukee October 1997
Family Care Dental Centers.............. 5 40 Janesville, Kenosha and Racine April 1998
John E. Carey, D.D.S. and
James J. Peterman, D.D.S................ 1 7 Madison April 1998
St. Croix Valley Orthodontics........... 1 4 Hudson November 1998
--- ---
Total................................... 103 830
=== ===
</TABLE>
___________
(1) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
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MARKET PENETRATION
After affiliating with a platform dental group practice, the Company's
strategy is to increase its market penetration by increasing the market share of
its existing affiliated dental group and by affiliating with other leading
dental groups that complement or add to the dental care provided by its existing
affiliate.
Increase Existing Groups' Market Share
Upon completing an affiliation, the Company prepares a thorough operating
evaluation of the affiliate which builds upon its operational due diligence.
Based on this evaluation, the Company prepares a plan for increasing the
affiliate's market penetration. This plan may include one or more of the
following methods: (i) opening new facilities that are conveniently located in
highly populated areas within the MSA or in contiguous MSAs; (ii) recruiting
additional general and specialty dentists that will complement or enhance the
dental care provided by each affiliated dental group; (iii) expanding physical
capacity by adding new operatories at existing facilities; (iv) increasing the
utilization of existing physical capacity by expanding hours of operation; and
(v) growing its affiliate's patient base through increased marketing efforts and
expanded relationships with third party payors.
Affiliations in Existing Markets
The Company also increases its market penetration by affiliating with other
leading general dentistry group practices and specialty dental group practices
that complement the platform dental group practice in a given market. These
practices are selected in much the same manner as the platform dental group
practice. The Company identifies those practices which have an outstanding
reputation for quality and provide the type of dental care which will complement
or add to the dental care offered by the platform dental group in that market.
OPERATIONS
Operating Structure
The Company operates under a decentralized organizational structure. At the
facility level, where permitted by applicable state law, the Company generally
employs the dental hygienists, dental assistants and administrative staff. At
each facility, a practice manager typically oversees the day-to-day business
operations. The practice manager and administrative staff are responsible for,
among other things, facility staffing, patient scheduling, on-site patient
invoicing and ordering office and dental supplies. The Company believes local
office scheduling is crucial because it allows each practice to accommodate the
needs of its patients and increase the productivity of its dentists.
In each market, the Company has a local management team that supervises the
operations of one or more affiliates. This team provides support in areas such
as recruiting, hiring and training facility staff, developing and implementing
quality assurance programs, developing and implementing operating policies and
procedures, billing and collecting accounts receivable, processing payroll,
information systems, accounting, marketing and facilities development and
management.
Each local management team reports to one of the Company's operating vice
presidents. An operating vice president is responsible for monitoring the
operating performance of multiple affiliated dental groups in multiple markets.
Each operating vice president participates as a member of the policy board of
the affiliated dental groups for which he or she has management oversight
responsibilities. The operating vice presidents are responsible for overseeing
the development of operating plans and annual budgets and monitoring actual
results. Additionally, the Company supports each of its dental group practices
with analysis of the capacity, utilization and productivity of each dental
facility. This analysis assists each practice in improving its operating
performance from both a clinical and financial perspective.
On a national level, the Company supports its affiliated network in several
ways. The Company assists its affiliates with: (i) sharing best clinical
practices through its National Professional Advisory Forum; (ii) evaluating and
negotiating third party payor contracts; (iii) designing, locating and leasing
new facilities; (iv) developing budgets and implementing accounting and
financial systems; and (v) developing and implementing practice management and
other information systems. The Company also takes advantage of economies of
scale by contracting for various goods and services. For example, the Company
has arranged for national contracts for the purchase of dental supplies and
equipment, professional, casualty, and general liability insurance and payroll
processing.
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National Professional Advisory Forum
The Company has organized the National Professional Advisory Forum ("NPAF")
to provide guidance to its affiliated dental group practices with respect to the
clinical aspects of dentistry. Leading dentists from the Company's affiliated
dental groups are selected to participate in the NPAF. The NPAF meets three
times per year and provides a forum for dentists to share the best clinical
practices of their respective dental groups and an opportunity for them to build
professional relationships with other dentists affiliated with the Company.
These dentists, as a result of their affiliation with the Company, share common
long-term goals. This enables the discussion at the NPAF to be more open than it
may be in other professional settings. While the primary emphasis of the NPAF is
on the clinical aspects of dentistry, it also provides the Company's management
an opportunity to communicate with affiliated dentists. This enables the Company
to continue to build strong, mutually beneficial partner relationships with its
affiliated dental groups.
Payor Relationships and Reimbursement Mix
The Company and its affiliates believe that clinical and economic decisions
should be made separately. However, the Company recognizes that the source of
payment for services affects operating and financial performance. The Company
assists its affiliates in analyzing their revenue and payor mix on an ongoing
basis and recommends methods by which the affiliated dental group practices can
improve operating efficiency by improving their revenue and payor mix. As a
general rule, the Company believes that growth in a market is best facilitated
where the payor mix of its affiliates mirrors the payor mix for that market. The
Company assists each of its affiliated dental groups in evaluating and
negotiating third-party payor contracts on a local, regional and national level.
The aggregate payor mix percentage of the Company's affiliated practices was
approximately 39% fee-for-service, 12% PPO plans and 49% capitated managed care
plans for the year ended December 31, 1998.
The Company believes it is advantageous to be affiliated with dental groups
that have successfully provided care to patients under all reimbursement
methodologies. Since a shift is taking place in the dental benefits market from
traditional fee-for-service to PPO and capitated managed care dental plans, the
Company believes that its affiliates' experience in operating under all of these
plans provides them with a competitive advantage. Most of the Company's
affiliated dental groups have provided care under traditional fee-for-service
plans and non-fee-for-service plans. Several of the Company's affiliated dental
groups have been providing care to patients with capitated managed care dental
benefits for more than 20 years.
Facilities Development and Management
The Company believes an inviting professional environment is a critical aspect
of overall patient satisfaction. Each of the Company's facilities is constructed
to be warm, attractive and inviting to the patients in addition to being highly
functional. The Company's dental facilities have from three to 39 operatories,
and typically accommodate general and specialty dentists, dental hygienists and
dental assistants, a business manager and a receptionist. Generally, the
Company's facilities are either stand alone or located within a professional
office building or medical facility and range in size from approximately 1,500
to 10,000 square feet.
The Company works with each of its affiliated dental groups in analyzing
utilization of existing capacity and identifying facility upgrade and expansion
priorities. The Company also provides its affiliates guidance in the site
selection process. The Company initially constructs each facility as appropriate
for the market and adds and equips additional operatories as necessary through a
capacity and utilization analysis.
The Company uses architectural design services to improve the facility design
process and to further ensure that all facilities are properly constructed and
meet the standards set forth by the AAAHC. To this end, the Company works with
each affiliated dental group to establish a defined set of standards for each
facility, such as operatory design and dental equipment, which are consistent
with the desires of the dental group. The Company believes such facility
standards are necessary to speed the site development process and create
consistency across newly developed facilities, leading to enhanced staff and
provider productivity.
Budgeting and Planning; Financial Information Systems
The Company assists each affiliate with budgeting and planning. The Company
and each affiliate develop a strategic plan for increased market penetration on
an annual basis. The Company and each affiliated dental group then jointly
develop a budget which sets specific goals for revenue growth, operating
expenses and capital expenditures. Once a budget has been approved, the
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Company measures the financial performance of each affiliated dental group on a
monthly basis and compares actual performance to budget.
The Company's financial information system enables it to measure, monitor and
compare the financial performance of affiliated dental groups on a standardized
basis across its entire network. The system also allows the Company to track and
control costs and facilitates the accounting and financial reporting process.
This financial system is installed in all affiliated dental group practices.
Historically, the Company has converted all affiliates to its system within 90
days of affiliation and intends to continue this practice with new affiliates.
Practice Management Systems
The Company uses various dental practice management software systems to
facilitate patient scheduling, to invoice patients and insurance companies, to
assist with facility staffing and for other practice related activities. In
connection with its affiliation with Park Dental, the Company acquired the
rights to Comdent, a proprietary practice management software system which has
been used and continuously enhanced at Park Dental since 1987. The Company
believes that Comdent's scheduling, electronic data interchange and data
management features are superior to others that are commercially available. In
addition, Comdent is scalable and capable of accommodating large multi-site
dental group practices. The Company intends, when appropriate, to convert its
affiliated dental group practices to the Comdent practice management software
system. The Company is also developing a data warehouse and decision support
system to analyze information across its entire network.
AFFILIATION STRUCTURE
Service Agreement
The Company has entered into a service agreement with each of its affiliated
professional corporations ("PCs") pursuant to which the Company performs all
administrative, non-clinical aspects of such PC's dental practice. The Company
expects that each new affiliated PC will enter into a similar service agreement
or become a party to an existing service agreement at the time of its
affiliation. The Company is dependent on its service agreements for the vast
majority of its operating revenue. The termination of one or more of these
service agreements could have a material adverse effect on the Company.
The Company is responsible for providing all services necessary for the
administration of the non-clinical aspects of the dental operations. These
services include assisting its affiliates with information systems, budgeting
and financial reporting, facilities management, third-party contracting,
supplies and equipment procurement, quality assurance initiatives, billing and
collecting accounts receivable, marketing and recruiting, hiring and training
support staff.
The PC is responsible for recruiting and hiring all of the dentists necessary
to provide dental care. The Company does not assume any authority,
responsibility, supervision or control over the provision of dental care to
patients. The service agreement requires the PC to enter into an employment or
independent contractor agreement with each dentist retained by the PC. The
service agreement also requires the PC to implement and maintain quality
assurance and peer review programs, maintain professional and comprehensive
general liability insurance covering the PC and each of its dentists and abide
by non-competition and confidentiality provisions.
The Company and each PC establish a joint policy board which is responsible
for developing and implementing management and administrative policies for the
dental operation. The policy board consists of an equal number of
representatives designated by the Company and the PC. The policy board members
designated by the PC must be licensed dentists employed by the PC. The policy
board's responsibilities include the review and approval of all renovation and
expansion plans and capital equipment expenditures with respect to the dental
facilities affiliated with the PC, all annual capital and operating budgets, all
advertising and marketing services, the long-term strategic and short-term
operational goals, objectives, and plans for the dental facilities and staffing
plans regarding provider and support personnel for the dental facilities. The
policy board also reviews and monitors the financial performance of the PC with
respect to the attainment of the PC's budgeted goals. The policy board also has
the authority to approve or disapprove any merger or combination with, or
acquisition of, any dental practice by the PC. Finally, the policy board reviews
and makes recommendations with respect to contractual relationships between the
PC and third-party payors. However, the PCs have final approval over matters
relating to dental care including all third-party payor contracts and fee
practices and schedules.
The PC reimburses the Company for actual expenses incurred on its behalf in
connection with the operation and administration of the dental facilities and
pays fees to the Company for management services. The Company's service fees
typically consist of a fixed monthly fee and an additional variable fee. The
fixed monthly fee is determined prior to each
10
<PAGE>
affiliation and annually thereafter by agreement of the Company and the
affiliated dental group in a formal budgeting process. To the extent that there
is operating income after payment of the fixed monthly fee, reimbursement of
expenses incurred in connection with the operation and administration of the
dental facilities and payment of provider expenses, an additional variable fee
is paid to the Company in the amount of such excess up to budgeted operating
income and 50% of such excess over budgeted operating income. Under certain
service agreements, the Company's service fees consist of a variable monthly fee
which is based upon a specified percentage of the amount by which the PC's
adjusted gross revenue exceeds expenses incurred in connection with the
operation and administration of its dental facilities. In those situations, no
additional variable fee is applicable. The PC is also responsible for provider
expenses, which generally consist of the salaries, benefits, and certain other
expenses of the dentists. Pursuant to the terms of the service agreements, the
Company bills patients and third party payors on behalf of the affiliated PCs.
Such funds are applied in the following order of priority: reimbursement of
expenses incurred in connection with the operation and administration of the
dental facilities; repayment of advances, if any, made by the Company to the PC;
payment of the monthly fee; payment of provider expenses; and payment of the
additional variable fee.
Each of the Company's current service agreements is for an initial term of 40
years and automatically renews for successive five-year terms, unless terminated
by notice given at least 120 days prior to the end of the initial term or any
renewal term. In addition, the service agreement may be terminated earlier by
either party upon the occurrence of certain events involving the other party,
such as its dissolution, bankruptcy, liquidation, or its failure to perform its
material duties and obligations under the service agreement. In the event a
service agreement is terminated, the related affiliated dental practice is
generally required to purchase, at the Company's option, the unamortized balance
of intangible assets at the current book value, as well as all related other
assets associated with the affiliated dental practice.
Employment Agreements with Dentists
The service agreements require that all dentists practicing full-time at the
dental facilities enter into employment agreements with their respective PCs.
The employment agreements with dentists who are owners of the PCs generally are
for a specified initial term of up to five years and may not be terminated by
the dentists without cause during such initial term. The employment agreements
with other dentists may be for terms up to 18 months. Such employment agreements
are usually terminable by either party upon advance written notice, which may be
90 days in some cases, and are terminable by the PC for cause immediately upon
written notice to the dentist. Such agreements typically contain non-competition
provisions which prohibit the dentist from engaging in the practice of dentistry
or otherwise performing professional dental services within a specified
geographic area, usually a specified number of miles from the relevant dental
facility, following termination. The non-competition restrictions are generally
for one to two years following termination.
COMPETITION
The dental practice management industry, currently in its formative stage, is
highly competitive and is expected to become more competitive. The Company
competes with other dental practice management companies with respect to
providing management services to dentists, as well as those seeking to affiliate
with existing dental practices through service agreement arrangements. The
Company believes that the principal factors of competition between dental
practice management companies are their affiliation methods and models, the
reputation of their existing affiliates, the scope of their dental care
networks, their management expertise and experience, the sophistication of their
management information, accounting, finance and other systems and their
operating methods. The Company believes that it competes effectively with other
dental practice management companies with respect to these factors.
GOVERNMENT REGULATION
General
The practice of dentistry is highly regulated, and the operations of the
Company and its affiliated dental practices are subject to numerous state and
federal laws and regulations. Furthermore, the Company may become subject to
additional laws and regulations as it expands into new markets. There can be no
assurance that the regulatory environment in which the Company and its
affiliated dental group practices operate will not change significantly in the
future. The ability of the Company to operate profitably will depend, in part,
upon the Company and its affiliated dental group practices obtaining and
maintaining all necessary licenses, certifications and other approvals and
operating in compliance with applicable laws.
11
<PAGE>
State Regulation
Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. Except for Wisconsin, the laws of the states
in which the Company currently operates prohibit, either by specific statutes,
case law or as a matter of general public policy, entities not wholly owned or
controlled by dentists, such as the Company, from practicing dentistry, from
employing dentists and, in certain circumstances, dental assistants and dental
hygienists, or from exercising control over the provision of dental services.
Many states prohibit or restrict the ability of a person other than a licensed
dentist to own, manage or control the assets, equipment or offices used in a
dental practice. The laws of some states prohibit the advertising of dental
services under a trade or corporate name and require all advertisements to be in
the name of the dentist. A number of states also regulate the content of
advertisements of dental services and the use of promotional gift items. These
laws and their interpretation vary from state to state and are enforced by
regulatory authorities with broad discretion.
There are certain regulatory issues associated with the Company's role in
negotiating and administering managed care contracts. To the extent that the
Company or any affiliated dental group practice contracts with third party
payors, including self-insured plans, under a capitated or other arrangement
which causes the Company or such affiliated dental group practice to assume a
portion of the financial risk of providing dental care, the Company or such
affiliated dental group practice may become subject to state insurance laws. If
the Company or any affiliated dental group practice is determined to be engaged
in the business of insurance, the Company may be required to change the method
of payment from third party payors or to seek appropriate licensure. Any
regulation of the Company or its affiliated dental group practices under
insurance laws could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many states have fraud and abuse laws, including anti-kickback laws, which are
similar to the federal laws, discussed below, and in many cases these laws apply
to all referrals for items or services reimbursable by any payor. A number of
states also impose significant criminal and civil penalties for false claims,
false or improper billings, or inappropriate coding for dental services. Many
states either prohibit or require disclosure of self-referral arrangements and
impose criminal and civil penalties for violations of these laws.
Many states also prohibit a dentist from paying a portion of fees received for
dental services to another person or entity. In some states, this "fee-
splitting" prohibition applies only to payments in exchange for referrals.
Other states flatly prohibit any rebates or split fees regardless of whether
referrals are involved. There can be no assurance that management fees paid to
the Company, to the extent based on a percentage of dental service revenues or
profits, will not be deemed to violate such laws.
Many states have antitrust laws which prohibit agreements in restraint of
trade, the exercise of monopoly power and other practices that are considered to
be anti-competitive, including cooperation by separate economic entities to fix
the prices of services. Dental practices are also subject to compliance with
state and local regulatory standards in the areas of safety and health.
Federal Regulation
The dental industry is also regulated at the federal level to the extent that
dental services are reimbursed under federal programs. Participation by the
affiliated dental group practices and their dentists in such programs subject
them, and potentially the Company, to significant regulation regarding the
provision of services to beneficiaries, submission of claims and related
matters, including the types of regulations discussed below. Violation of these
laws or regulations can result in civil and criminal penalties, including
possible exclusion of individuals and entities from participation in federal
payment programs.
The federal anti-kickback statutes prohibit, in part, and subject to certain
safe harbors, the payment or receipt of remuneration in return for, or in order
to induce, referrals, or arranging for referrals, for items or services which
are reimbursable under federal payment programs. Other federal laws impose
significant penalties for false or improper billings or inappropriate coding for
dental services regardless of the payor source. The federal self-referral law,
or "Stark law," prohibits dentists from making referrals for certain
designated health services reimbursable under federal payment programs to
entities with which they have financial relationships unless a specific
exception applies. The Stark law also prohibits the entity receiving such
referrals from submitting a claim for services provided pursuant to such
referral. The Company may be subject to federal payor rules prohibiting the
assignment of the right to receive payment for services rendered unless certain
conditions are met. These rules prohibit a billing agent from receiving a fee
based on a percentage of collections and may require payments for the services
of the dentists to be made directly to the dentist providing the services or to
a lock-box account held in the name of the dentist or his or her dental group.
In addition, these rules provide that accounts receivables from federal payors
are not saleable or assignable.
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<PAGE>
Federal antitrust laws prohibit agreements in restraint of trade, the exercise
of monopoly power and other practices that are considered to be anti-
competitive, including cooperation by separate economic entities to fix the
prices of services. Finally, dental practices are also subject to compliance
with federal regulatory standards in the areas of safety and health.
INSURANCE
The Company maintains property-casualty insurance covering its dental
facilities, local management offices and its corporate office on a replacement
cost basis. Each affiliated PC maintains, or causes to be maintained,
professional liability insurance covering itself and its employees and
contractors, including the dentists, hygienists and dental assistants employed
by, or contracted by such affiliated PC in the amount of $1 million per
occurrence and $3 million annual aggregate. The Company generally is a named
insured under such policies. The Company also maintains umbrella liability
coverage for its property-casualty policies in the amount of $10 million.
Certain types of risks and liabilities may not be covered by insurance, however,
and there can be no assurance that coverage will continue to be available upon
terms satisfactory to the Company or that the coverage will be adequate to cover
losses. Malpractice insurance, moreover, can be expensive and varies from state
to state. Successful malpractice claims asserted against the dentists, the PCs
or the Company may have a material adverse effect on the Company's business,
financial condition and operating results. While the Company believes its
insurance policies are adequate in amount and coverage for its current
operations, there can be no assurance that the coverage maintained by the
Company will be sufficient to cover all future claims or will continue to be
available in adequate amounts or at a reasonable cost.
EMPLOYEES
As of February 28, 1999, the Company employed, either directly or through
independent contract arrangements, 1,155 people. This amount included 627
hygienists and dental assistants and 528 administrative and management personnel
located at the Company's dental facilities, local management offices and its
corporate office. In addition, the Company was affiliated with 259 dentists, as
well as 77 hygienists and dental assistants located in states which prohibit the
Company's employment of hygienists and/or dental assistants, all of whom were
employees or independent contractors of their respective affiliated PCs. The
Company considers its relations with its employees to be good.
EXECUTIVE OFFICERS
The following table sets forth information concerning each of the executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gregory A. Serrao......................... 36 Chairman, President and Chief Executive Officer
Ronald M. Levenson........................ 43 Senior Vice President, Chief Financial Officer and Treasurer
William H. Bottlinger..................... 54 Vice President-Regional Operations and Chief Information Officer
Joseph V. Errante, D.D.S.................. 43 Vice President-Regional Operations
Lee S. Feldman............................ 31 Vice President-General Counsel
Forrest M. Flint.......................... 46 Vice President-Business Development
Michael F. Frisch......................... 41 Vice President-Regional Operations
Jesley C. Ruff, D.D.S..................... 44 Vice President-Chief Professional Officer
</TABLE>
_______________
The executive officers of the Company are elected annually by the Board of
Directors.
Mr. Serrao, the founder of the Company, has served as President, Chief
Executive Officer and a Director of the Company since December 1995 and as
Chairman since October 1997. From 1992 through December 1995, Mr. Serrao served
as the President of National Specialty Services, Inc., a subsidiary of Cardinal
Health, Inc. ("Cardinal Health"). From 1991 to 1992, Mr. Serrao served as Vice
President--Corporate Development of Cardinal Health. Before joining Cardinal
Health, Mr. Serrao was an investment banker at Dean Witter Reynolds Inc. where
he co-founded its health care investment banking group and specialized in
mergers, acquisitions and public equity offerings.
Mr. Levenson has served as Senior Vice President, Chief Financial Officer and
Treasurer of the Company since April 1996. Prior to joining the Company, Mr.
Levenson was employed by American Medical Response, Inc. ("AMR"), a national
provider of ambulance services, where he served as Senior Vice President and
Chief Accounting Officer from October 1992 through April 1996 and also served as
Treasurer from August 1995 through April 1996. Prior to joining AMR, Mr.
Levenson was a Senior Manager at KPMG Peat Marwick LLP, a public accounting
firm, where he was employed from 1979 through 1992.
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<PAGE>
Mr. Bottlinger has served as Vice President and Chief Information Officer of
the Company since January 1997 and as Vice President--Regional Operations since
November 1997. From 1985 through 1996, Mr. Bottlinger served as Senior Vice
President and Chief Information Officer for Cardinal Health and Senior Vice
President and General Manager of CORD Logistics, Inc., a Cardinal Health
subsidiary which provided pharmaceutical distribution and information technology
services for emerging biotechnical manufacturing companies. During his career,
Mr. Bottlinger has initiated the use of state of the art information system
technology in a variety of businesses engaged in retailing, food wholesaling,
pharmaceutical manufacturing and distribution, pharmacy operations and financial
services.
Dr. Errante has served as Vice President--Regional Operations of the Company
since November 1998 and as Chief Executive Officer of Innovative Practice
Concepts, Inc. (which was acquired by the Company in January 1998) since January
1996. From January 1996 to January 1998, Dr. Errante also served as Chairman of
Associated Dental Care Providers, P.C. (an affiliated dental group practice of
the Company since January 1998), which he co-founded in 1985. From 1992 to 1996,
Dr. Errante served as Chief Executive Officer and Chairman of Associated
Companies, Inc., the management company that operated Associated Health Plans,
Inc. ("AHP"), a managed care dental plan in Arizona. From 1985 to 1992, Dr.
Errante served as the Dental Director for AHP. Dr. Errante currently serves as
President of the American Academy of Dental Group Practices ("AADGP") and sits
on the Managed Care Dental Advisory Board to Proctor and Gamble.
Mr. Feldman has served as Vice President--General Counsel of the Company since
November 1998. Prior to joining the Company, Mr. Feldman was employed by
Professional Dental Associates, Inc., a dental practice management company,
where he served as Vice President--General Counsel and Secretary from June 1997
to November 1998. From 1993 to 1997, Mr. Feldman was an associate with Ropes and
Gray, a law firm located in Boston, Massachusetts.
Mr. Flint has served as Vice President--Business Development of the Company
since November 1996. From 1985 through November 1996, Mr. Flint served as the
Executive Director of PDHC, Ltd. ("Park"), prior to its affiliation with the
Company. At Park, Mr. Flint was responsible for managing all external
relationships and contracting with third party payors. From 1984 to 1985, Mr.
Flint was an investment banker in the health care finance group of Dain
Bosworth, Inc. From 1977 to 1984, Mr. Flint was the Director of the South Dakota
Division of Health Services. Mr. Flint is a past Board Member of the
Accreditation Association for Ambulatory Health Care, Inc.
Mr. Frisch has served as Vice President--Regional Operations of the Company
since June 1997. From January 1997 to June 1997, Mr. Frisch served as the
Company's Director--National Support Initiatives. From July 1996 to January
1997, Mr. Frisch was an independent consultant to the Company. From June 1993 to
July 1996, Mr. Frisch served as Vice President and General Manager of National
Specialty Services, Inc., a subsidiary of Cardinal Health. From July 1986 to
June 1993, Mr. Frisch was employed by VHA, Inc., a national health care
alliance, in a variety of marketing, business development and management
positions.
Dr. Ruff has served as Vice President--Chief Professional Officer of the
Company since January 1999 and has chaired the Company's National Professional
Advisory Forum since January 1997. From 1992 to 1998, Dr. Ruff served as
President of Wisconsin Dental Group, S.C., an affiliated dental group practice
of the Company, where he was employed as a practicing dentist and held a variety
of positions since 1985. In 1994, Dr. Ruff served on the Board of Directors of
the National Association of Prepaid Dental Plans. From 1983 to 1991, Dr. Ruff
was an Assistant Professor at the Marquette University School of Dentistry and
adjunct faculty from 1991 to 1996, where he held a variety of clinical faculty
and grant-related positions.
ITEM 2. PROPERTIES
As of February 28, 1999, the Company owned or leased 112 dental facilities and
seven local management offices.
The Company's corporate office is located at 301 Edgewater Place, Suite 320,
Wakefield, Massachusetts, in approximately 6,900 square feet occupied under a
lease which expires in March 2002. The Company leases most of its dental
facilities. Typically, each acquired dental facility is located at the site used
by the dental group practice prior to affiliating with the Company.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. The
dentists employed by, or independent contractors of, the Company's affiliated
PCs are from time to time subject to malpractice claims. Such claims, if
successful, could result in damage awards exceeding applicable insurance
coverage which could have a material adverse effect on the Company's financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION, HOLDERS AND DIVIDENDS
The Company's Common Stock has been traded on the Nasdaq National Market
system under the symbol "ADPI" since April 16, 1998. The following table sets
forth the range of the reported high and low sales prices of the Company's
Common Stock for the year ended December 31, 1998:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1998
---
2nd Quarter (beginning April 16, 1998).................................. $19.375 $13.750
3rd Quarter............................................................. $15.000 $ 8.250
4th Quarter............................................................. $13.875 $ 7.125
</TABLE>
As of March 1, 1999, there were approximately 62 holders of record of Common
Stock, as shown on the records of the transfer agent and registrar of Common
Stock. The number of record holders does not bear any relationship to the number
of beneficial owners of the Common Stock. The last reported sale price of the
Common Stock on the Nasdaq National Market as of March 1, 1999 was $8.125 per
share.
The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividends on its Common Stock in the
foreseeable future. In addition, the terms of the Company's revolving credit
facility prohibit it from paying dividends or making other payments with respect
to its Common Stock without the lenders' consent. The Company's Board of
Directors intends, for the foreseeable future, to retain earnings to finance the
continued operation and expansion of the Company's business.
RECENT SALES OF UNREGISTERED SECURITIES
In 1998, the Company issued the following securities that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"). No
underwriters were engaged in connection with any of the following transactions,
and accordingly, no underwriting discounts or commissions were paid. The shares
of capital stock and other securities issued in the following transactions were
offered and sold in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act or Regulation D promulgated thereunder
relative to sales by an issuer not involving a public offering.
(i) On January 1, 1998, the Company issued 34,800 shares of Common Stock to
the stockholders of Innovative Practice Concepts, Inc. as part of the
consideration (along with subordinated promissory notes in the aggregate
original principal amount of $500,000 and cash) paid by the Company in exchange
for all of the outstanding capital stock of Innovative Practice Concepts, Inc.;
(ii) on June 3, 1998, the Company issued subordinated promissory notes in the
aggregate original principal amount of $900,000 to Reston Dental Group, P.C.
("Reston") as part of the consideration (along with cash, future contingent
payments and the assumption of liabilities) paid by the Company in connection
with the purchase of certain non-clinical assets of Reston; and (iii) On June 6,
1998, the Company issued subordinated promissory notes in the aggregate original
principal amount of $345,000 to William S. Dillon and Rick G. Friedrichs as Co-
Agents for Tomball-Spring Cypress Dental Center, Inc., TSC Dental
Center/Greenspoint, Inc. and TSC Dental Center at the Woodlands, Inc. (the "TSC
Dental Centers") and for the shareholders thereof as part of the consideration
(along with cash and assumed liabilities) paid by the Company in connection with
the purchase of certain non-clinical assets of the TSC Dental Centers. The
Company does not believe that the promissory notes issued in these transactions
constitute "securities" as defined inSection 2(1) of the Securities Act;
however, in the event the promissory notes are deemed to be securities, these
transactions were exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) or Regulation D thereunder relative to sales by an
issuer not involving a public offering.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
STATISTICAL DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue.................................................. $ 3,933 $53,270 $84,090
------- ------- -------
Operating expenses:
Salaries and benefits....................................... 2,098 28,438 43,190
Lab fees and dental supplies................................ 534 6,435 10,796
Office occupancy............................................ 389 4,814 7,635
Other operating expenses.................................... 773 6,264 6,840
General corporate expenses.................................. 2,395 3,337 3,951
Depreciation................................................ 177 1,580 2,495
Amortization of intangibles................................. 48 645 1,732
------- ------- -------
Total operating expenses................................. 6,414 51,513 76,639
------- ------- -------
Earnings (loss) from operations.............................. (2,481) 1,757 7,451
Interest expense (income), net.............................. (38) 563 1,085
------- ------- -------
Earnings (loss) before income taxes.......................... (2,443) 1,194 6,366
Income taxes................................................ - 124 2,480
------- ------- -------
Net earnings (loss)......................................... $(2,443) $ 1,070 $ 3,886
======= ======= =======
Net earnings (loss) per common share (1):
Basic....................................................... $(3.45) $(0.05) $0.59
Diluted..................................................... $(3.45) $(0.05) $0.54
Weighted average common shares outstanding (1):
Basic....................................................... 768 2,273 5,907
Diluted..................................................... 768 2,273 6,867
<CAPTION>
December 31,
-----------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,836 $ 4,675 $ 2,091
Working capital............................................. 3,189 759 (2,725)
Total assets................................................ 25,294 47,959 70,535
Long-term debt, excluding current maturities................ 3,063 21,253 9,980
Redeemable and convertible preferred stock.................. 15,105 16,297 -
Total stockholders' equity.................................. 164 909 48,305
STATISTICAL DATA (END OF PERIOD):
Number of states............................................ 3 5 8
Number of dental facilities................................. 42 77 103
Number of operatories (2)................................... 331 566 830
Number of affiliated dentists (3)........................... 128 171 231
</TABLE>
_____________
(1) Net earnings (loss) per common share are computed on the basis described in
Notes 2 and 11 to the Company's Consolidated Financial Statements.
(2) An operatory is an area where dental care is performed and generally
contains a dental chair, a hand piece delivery system and other essential
dental equipment.
(3) Includes full-time general dentists employed by the PCs and full-time
specialists, some of whom are independent contractors to the PCs.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
American Dental Partners, Inc. is a leading provider of dental practice
management services to multi-disciplinary dental group practices in selected
markets in the United States. The Company was formed in December 1995, commenced
operations in January 1996 and began engaging in dental practice management
operations in November 1996, concurrent with the completion of its first dental
group practice affiliation. The Company's rapid growth has resulted primarily
from the Company's affiliations with dental group practices. From November 1996
(the date of the Company's first dental group practice affiliation) to December
31, 1998, the Company completed affiliations with 19 dental group practices and,
at December 31, 1998, operated 103 dental facilities with 830 operatories in
eight states.
An integral part of the Company's strategy is to affiliate with dental group
practices. Because of the financial impact of the Company's affiliations during
1996 and 1997, it is difficult to make meaningful comparisons between the
Company's financial statements during these periods. In addition, due to the
relatively small number of affiliated dental group practices, each affiliation
can impact the overall operating results of the Company. After affiliating with
a dental group practice, the Company typically takes a number of steps designed
to enhance the dental group's practice revenue, improve practice operating
efficiencies and expand practice operating margins. The benefits of these
actions generally do not occur immediately. Consequently, the financial
performance of a newly-affiliated dental group practice could negatively affect
overall operating margins in the near term. As the Company grows, it expects
that the effect of adding a new dental group practice affiliation will be
mitigated by the expanded financial base of the existing affiliations. See
"Business--Business Strategy."
AFFILIATION SUMMARY
When affiliating with a dental group practice, the Company acquires
substantially all its assets except those required by law to be owned or
maintained by dentists (such as third party contracts, certain governmental
receivables and patient records), and enters into a long-term service agreement
with the affiliated dental practice. Under its service agreements, the Company
is responsible for providing all services necessary for the administration of
the non-clinical aspects of the dental operations. The PC is responsible for the
provision of dental care. Each of the Company's service agreements is for an
initial term of 40 years. The Company does not own or control the affiliated
dental practices and, accordingly, does not consolidate the financial statements
of the PCs with those of the Company.
1996 Transactions
During 1996, the Company acquired substantially all the assets of three dental
group practices and simultaneously entered into a 40-year service agreement with
each of the affiliated dental groups. These affiliated dental groups are: Park
Dental in Minneapolis; Longhorn Dental in Austin; and Smileage Dental Care in
Milwaukee. These transactions resulted in the addition of 42 dental facilities
with 331 operatories.
1997 Transactions
During 1997, the Company acquired substantially all the assets of six dental
group practices and Orthocare, Ltd., a related entity of one of these practices,
and simultaneously entered into 40-year service agreements with four of these
affiliated dental groups (two practices joined existing affiliates). These six
dental group practices are: Lakeside Dental Care in New Orleans; Malcolm R.
Scott, D.D.S. in San Marcos, Texas; Soster Dental Group in Pittsburgh;
Northpoint Dental Group and Wilkens Dental Group in Milwaukee; and the Orthocare
Group in Minneapolis. The Lakeside Dental Care and Soster Dental Group
affiliations represented the entry into two new markets by the Company. The
affiliation with Malcolm R. Scott, D.D.S. expanded the Company's market presence
in Austin by adding one dental facility with six operatories. The affiliation
with Northpoint Dental and Wilkens Dental groups expanded the Company's market
presence in Milwaukee by adding six dental facilities with 53 operatories. In
total, these transactions resulted in the addition of 29 dental facilities with
199 operatories.
18
<PAGE>
1998 Transactions
During 1998, the Company acquired substantially all the assets of ten dental
group practices and simultaneously entered into 40-year service agreements with
four of the affiliated dental groups (six practices joined existing affiliates).
These ten dental group practices are: Associated Dental Care in Phoenix and
Tucson; Family Care Dental Centers in Janesville, Kenosha and Racine, Wisconsin;
John E. Carey, D.D.S. and James J. Peterman, D.D.S. in Madison, Wisconsin; Leroy
S. Crapanzano, D.D.S. in New Orleans; Reston Dental Group in Reston, Virginia;
TSC Dental Centers in Houston; Indiana Dental Group in Indiana, Pennsylvania;
Mintz & Pincus Dental Group in Oxon Hill and Waldorf, Maryland; Westmore Dental
Group in Mt. Pleasant, Pennsylvania; and St. Croix Valley Orthodontics in
Hudson, Wisconsin. The Associated Dental Care, Reston Dental Group, TSC Dental
Centers, Indiana Dental Group and Mintz & Pincus Dental Group affiliations
represented the entry into six new markets by the Company. The affiliation with
Family Care Dental Centers expanded the Company's market presence in the
Kenosha, Wisconsin market and represented the entry of the Company into two new
markets in Wisconsin, Janesville and Racine. The affiliations with John E.
Carey, D.D.S. and James J. Peterman, D.D.S., Leroy S. Crapanzano, D.D.S.,
Westmore Dental Group and St. Croix Valley Orthodontics expanded the Company's
market presence in the Madison, New Orleans, Pittsburgh and Minneapolis markets,
respectively. In total, these affiliations resulted in the addition of 23 dental
facilities with 231 operatories.
1999 Completed and Pending Transactions
Subsequent to December 31, 1998, the Company acquired substantially all the
assets of two dental practices and simultaneously entered into a 40-year service
agreement with one of the affiliated dental groups (the dentists of the other
dental group joined an existing affiliate). The two dental groups are: Dental
Care of Alabama in Birmingham and Tuscaloosa; and the dental facilities formerly
part of CIGNA HealthCare of Arizona, Inc. in Phoenix. The aggregate purchase
price paid in connection with these transactions consisted of approximately $3.9
million in cash, $0.1 million in subordinated promissory notes and $0.1 million
in deferred payments.
In addition, the Company currently is in discussions with a number of dentists
and owners of dental group practices about possible affiliations with the
Company. There can be no assurance that the Company will consummate any of
these possible affiliations.
COMPONENTS OF REVENUE AND EXPENSES
Affiliate Adjusted Gross Revenue and Payor Mix. The Company's affiliated
dental group practices generate revenue from patients and third party payors
under fee-for-service, PPO plans and capitated managed care plans. The
affiliated dental group practices record revenue at established rates reduced by
contractual adjustments and allowances for doubtful accounts to arrive at
adjusted gross revenue. Contractual adjustments represent the difference between
gross billable charges at established rates and the portion of those charges
reimbursed pursuant to certain third party payor contracts. While payor mix
varies from market to market, the aggregate payor mix percentage of the
Company's affiliated practices was approximately 39% fee-for-service, 12% PPO
plans and 49% capitated managed care plans for the year ended December 31, 1998.
The PC reimburses the Company for expenses incurred on its behalf in
connection with the operation and administration of the dental facilities and
pays fees to the Company for management services. Expenses incurred for the
operation and administration of the dental facilities include salaries and
benefits for non-dentist personnel working at the dental facilities (the
administrative staff and, where permitted by law, the dental hygienists and
dental assistants), lab fees, dental supplies, office occupancy costs of the
dental facilities (rent, utilities, etc.) and depreciation related to the fixed
assets at the dental facilities. The PC is also responsible for provider
expenses, which generally consist of the salaries, benefits and certain other
expenses of the dentists.
Net Revenue. Net revenue for the Company represents the aggregate amounts
charged to the affiliated dental practices pursuant to the terms of the long-
term service agreements under which the Company agrees to manage the non-
clinical aspects of the dental practice. Under such agreements, the affiliated
dental group practices reimburse the Company for actual expenses incurred in
connection with the operation and administration of the dental facilities and
pay fees to the Company for its management services. The Company's service fees
typically consist of a fixed monthly fee and an additional variable fee. The
fixed monthly fee is determined prior to each affiliation and annually
thereafter by agreement of the Company and the affiliated dental group in a
formal budgeting process. To the extent that there is operating income after
payment of the fixed monthly fee, reimbursement of expenses incurred in
connection with the operation and administration of the dental facilities and
payment of
19
<PAGE>
provider expenses, an additional variable fee is paid to the Company in the
amount of such excess up to budgeted operating income and 50% of such excess
over budgeted operating income. Under certain service agreements, the Company's
service fees consist of a variable monthly fee which is based upon a specified
percentage of the amount by which the PC's adjusted gross revenue exceeds
expenses incurred in connection with the operation and administration of its
dental facilities. In those situations, no additional variable fee is
applicable. Pursuant to the terms of the service agreements, the Company bills
patients and third party payors on behalf of the affiliated PCs. Such funds are
used to pay all operating expenses, to pay fees to the Company for its
management services and are then used by the PCs to pay their provider expenses.
Such funds are applied in the following order of priority: reimbursement of
expenses incurred in connection with the operation and administration of the
dental facilities; repayment of advances, if any, made by the Company to the PC;
payment of the monthly fee; payment of provider expenses; and payment of the
additional variable fee, if applicable. Additionally, the Company's net revenue
includes amounts from third party payors related to the arrangement of the
provision of care to patients.
Operating Expenses. Operating expenses (excluding general corporate
expenses, depreciation and amortization of intangibles) consist of the expenses
incurred by the Company in fulfilling its obligations under the service
agreements. These expenses are operating costs and expenses that would have been
incurred by the affiliated dental groups had they not affiliated with the
Company and include non-dentist salaries and benefits, lab fees and dental
supplies, office occupancy cost and other expenses related to operations.
Salaries and benefits expense are for personnel working for the Company at the
dental facilities, as well as the local operating management. At the facility
level, the Company generally employs the administrative staff and, where
permitted by law, the dental hygienists and dental assistants. The local
operating management team supervises and supports the staff at the dental
facilities. Office occupancy includes rent expense and certain other operating
costs such as utilities associated with dental facilities and the local
administrative offices. Such costs vary based on the size of each facility and
the market rental rate for dental office space in the particular geographic
market. Other expenses consist of professional fees, marketing costs and other
general and administrative expenses. See "Business--Operations--Operating
Structure."
General Corporate Expenses. General corporate expenses consist of
compensation expenses for the Company's corporate personnel and administrative
staff, as well as facility and other administrative costs of the Company's
corporate offices. The Company provides management, administrative, third party
contracting and other services to the affiliated groups.
Depreciation. Depreciation expense includes depreciation charges related to
leasehold improvements and furniture, fixtures and equipment used to operate the
dental facilities.
Amortization of Intangibles. Amortization of intangibles relates to
intangible assets incurred in connection with the 1996, 1997 and 1998
Transactions.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Overview
The Company conducted no significant operations from January 1996 until
November 1996, when it completed its first affiliation. Accordingly, the Company
generated net revenue of only $3,933,000 for 1996. General corporate expenses
incurred during 1996 were $2,395,000 and contributed to a net loss of
$2,443,000. During 1997, net revenue generated from completed affiliations
exceeded operating expenses and general corporate expenses resulting in net
income of $1,070,000. As a result of the Company's rapid expansion, the Company
does not believe that a period-to-period comparison and the percentage
relationships of the year ended December 31, 1996 as compared with the year
ended December 31, 1997 are meaningful.
Results of Operations
Net Revenue. Net revenue amounted to $3,933,000 for 1996 as compared with
$53,270,000 for 1997. The 1997 period included revenue derived from service
agreements entered into in connection with the 1996 Transactions for the entire
year of 1997, plus revenue derived from service agreements entered into in
connection with the 1997 Transactions. Net revenue included expense
reimbursements ($3,175,000 for 1996 as compared with $36,386,000 for 1997),
management service fees ($720,000 for 1996 as compared with $12,056,000 for
1997) and revenue related to the arrangement of the provision of care to
patients ($38,000 for 1996 as compared with $4,828,000 for 1997). Expense
reimbursements included rent expense ($267,000 for 1996 as compared with
$3,476,000 for 1997) and other operating expenses ($2,908,000 for 1996 as
compared with $32,910,000 for 1997). Management service fees included the
monthly fee ($720,000 for 1996 as compared with $10,724,000 for 1997) and the
additional variable fee ($0 for 1996 as compared with $1,332,000 for 1997). Net
revenue derived from the Company's service agreement with Park Dental
represented approximately 56% of the Company's consolidated net revenue for the
year ended December 31, 1997.
20
<PAGE>
Operating Expenses. Operating expenses for 1996 were $3,794,000 or 96.5% of
net revenue as compared with $45,951,000 or 86.3% of net revenue for 1997. The
increase in the dollar amount resulted from the full year impact of the 1996
Transactions plus the impact of the 1997 Transactions.
General Corporate Expenses. General corporate expenses were $2,395,000 or
60.9% of net revenue for 1996, as compared with $3,337,000 or 6.3% of net
revenue for 1997. The increase resulted primarily from the impact of additional
corporate personnel hired in finance, information systems and operations in late
1996 and early 1997 to build infrastructure in anticipation of the Company's
growth.
Depreciation. Depreciation expense was $177,000 or 4.5% of net revenue for
1996, as compared with $1,580,000 or 3.0% of net revenue for 1997. Depreciation
expense for 1996 resulted primarily from costs incurred in connection with the
purchase of furniture, fixtures and equipment for the corporate office.
Depreciation expense for 1997 included depreciation related primarily to the
assets acquired and capital expenditures incurred in connection with the
Company's completed affiliations.
Amortization of Intangible Assets. Amortization of intangibles was $48,000
or 1.2% of net revenue for 1996, as compared with $645,000 or 1.2% of net
revenue for 1997. Amortization resulted from intangible assets recorded in
connection with the Company's nine affiliations and one acquisition completed
during 1997.
Interest Expense (Income), Net. Net interest income was $38,000 for 1996, as
compared with net interest expense of $563,000 for 1997. Interest income for
1996 resulted from earnings on proceeds received from the Company's private
sales of equity securities. Interest expense for 1997 resulted from borrowings
under the Company's credit facility, the issuance of subordinated notes and the
assumption of certain other debt in connection with completed affiliations.
Income Taxes. The Company incurred no income tax expense for 1996, as
compared with $124,000 for 1997. The net loss incurred for 1996 resulted in the
Company creating a net operating loss carryforward for financial statement
purposes. For 1997, the Company utilized a portion of its net operating loss
carryforward which resulted in only $124,000 of income tax expense.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Overview
The Company's net earnings amounted to $1,070,000 or a diluted loss per share
available to common stockholders of $(0.05) for 1997, as compared with net
earnings of $3,886,000 or diluted earnings per share of $0.54 for 1998. The
increase in net earnings resulted from incremental earnings provided from
completed acquisitions and affiliations and from internal growth.
Net Revenue. Net revenue increased from $53,270,000 for 1997 to $84,090,000
for 1998, an increase of approximately 58%. The increase in net revenue in 1998
is due primarily to the inclusion of revenue derived from service agreements
entered into in connection with the 1997 Transactions for the entire period and
from the 1998 Transactions. In addition, same market growth from the Company's
affiliates in Austin, Milwaukee and Minneapolis resulted from the addition and
expansion of the Company's facilities, the addition of dentists to the Company's
affiliated dental group network and increases in certain affiliates' fees. Net
revenue included expense reimbursements ($36,386,000 for 1997 as compared with
$56,278,000 for 1998), management service fees ($12,056,000 for 1997 as compared
with $19,138,000 for 1998) and revenue related to the arrangement of the
provision of care to patients and other revenue ($4,828,000 for 1997 as compared
with $8,674,000 for 1998). Expense reimbursements included rent expense
($3,476,000 for 1997 as compared with $5,590,000 for 1998) and other operating
expenses ($32,910,000 for 1997 as compared with $50,688,000 for 1998).
Management service fees included a monthly fee ($10,724,000 for 1997 as compared
with $17,306,000 for 1998) and an additional variable fee ($1,332,000 for 1997
as compared with $1,832,000 for 1998). Net revenue derived from the Company's
service agreement with Park Dental represented approximately 56% and 41% of the
Company's consolidated net revenue for 1997 and 1998, respectively.
Salaries and Benefits Expense. Salaries and benefits amounted to $28,438,000
or 53.4% of net revenue for 1997, as compared with $43,190,000 or 51.4% of net
revenue for 1998. The decrease in salaries and benefits as a percentage of net
21
<PAGE>
revenue resulted primarily from more efficient utilization of staff in existing
facilities, the regionalization of finance, operations and administrative staff
in certain markets and the acquisition of facilities with a generally lower
ratio of staffing costs to net revenue in their respective markets compared to
the existing base of facilities. These cost savings were partially offset by an
increase in the amount of expense related to the arrangement of the provision of
care to patients, which is at a higher percentage of net revenue.
Lab Fees and Dental Supplies Expense. Lab fees and dental supplies expense
increased from $6,435,000 or 12.1% of net revenue for 1997 to $10,796,000 or
12.8% of net revenue for 1998. Lab fees and dental supplies expense varies from
affiliate to affiliate and is affected by the volume and type of procedures
performed. The increase in lab fees and dental supplies as a percentage of net
revenue is attributable to a combination of the acquisition of facilities with a
generally higher ratio of lab fees and dental supplies expense to net revenue in
their respective markets compared to the existing base of facilities, rate
increases from certain lab providers and the outsourcing of certain lab work
which was previously handled in-house.
Office Occupancy Expense. Office occupancy expense amounted to $4,814,000
for 1997, as compared with $7,635,000 for 1998. As a percentage of net revenue,
these costs remained relatively consistent at 9.0% for 1997 and 9.1% for 1998.
Other Operating Expenses. Other expenses amounted to $6,264,000 or 11.8% of
net revenue for 1997, as compared with $6,840,000 or 8.1% of net revenue for
1998. Other costs decreased as a percentage of net revenue due primarily to the
reduction of certain expenses associated with the administration of a benefit
plan that was renegotiated, the regionalization of administrative functions in
certain markets, a reduction of the Minnesota Care Tax rate from 2.0% to 1.5%
and efficiencies from managing certain expenses, such as professional fees and
other costs associated with operating a stand alone dental group practice, on a
national level, as opposed to on a local level.
General Corporate Expenses. General corporate expenses were $3,337,000 or
6.3% of net revenue for 1997, as compared with $3,951,000 or 4.7% of net revenue
for 1998. The Company has built its management infrastructure in anticipation of
rapid growth. This included the hiring of key management and support staff in
the areas of finance, operations and information systems. In 1998, the Company
began to leverage these costs, resulting in a reduction of general corporate
expenses as a percentage of net revenue. This reduction was partially offset by
an increase in costs associated with being a public company. The level of
general corporate expenses is expected to continue to increase in the future as
the Company continues to expand its management infrastructure. However, it is
anticipated that these expenses will continue to decline as a percentage of net
revenue.
Depreciation. Depreciation expense was $1,580,000 or 3.0% of net revenue for
1997, as compared with $2,495,000 or 3.0% of net revenue for 1998. Depreciation
expense included depreciation related primarily to assets acquired and capital
expenditures associated with the addition of three new dental facilities in
Minneapolis and one new dental facility in Phoenix in 1998 and the addition of
new operatories in Austin, Milwaukee and Minneapolis throughout 1998.
Depreciation expense is expected to increase as a result of depreciable assets
acquired in connection with future acquisitions and affiliations and future
capital expenditures.
Amortization of Intangibles. Amortization of intangibles was $645,000 or
1.2% of net revenue for 1997, as compared with $1,732,000 or 2.1% of net revenue
for 1998. The increase in amortization resulted from intangible assets recorded
in connection with the Company's six affiliations and one acquisition completed
during 1997 and ten affiliations completed during 1998. The Company expects that
amortization of intangibles will increase in the future as a result of
intangibles recorded in connection with future acquisitions and affiliations.
Interest Expense, Net. Net interest expense was $563,000 or 1.1% of net
revenue for 1997, as compared with $1,085,000 or 1.3% of net revenue for 1998.
The increase in interest expense resulted primarily from increased average
borrowings under the Company's credit facility in 1998 as compared with 1997. In
addition, the issuance of subordinated notes in connection with the 1997 and
1998 Transactions contributed to higher interest expense in 1998.
Income Taxes. The Company incurred income tax expense of $124,000 for 1997,
as compared with $2,480,000 for 1998. In 1997, the Company utilized a portion of
its net operating loss carryforward which resulted in minimal income tax
expense. For 1998, the Company's effective tax rate was approximately 39%,
resulting in income tax expense of $2,480,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital needs, including cash used
for acquisitions and affiliations, capital expenditures and working capital,
from its sales of equity securities, borrowings under its revolving line of
credit and cash generated from operations.
22
<PAGE>
From November 1996 (the date of the Company's first dental group practice
affiliation) through December 31, 1998, the Company completed 19 dental group
practice affiliations for aggregate consideration of $42,530,000 in cash,
$6,778,000 in subordinated promissory notes, $1,015,000 in deferred payments,
1,848,588 shares of Common Stock and future contingent payments for one
affiliation based on a multiple of service fees received in excess of a
predetermined threshold for each of the three years ending May 31, 1999, 2000
and 2001. The Company's growth strategy depends in large measure on its ability
to affiliate with additional dental group practices. Although the Company has
affiliated with many dental group practices since its initial affiliation in
November 1996, there can be no assurance that additional affiliation candidates
can be identified, consummated or successfully integrated into the Company's
operations. The Company has used a combination of cash, common stock, and
subordinated debt as consideration for past acquisitions and affiliations and
plans to continue to use these sources in the future. In the event that the
Company's common stock does not maintain sufficient valuation or if potential
affiliation candidates are unwilling to accept the Company's securities as
consideration, the Company will be required to use more cash resources to
continue its affiliation program. In addition, if sufficient financing is not
available as needed on terms acceptable to the Company, the Company's
affiliation program could be adversely affected.
For the years ended December 31, 1997 and 1998, cash provided by operating
activities amounted to $3,991,000 and $9,771,000, respectively. The increase in
cash from operations resulted primarily from earnings generated from
acquisitions and affiliations, same market growth and expanded profit margins.
For the years ended December 31, 1997 and 1998, cash used in investing
activities amounted to $19,510,000 and $24,886,000, respectively. Cash used for
investing activities included cash used for acquisitions and affiliations and
for capital expenditures. Cash used for acquisitions, net of cash acquired, was
$14,878,000 for 1997 and $18,290,000 for 1998. Cash used for capital
expenditures was $3,212,000 and $5,074,000 for 1997 and 1998, respectively.
Capital expenditures for 1997 included costs associated with the addition of
dental facilities in Austin, Milwaukee and Minneapolis and the addition of new
operatories in Austin, Minneapolis and Pittsburgh. Capital expenditures for 1998
included costs associated with the addition of three new dental facilities in
Minneapolis, a new dental facility in Phoenix and the addition of new
operatories in Austin, Milwaukee and Minneapolis. The establishment of new
dental facilities and the expansion of existing dental facilities in the future
will require ongoing capital expenditures.
For the years ended December 31, 1997 and 1998, cash provided by financing
activities amounted to $14,358,000 and $12,531,000, respectively. Cash provided
by financing activities during 1997 resulted from borrowings under the Company's
revolving line of credit of $16,700,000, reduced by the repayment of certain
indebtedness and the payment of debt issuance costs and initial public offering
costs. Cash provided by financing activities in 1998 resulted primarily from net
proceeds received from the Company's initial public offering.
During the second quarter of 1998, the Company sold 2,587,500 shares of Common
Stock in an initial public offering ("IPO") at $15.00 per share. Net proceeds to
the Company after deducting underwriting discounts and commissions and offering
expenses totaled approximately $34,596,000. Such proceeds were used to (i)
redeem all the Series B Redeemable Preferred Stock, including unpaid dividends,
in the amount of $7,851,000, (ii) repay outstanding indebtedness under the
Company's revolving credit facility, including accrued interest, in the amount
of $20,651,000 and (iii) complete additional affiliation transactions. In
connection with the IPO, all 400,000 shares of Series A Convertible Preferred
Stock were converted to 2,399,995 shares of Common Stock.
In April 1997, the Company entered into a $30 million revolving line of credit
agreement with a bank. In December 1998, the Company amended its line of credit
to (i) increase the amount available under the line to $50 million, (ii) add two
additional banks, (iii) extend the maturity date and (iv) modify certain other
terms, including pricing. The credit facility is being used for general
corporate purposes including acquisitions and affiliations. Borrowings under
this line of credit bear interest at either prime or LIBOR plus a margin, at the
Company's option. The margin for LIBOR loans is based upon the Company's debt
coverage ratio and ranges up to 1.625%. In addition, the Company pays a
commitment fee of 0.25% of the average daily balance of the unused line.
Borrowings are limited to an availability formula based on adjusted EBITDA. The
credit facility is secured by a first lien on substantially all of the Company's
assets, including a pledge of the stock of the Company's subsidiaries. The
Company is also required to comply with certain financial and other covenants.
The line of credit matures in December 2001. The outstanding balance under this
line as of December 31, 1998 was $4,300,000.
The Company has a Shelf Registration Statement on file with the Securities and
Exchange Commission (Registration No. 333-56941) covering a total of 750,000
shares of Common Stock and $25,000,000 aggregate principal amount of
subordinated promissory notes to be issued in connection with future dental
group practice affiliations. As of December 31, 1998, 730,446 shares and
$24,540,000 of subordinated notes remain available.
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<PAGE>
The Company believes that cash generated from operations and amounts
available under its revolving credit facility will be sufficient to fund its
anticipated cash needs for working capital, capital expenditures and
acquisitions and affiliations for at least the next 12 months.
YEAR 2000 ISSUE
The Year 2000 issue is the result of certain computer programs being written
using two digits rather than four digits to define the year. Accordingly,
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than 2000. This could result in system failures
or miscalculations causing disruptions in operations, including the temporary
inability to process transactions, send invoices or statements, or engage in
similar normal business activities. The Company utilizes software and related
computer technologies essential to its operations.
All significant operating systems, the general ledger system and network
communication software system utilized by the Company are either already Year
2000 compliant or are expected to be Year 2000 compliant upon installation of
available patches or upgrades at minimal to no cost. The general ledger system
has already been satisfactorily tested for compliance by the software vendor.
The Company expects that all necessary upgrades for significant operating
systems and network communication software will be completed by the end of the
second quarter of 1999.
The Company also uses various dental practice management software systems in
its affiliated dental group practices. In particular, the Company's proprietary
practice management system, Comdent, which is currently used at 34 of the
Company's dental facilities, is Year 2000 compliant. The Company intends, when
appropriate, to convert its current and future affiliated dental group practices
to Comdent. In general, the other practice management systems utilized by the
Company are commercially available systems that are either already Year 2000
compliant or scheduled for Year 2000 compliance by the end of the second quarter
of 1999. Preliminary compliance testing has been done by the Company on Comdent
and other significant practice management systems and the Company intends to
complete all such testing by the end of the second quarter of 1999. Any systems
deemed to be non-compliant at such time will be converted to Year 2000 compliant
systems by the end of 1999. As part of its due diligence in connection with
future affiliations, the Company will perform a review of the dental practice
management software systems being used by those dental practices for Year 2000
compliance. Continual system upgrades and conversion of dental practice
management systems to preferred systems of the Company is an integral part of
the Company's overall information systems strategy. The Company believes that
costs specifically associated with Year 2000 compliance issues, if any, will not
be material to the Company's financial position or results of operations.
The Company is still in the process of identifying potential compliance issues
with non-information technology ("non-IT") systems such as phone systems and
certain other equipment. The Company does not believe the failure of such
systems would have a material adverse effect on the Company's operations. Non-IT
systems that are not compliant, if any, are expected to be upgraded or replaced
by the end of the second quarter of 1999. The costs of such upgrades are not
expected to be material to the Company's financial position or results of
operations.
Year 2000 issues also relate to third parties with which the Company has
significant relationships. In particular, the Company's affiliated dental
groups have contracts with third party payors to provide dental services in
exchange for capitation, fee-for-service and PPO payments. These third party
payors have systems that may be vulnerable to Year 2000 issues. The Company has
identified and initiated discussions with all significant third party payors to
determine their compliance status and develop appropriate contingency plans.
There can be no assurance, however, that the systems of these significant third
party payors will be Year 2000 compliant on a timely basis. Year 2000 problems
experienced by such third party payors could result in late payments received
under the payor contracts and related cash flow problems. Potential contingency
plans may include temporary advancing of funds to the Company's affiliates by
third party payors unable to process claims on a timely basis and the direct
billing of patients in lieu of reimbursements under the payor contracts. In
addition, the Company could, if necessary, use borrowings under its revolving
credit facility to support working capital obligations in the event of payment
problems from third party payors. Due to the dependence of the Company's
affiliated dental groups on third party payor relationships, Year 2000 system
failures of such payors could have a material adverse effect on the Company's
cash flows and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................... 26
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... 27
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998................. 28
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997
and 1998.................................................................................................. 29
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998................. 30
Notes to Consolidated Financial Statements................................................................. 31
</TABLE>
FINANCIAL STATEMENT SCHEDULES
Not applicable.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Dental Partners, Inc.:
We have audited the accompanying consolidated balance sheets of American
Dental Partners, Inc. (the "Company") as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Dental Partners, Inc. as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 12, 1999
26
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AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 4,675 $ 2,091
Accounts receivable......................................................................... 101 186
Receivables due from affiliated practices................................................... 3,207 4,579
Inventories................................................................................. 387 585
Prepaid expenses and other receivables...................................................... 1,631 1,466
Deferred income taxes....................................................................... - 65
-------- --------
Total current assets.................................................................. 10,001 8,972
-------- --------
Property and equipment, net....................................................................... 8,752 12,943
-------- --------
Non-current assets:
Intangible assets, net...................................................................... 28,975 47,152
Deferred income taxes....................................................................... - 1,120
Other assets................................................................................ 231 348
-------- --------
Total non-current assets.............................................................. 29,206 48,620
-------- --------
Total assets.......................................................................... $47,959 $70,535
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................ $ 2,618 $ 3,010
Accrued compensation, benefits and taxes.................................................... 3,001 3,426
Accrued expenses............................................................................ 2,666 3,377
Income taxes payable........................................................................ 183 805
Current maturities of debt.................................................................. 774 1,079
-------- --------
Total current liabilities............................................................. 9,242 11,697
-------- --------
Non-current liabilities:
Long-term debt.............................................................................. 21,253 9,980
Deferred income taxes....................................................................... 231 -
Other liabilities........................................................................... 27 553
-------- --------
Total non-current liabilities......................................................... 21,511 10,533
-------- --------
Total liabilities..................................................................... 30,753 22,230
-------- --------
Series A convertible preferred stock, par value $0.01 per share, 400,000 shares authorized,
issued and outstanding as of December 31, 1997; no shares authorized, issued or
outstanding as of December 31, 1998............................................................ 8,641 -
Series B redeemable preferred stock, par value $0.01 per share, 70,000 shares authorized,
issued and outstanding as of December 31, 1997; no shares authorized, issued or
outstanding as of December 31, 1998............................................................ 7,656 -
Stockholders' equity:
Preferred stock, par value $0.01 per share, 530,000 and 1,000,000 shares authorized,
no shares issued or outstanding.......................................................... - -
Common stock, par value $0.01 per share, 25,000,000 shares authorized, 2,394,212 and
7,436,066 shares issued and outstanding.................................................. 24 74
Additional paid-in capital.................................................................. 2,307 45,742
Unearned compensation....................................................................... (49) (24)
Retained earnings (accumulated deficit)..................................................... (1,373) 2,513
-------- --------
Total stockholders' equity............................................................ 909 48,305
-------- --------
Commitments and contingencies
Total liabilities and stockholders' equity.................................................. $ 47,959 $ 70,535
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net revenue...................................................................... $ 3,933 $53,270 $84,090
------- ------- -------
Operating expenses:
Salaries and benefits....................................................... 2,098 28,438 43,190
Lab fees and dental supplies................................................ 534 6,435 10,796
Office occupancy............................................................ 389 4,814 7,635
Other operating expenses.................................................... 773 6,264 6,840
General corporate expenses.................................................. 2,395 3,337 3,951
Depreciation................................................................ 177 1,580 2,495
Amortization of intangible assets........................................... 48 645 1,732
------- ------- -------
Total operating expenses............................................... 6,414 51,513 76,639
------- ------- -------
Earnings (loss) from operations.................................................. (2,481) 1,757 7,451
Interest expense (income), net.............................................. (38) 563 1,085
------- ------- -------
Earnings (loss) before income taxes.............................................. (2,443) 1,194 6,366
Income taxes................................................................ - 124 2,480
------- ------- -------
Net earnings (loss)......................................................... $(2,443) $ 1,070 $ 3,886
======= ======= =======
Net earnings (loss) per common share:
Basic....................................................................... $ (3.45) $ (0.05) $ 0.59
Diluted..................................................................... $ (3.45) $ (0.05) $ 0.54
Weighted average common shares outstanding:
Basic....................................................................... 768 2,273 5,907
Diluted..................................................................... 768 2,273 6,867
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ Paid-in Unearned Retained Stockholders'
Shares Amount Capital Compensation Earnings Equity
------ ------ ------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996................. - $ - $ - $ - $ - $ -
Issuance of common stock for
acquisitions and affiliations...... 1,613 16 2,673 - - 2,689
Sale of common stock.................. 600 6 191 (97) - 100
Amortization of unearned
compensation....................... - - - 23 - 23
Dividends on Series A convertible
preferred stock.................... - - (109) - - (109)
Dividends on Series B redeemable
preferred stock.................... - - (96) - - (96)
Net loss.............................. - - - - (2,443) (2,443)
----- ------- ------- ----- ------- -------
Balance at December 31, 1996............... 2,213 22 2,659 (74) (2,443) 164
Issuance of common stock for
acquisitions and affiliations...... 181 2 840 - - 842
Amortization of unearned
compensation....................... - - - 25 - 25
Dividends on Series A convertible
preferred stock.................... - - (632) - - (632)
Dividends on Series B redeemable
preferred stock.................... - - (560) - - (560)
Net earnings.......................... - - - - 1,070 1,070
----- ------- ------- ----- ------- -------
Balance at December 31, 1997............... 2,394 24 2,307 (49) (1,373) 909
Issuance of common stock in
initial public offering, net....... 2,588 26 34,570 - - 34,596
Issuance of common stock for
acquisitions and affiliations...... 54 - 443 - - 443
Amortization of unearned
compensation....................... - - - 25 - 25
Dividends on Series A convertible
preferred stock.................... - - (200) - - (200)
Dividends on Series B redeemable
preferred stock.................... - - (195) - - (195)
Conversion of Series A convertible
preferred stock to common stock 2,400 24 8,817 - - 8,841
Net earnings.......................... - - - - 3,886 3,886
----- ------- ------- ----- ------- -------
Balance at December 31, 1998............... 7,436 $ 74 $45,742 $ (24) $ 2,513 $48,305
===== ======= ======= ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................... $(2,443) $ 1,070 $ 3,886
Adjustments to reconcile net earnings (loss) to net cash provided by
(used for) operating activities:
Depreciation....................................................... 177 1,580 2,495
Amortization of intangible assets.................................. 48 645 1,732
Other amortization................................................. 23 65 106
Deferred income taxes.............................................. - (32) 1,466
Changes in assets and liabilities, net of acquisitions and
affiliations:
Accounts receivable........................................... 1,417 1,871 864
Receivables due from affiliated practices..................... (1,707) (1,801) (764)
Other current assets.......................................... 237 509 (384)
Accounts payable and accrued expenses......................... 941 (314) (418)
Accrued compensation, benefits and taxes...................... (232) 427 118
Income taxes payable.......................................... - (29) 670
------- ------- -------
Net cash provided by (used for) operating activities....... (1,539) 3,991 9,771
------- ------- -------
Cash flows from investing activities:
Acquisitions and affiliations, net of cash acquired.................... (6,632) (14,878) (18,290)
Capital expenditures, net.............................................. (386) (3,212) (5,074)
Other.................................................................. 140 (1,420) (1,522)
------- ------- -------
Net cash used for investing activities..................... (6,878) (19,510) (24,886)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of Series A convertible preferred stock......... 7,900 - -
Proceeds from issuance of Series B redeemable preferred stock.......... 7,000 - -
Proceeds from issuance of common stock................................. 100 - -
Borrowings under (repayments of) revolving line of credit, net......... - 16,700 (12,400)
Repayment of borrowings................................................ (747) (1,543) (2,254)
Proceeds from issuance of common stock in initial public offering, net
of underwriting discounts and commissions............................ - - 36,096
Redemption of Series B redeemable preferred stock...................... - - (7,851)
Payment of initial public offering costs............................... - (557) (943)
Payment of debt issuance costs......................................... - (242) (117)
------- -------- -------
Net cash provided by financing activities.................. 14,253 14,358 12,531
------- -------- -------
Increase (decrease) in cash and cash equivalents........................... 5,836 (1,161) (2,584)
Cash and cash equivalents at beginning of year............................. - 5,836 4,675
------- -------- -------
Cash and cash equivalents at end of year................................... $ 5,836 $ 4,675 $ 2,091
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net............................ $ 3 $ 459 $ 898
======= ======== =======
Cash paid during the year for income taxes, net........................ $ - $ 185 $ 348
======= ======== =======
Supplemental disclosure of non-cash information:
Dividends accrued on Series A convertible preferred stock and
Series B redeemable preferred stock.................................. $ 205 $ 1,192 $ 395
======= ======== =======
Conversion of Series A convertible preferred stock to common stock..... $ - $ - $ 8,841
======= ======== =======
Acquisitions and affiliations:
Assets acquired........................................................ $20,099 $24,693 $26,938
Liabilities assumed and issued......................................... (10,063) (7,054) (8,109)
Common stock issued.................................................... (2,689) (842) (443)
------- ------- -------
Cash paid.............................................................. 7,347 16,797 18,386
Less cash acquired..................................................... (715) (1,919) (96)
------- ------- -------
Net cash paid for acquisitions and affiliations............ $ 6,632 $14,878 $18,290
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(1) DESCRIPTION OF BUSINESS
American Dental Partners, Inc. (the "Company") was formed in December 1995
to provide management services to dental practices and commenced operations in
January 1996. The Company acquires substantially all the assets of the dental
practices with which it affiliates, except those required by law to be owned or
maintained by dentists (such as third party contracts, certain governmental
receivables and patient records), and enters into long-term service agreements
with these affiliated dental practices. The Company provides all services
necessary for the administration of the non-clinical aspects of the dental
operations. Services provided to the affiliated dental practices include
assistance with information systems, budgeting, financial reporting, facilities
management, third-party payor contracting, supplies and equipment procurement,
billing and collecting accounts receivable, marketing and recruiting, hiring and
training support staff.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting. The Company does not own any interests in or
control the activities of the affiliated dental practices. Accordingly, the
consolidated financial statements of the affiliated dental practices are not
consolidated with those of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Prior Period Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for the year ended December 31, 1997 in order to conform with the
December 31, 1998 presentation.
Use of Estimates
The preparation of these consolidated 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 at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents.
31
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Fair Value of Financial Instruments
The Company believes the carrying amount of cash and cash equivalents,
accounts receivable, receivables due from affiliated practices, accounts payable
and accrued expenses approximate fair value because of the short-term nature of
these items. The carrying amount of long-term debt approximates fair value
because the interest rates approximate rates at which similar types of borrowing
arrangements could be obtained by the Company.
Net Revenue
The Company's net revenue represents the aggregate amounts charged to
affiliated dental practices pursuant to the terms of the service agreements.
Under such agreements, the affiliated dental practices reimburse the Company for
expenses incurred on their behalf in connection with the operation and
administration of the dental facilities and pay fees to the Company for its
management services. The Company's service fees generally consist of a fixed
monthly fee and an additional variable fee. Under certain service agreements,
the Company's service fees consist of a variable monthly fee which is based upon
a specified percentage. Additionally, the Company's net revenue includes amounts
from third party payors related to the arrangement of the provision of care to
patients. The Company records all revenue monthly as earned.
Inventories
Inventories consist primarily of dental supplies and are stated at the lower
of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
related assets which are 30-40 years for buildings, 3-12 years for equipment and
5-7 years for furniture and fixtures.
Property and equipment under capital leases are stated at the present value of
minimum lease payments at inception of the lease. Equipment held under capital
leases and leasehold improvements are amortized over the shorter of the lease
term or estimated useful life of the asset. Amortization of assets subject to
capital leases is included in depreciation expense.
Intangible Assets
Identifiable intangible assets result from service agreements with the
affiliated dental groups and goodwill associated with the Company's acquisition.
The estimated fair value of the service agreements is the excess of the purchase
price over the estimated fair value of the tangible assets acquired and
liabilities assumed of dental practices. Intangible assets associated with
service agreements and goodwill are amortized over 25 years. In the event a
service agreement is terminated, the related affiliated dental practice is
generally required to purchase, at the Company's option, the unamortized balance
of intangible assets at the current book value, as well as all related other
assets associated with the affiliated dental practice. Accumulated amortization
amounted to $28,000, $673,000 and $2,405,000 at December 31, 1996, 1997 and
1998, respectively.
32
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The Company reviews the carrying value of intangible assets on an entity by
entity basis to determine if facts and circumstances exist which would suggest
that the intangible assets may be impaired or that the amortization period needs
to be modified. Among the factors the Company considers in making the evaluation
are changes in the practices' market position, reputation, profitability and
geographical penetration. If conditions are present which indicate impairment is
probable, the Company will prepare a projection of the undiscounted cash flows
of the specific practice and determine if the intangible assets are recoverable
based on these undiscounted cash flows. If impairment is indicated, then an
adjustment will be made to reduce the carrying amount of the intangible assets
to their fair value.
Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of
changes in the tax rate is recognized in operations in the period that includes
the enactment date.
Stock Option Plans
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," allows companies to recognize expense for the
fair value of stock-based awards or to continue to apply the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and disclose the
effects of SFAS 123 as if the fair-value-based method defined in SFAS No. 123
had been applied. Under APB Opinion No. 25, compensation expense is recognized
only if on the measurement date the fair value of the underlying stock exceeds
the exercise price. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123.
Earnings Per Share
Earnings per share are computed based on Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent
stock arrangements). Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings.
Recently Issued Financial Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
requires adoption by the Company by January 1, 1999. SOP 98-1 provides guidance
on accounting for costs of computer software developed or obtained for internal
use.
In April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities," which requires adoption by the
Company by January 1, 1999. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of start-
up activities and organization costs to be expensed as incurred.
Adoption of these statements is not expected to have a material impact on
the Company's consolidated financial statements.
33
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(3) ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts Receivable
Accounts receivable represent amounts due from patients and third party payors
for dental services provided by affiliated dental practices that were
outstanding at the time the Company acquired the assets of the practice and
amounts due from third party payors related to the arrangement of the provision
of care to patients.
Receivables Due From Affiliated Dental Practices
Receivables due from affiliated practices represent amounts due pursuant to
the terms of the service agreements as described below.
Revenue--Affiliated Dental Practices
The affiliated dental practices record revenue at established rates reduced by
contractual adjustments and allowances for doubtful accounts to arrive at
adjusted gross revenue. Contractual adjustments represent the difference between
gross billable charges at established rates and the portion of those charges
reimbursed pursuant to certain third party payor contracts .
The Company does not consolidate the financial statements of its affiliated
dental practices with those of the Company. The adjusted gross revenue and
amounts retained by the affiliated dental practices are presented below for
illustrative purposes only (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- -----------------------
Park All Affiliated Park All Affiliated Park All Affiliated
Dental Practices Dental Practices Dental Practices
------ -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Adjusted gross revenue-affiliated dental practices... $4,459 $4,920 $38,515 $64,492 $45,142 $105,438
Amounts retained by affiliated dental practices...... 858 1,025 8,461 16,050 10,728 30,022
------ ------ ------- ------- ------- --------
Net revenue earned by the Company under service
agreements.......................................... $3,601 $3,895 $30,054 $48,442 $34,414 $ 75,416
====== ====== ======= ======= ======= ========
</TABLE>
34
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Net Revenue
The Company's net revenue represents the aggregate amounts charged to
affiliated dental practices pursuant to the terms of the service agreements.
Under such agreements, the affiliated dental practices reimburse the Company for
actual expenses incurred on their behalf in connection with the operation and
administration of the dental facilities and pay fees to the Company for its
management services. The Company's service fees generally consist of a fixed
monthly fee and an additional variable fee. The fixed monthly fee is determined
prior to each affiliation and annually thereafter by agreement of the Company
and the affiliated dental group in a formal budgeting process. To the extent
that there is operating income after payment of the fixed monthly fee,
reimbursement of expenses incurred in connection with the operation and
administration of the dental facilities and payment of provider expenses, an
additional variable fee is paid to the Company in the amount of such excess up
to budgeted operating income and 50% of such excess over budgeted operating
income. Under certain service agreements, the Company's service fees consist of
a variable monthly fee which is based upon a specified percentage of the amount
by which the PC's adjusted gross revenue exceeds expenses incurred in connection
with the operation and administration of the dental facilities. Additionally,
the Company's net revenue includes amounts from third party payors related to
the arrangement of the provision of care to patients. The Company records its
revenue monthly as earned.
For the years ended December 31, 1996, 1997 and 1998, net revenue consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Reimbursement of expenses:
Rent expense................................................................. $ 267 $ 3,476 $ 5,590
Other operating expenses..................................................... 2,908 32,910 50,688
------ ------- -------
Total reimbursement of expenses........................................... 3,175 36,386 56,278
------ ------- -------
Service fees:
Monthly fee.................................................................. 720 10,724 17,306
Additional variable fee...................................................... - 1,332 1,832
------ ------- -------
Total service fees........................................................ 720 12,056 19,138
------ ------- -------
Net revenue earned by the company under service agreements................ 3,895 48,442 75,416
Revenue related to the arrangement of the provision of care to patients........ 38 4,828 8,674
------ ------- -------
Total net revenue......................................................... $3,933 $53,270 $84,090
====== ======= =======
</TABLE>
(4) ACQUISITIONS AND AFFILIATIONS
During the year ended December 31, 1997, the Company acquired substantially
all the assets of six dental practices and a related entity associated with one
of these practices, Orthocare, Ltd., (now a wholly-owned subsidiary), which
contracts with third party payors and orthodontic providers to arrange for the
provision of orthodontic care to patients insured by such third party payors.
The Company simultaneously entered into 40-year service agreements with four of
the affiliated dental groups (two practices joined existing affiliates). The
aggregate purchase price paid in connection with these transactions consisted of
approximately $16.8 million in cash, $2.4 million in subordinated promissory
notes and 180,834 shares of Common Stock. All transactions completed in 1997 are
referred to as the "1997 Transactions."
During the year ended December 31, 1998, the Company acquired substantially
all the assets of ten dental group practices and simultaneously entered into 40-
year service agreements with four of the affiliated dental groups (six practices
joined existing affiliates). The aggregate purchase price paid in connection
with these transactions consisted of approximately $18.4 million in cash, $2.2
million in subordinated promissory notes, $1.0 million in deferred payments,
54,354 shares of Common Stock and future contingent payments for one affiliation
based on a multiple of service fees received in excess of a predetermined
threshold for each of the three years ending May 31, 1999, 2000 and 2001. All
transactions completed in 1998 are referred to as the "1998 Transactions."
35
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For The Years Ended December 31, 1996, 1997 and 1998
The 1997 and 1998 Transactions are as follows:
<TABLE>
<CAPTION>
Date Affiliated Group Location(s)
---- ---------------- -----------
<S> <C> <C>
March 1997............................... Malcolm R. Scott, D.D.S. San Marcos, TX
March 1997............................... Lakeside Dental Care Metairie, LA
May 1997................................. Soster Dental Group Pittsburgh, PA
July 1997................................ Northpoint Dental Group Milwaukee, WI
October 1997............................. Wilkens Dental Group Milwaukee, WI
October 1997............................. Orthocare Group Minneapolis, MN
January 1998............................. Associated Dental Care Phoenix and Tucson, AZ
April 1998............................... Family Care Dental Centers Janesville, Kenosha and Racine, WI
April 1998............................... John E. Carey, D.D.S. and James J. Peterman, D.D.S. Madison, WI
April 1998............................... Leroy S. Crapanzano, D.D.S. Hammond, LA
June 1998................................ Reston Dental Group Reston, VA
June 1998................................ TSC Dental Centers Houston, TX
July 1998................................ Indiana Dental Group Indiana, PA
September 1998........................... Mintz & Pincus Dental Group Oxon Hill and Waldorf, MD
September 1998........................... Westmore Dental Group Mt. Pleasant, PA
November 1998............................ St. Croix Valley Orthodontics Hudson, WI
</TABLE>
The accompanying consolidated financial statements include the results of
operations under the service agreements from the date of acquisition. The excess
of the purchase price associated with all of the 1997 and 1998 Transactions over
the estimated fair value of net assets acquired has been recorded as intangible
assets which are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Fair value of total consideration paid................................................................... $42,081
Fair value of net tangible assets acquired and liabilities assumed....................................... 148
-------
Excess of fair value of the consideration paid over the fair value of net tangible assets acquired....... $41,933
=======
The excess of the fair value of the consideration paid over the fair value of the net tangible assets
acquired has been allocated as follows:
Service agreements associated with affiliations.......................................................... $38,573
Goodwill associated with the acquisition................................................................. 3,360
-------
$41,933
=======
</TABLE>
If the acquisition of Orthocare, Ltd., which was accounted for as a purchase,
had occurred on January 1, 1996, the Company's unaudited net revenue, earnings
(loss) before income taxes, net earnings (loss) and net loss per share would
have been $7,661,000, $(2,465,000), $(2,465,000), and $(3.24) per share,
respectively, for the year ended December 31, 1996 and $56,346,000, $1,248,000,
$1,118,000, and $(0.03) per share, respectively, for the year ended December 31,
1997. Such pro forma financial information reflects certain adjustments,
including amortization of intangibles, income tax effects and an increase in the
weighted average shares outstanding. This unaudited pro forma information does
not necessarily reflect the results of operations that would have occurred had
the acquisition taken place at the beginning of 1996 and is not necessarily
indicative of results that may be obtained in the future.
Subsequent to December 31, 1998, the Company acquired substantially all the
assets of two dental practices and simultaneously entered into a 40-year service
agreement with one of the affiliated dental groups (the dentists of the other
dental group joined an existing affiliate). The aggregate purchase price paid in
connection with these transactions consisted of approximately $3.9 million in
cash, $0.1 million in subordinated promissory notes and $0.1 million in deferred
payments. These transactions are referred to as the "1999 Transactions."
36
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Land, buildings and leasehold improvements...................... $ 6,376 $ 9,850
Equipment....................................................... 6,191 9,938
Furniture and fixtures.......................................... 2,868 3,461
------- --------
Total property and equipment................................. 15,435 23,249
Less accumulated depreciation................................... (6,683) (10,306)
------- --------
Property and equipment, net.................................. $ 8,752 $ 12,943
======= ========
</TABLE>
Operating Leases
The Company is obligated under non-cancelable operating leases for premises
and equipment expiring in various years through the year 2009. Rent expense for
the years ended December 31, 1996, 1997 and 1998 amounted to $319,000,
$3,926,000 and $6,248,000, respectively, of which $267,000, $3,476,000 and
$5,590,000 were reimbursed under service agreements. The Company has several
leases with stockholders that were assumed in connection with its affiliation
transactions. Such amounts are generally reimbursed pursuant to the terms of the
service agreements.
Minimum future rental payments under non-cancelable operating leases and
amounts to be reimbursed under service agreements as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
Amount to be
Reimbursed
Under
Total Amount Service Net
Due Agreements Amount
------------ ------------ ------
<S> <C> <C> <C>
1999............................................................ $ 5,817 $ 5,268 $ 549
2000............................................................ 5,152 4,676 476
2001............................................................ 4,486 4,056 430
2002............................................................ 3,967 3,613 354
2003............................................................ 3,333 3,184 149
Thereafter...................................................... 13,836 13,836 -
------- ------- ------
Total minimum lease payments.................................. $36,591 $34,633 $1,958
======= ======= ======
</TABLE>
37
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(6) INCOME TAXES
Income tax expense (benefit) for the years ended December 31 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................... $ - $ 54 $ 704
State...................................... - 102 308
--------- -------- --------
- 156 1,012
--------- -------- --------
Deferred:
Federal.................................... - (32) 1,249
State...................................... - - 217
--------- -------- --------
- (32) 1,466
--------- -------- --------
Total income taxes....................... $ - $ 124 $ 2,478
========= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities as of December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Operating loss and other carryforwards................................. $ 989 $ 91
Property and equipment................................................. 566 632
Organization and start-up costs........................................ 243 630
Accrued expenses and other liabilities................................. 730 524
------- ------
Total gross deferred tax assets........................................ 2,528 1,877
Valuation allowance.................................................... (2,454) -
------- ------
Total deferred tax assets............................................. 74 1,877
------- ------
Deferred tax liabilities:
Intangibles............................................................ (16) (389)
Other.................................................................. (289) (303)
------- ------
Total deferred tax liabilities........................................ (305) (692)
------- ------
Net deferred tax assets (liabilities)................................. $ (231) $1,185
======= ======
</TABLE>
The valuation allowance for deferred tax assets was $2,454,000 and $0 as of
December 31, 1997 and 1998, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996, 1997 and 1998 was an increase
of $3,062,000, a decrease of $608,000 and a decrease of $2,454,000,
respectively. The valuation allowance was reversed due to the Company's taxable
earnings in 1998 and management's assessment that it is more likely than not
that the remaining net deferred tax assets will be realized through future
taxable earnings. The reversal of the valuation allowance attributable to
acquired deferred tax assets reduced intangible assets by $2,083,000. The
remaining reversal of the valuation allowance provided a tax benefit of
$371,000 in the Company's consolidated statement of operations for the year
ended December 31, 1998.
38
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The net deferred tax assets (liabilities) consisted of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------------- -------------------------
Federal State Total Federal State Total
------- ----- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Current................................. $ 354 $ 95 $ 449 $ 49 $ 16 $ 65
Non-current............................. 1,457 622 2,079 1,250 562 1,812
Valuation allowance..................... (1,807) (647) (2,454) - - -
------- ----- ------- ------ ----- ------
Total deferred tax assets............ 4 70 74 1,299 578 1,877
------- ----- ------- ------ ----- ------
Deferred tax liabilities:
Current................................. - - - - - -
Non-current............................. (203) (102) (305) (497) (195) (692)
------- ----- ------- ------ ----- ------
Total deferred tax liabilities....... (203) (102) (305) (497) (195) (692)
------- ----- ------- ------ ----- ------
Net deferred tax assets (liabilities) $ (199) $ (32) $ (231) $ 802 $ 383 $1,185
======= ===== ======= ====== ===== ======
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $2,092,000 which were utilized in
full to offset Federal taxable income in 1998.
The following table reconciles the Federal statutory income tax rate to the
Company's effective income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income taxes at Federal statutory rate........................... (34.0)% 34.0% 34.0%
State taxes, net of Federal benefit.............................. (6.0) 4.0 5.5
Valuation reserve and other changes.............................. 33.0 (36.6) (5.0)
Intangibles and other permanent differences...................... 7.0 9.0 4.5
----- ----- ----
Effective income tax rate........................................ - % 10.4% 39.0%
===== ===== ====
</TABLE>
(7) DEBT
Long-term debt and capital lease obligations consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Revolving line of credit advances, collateralized by substantially all assets of the
Company, all at a LIBOR-based rate of approximately 6.6%............................ $16,700 $ 4,300
Mortgages payable, secured, interest rates ranging from 8.6% to 8.8% payable in
installments through 2015........................................................... 727 660
Note payable, unsecured, interest rate of 8.5% payable in installments, maturing
in 2004............................................................................. 45 40
Subordinated notes payable to stockholders and former owners, bearing interest
at 7%, maturing through 2005........................................................ 4,308 5,894
Capital lease obligations............................................................. 247 165
------- -------
Total long-term debt and capital lease obligations.................................... 22,027 11,059
Less current maturities............................................................... 774 1,079
------- -------
Long-term debt and capital lease obligations, excluding current maturities............ $21,253 $ 9,980
======= =======
</TABLE>
39
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Annual maturities of long-term debt and future minimum lease payments under
capital leases as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Long-term Capital
Debt Leases
---- ------
<S> <C> <C>
1999.................................................... $ 1,029 $ 63
2000.................................................... 1,052 50
2001.................................................... 5,377 50
2002.................................................... 1,104 31
2003.................................................... 1,071 -
Thereafter.............................................. 1,261 -
------- ----
Total payments....................................... $10,894 194
=======
Less amounts representing interest...................... 29
----
Total obligations under capital leases.................. $165
====
</TABLE>
Revolving Line of Credit
In April 1997, the Company entered into a $30 million revolving line of
credit agreement with a bank. In December 1998, the Company amended its line of
credit to (i) increase the amount available under the line to $50 million, (ii)
add two additional banks, (iii) extend the maturity date and (iv) modify certain
other terms, including pricing. The credit facility is being used for general
corporate purposes including acquisitions and affiliations. Borrowings under
this line of credit bear interest at either prime or LIBOR plus a margin, at the
Company's option. The margin for LIBOR loans is based upon the Company's debt
coverage ratio and ranges up to 1.625%. In addition, the Company pays a
commitment fee of 0.25% of the average daily balance of the unused line.
Borrowings are limited to an availability formula based on adjusted EBITDA. The
credit facility is secured by a first lien on substantially all of the Company's
assets, including a pledge of the stock of the Company's subsidiaries. The
Company is also required to comply with certain financial and other covenants.
The line of credit matures in December 2001.
(8) STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $0.01 par value. At the closing of the initial public offering, 400,000
shares of Series A Convertible Preferred Stock (which were converted into
2,399,995 shares of Common Stock) and 70,000 shares of Series B Redeemable
Preferred Stock (which were redeemed for cash) were restored to the status of
undesignated preferred stock available for issuance.
Preferred Stock may be issued in one or more series as determined by the
Board of Directors without further stockholder approval, and the Board or
Directors is authorized to fix and determine the terms, limitations, and
relative rights and preferences of such Preferred Stock, and to fix and
determine the variations among series of Preferred Stock. Any new Preferred
Stock issued would have priority over the Common Stock with respect to dividends
and other distributions, including the distribution of assets upon liquidation
and dissolution. Such Preferred Stock may be subject to repurchase or redemption
by the Company. The Board of Directors, without stockholder approval, could
issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of the holders of Common Stock and the issuance of
which, could be used by the Board of Directors in defense of a hostile takeover
of the Company. As of December 31, 1998, there were no shares of Preferred Stock
issued or outstanding.
40
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Common Stock
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$0.01 par value, of which 2,394,212 and 7,436,066 shares were issued and
outstanding at December 31, 1997 and 1998, respectively. In January and February
of 1996, the Company sold 300,000 shares of its Common Stock for $100,000.
Additionally, in January 1996, the Company sold 300,000 shares of its Common
Stock, which were subject to certain restrictions, for $500. In connection with
this transaction, the Company is recording compensation expense ratably as the
restrictions lapse. Compensation expense amounted to $22,809, $24,884 and
$24,888 for the years ended December 31, 1996, 1997 and 1998, respectively.
On November 7, 1997, the Company approved a 6-for-1 split of the Company's
Common Stock effected in the form of a stock dividend. All share and per share
amounts in the accompanying consolidated financial statements have been
retroactively restated to reflect this split.
Initial Public Offering
During the second quarter of 1998, the Company sold 2,587,500 shares of
Common Stock in an initial public offering ("IPO") at $15.00 per share. Net
proceeds to the Company after deducting underwriting discounts and commissions
and offering expenses totaled approximately $34,596,000. Such proceeds were used
to (i) redeem all the Series B Redeemable Preferred Stock, including unpaid
dividends, in the amount of $7,851,000, (ii) repay outstanding indebtedness
under the Company's revolving credit facility, including accrued interest, in
the amount of $20,651,000 and (iii) complete additional affiliation
transactions.
Dividend Restriction
The Company has not paid any cash dividends on its Common Stock and does not
plan to pay any cash dividends on its Common Stock in the foreseeable future.
Additionally, the terms of the Company's revolving credit facility prohibit it
from paying dividends or making other payments with respect to its Common Stock
without the lenders' consent.
(9) STOCK OPTION PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), provides
for the grant of stock options to key employees. The 1996 Plan permits the
granting of options that qualify as incentive stock options and non-qualified
options. The exercise price of such options is no less than the fair market
value of the Common Stock at the time of grant. Options granted pursuant to the
1996 Plan expire ten years after the date of grant. At December 31, 1998,
options for a total of 973,246 shares were reserved for issuance and options for
731,232 shares were outstanding under this Plan.
41
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 Time Accelerated Restricted Stock Option Plan
The Company's 1996 Time Accelerated Restricted Stock Option Plan, as amended
("TARSOP Plan"), provides for the grant of stock options to key employees. Only
non-qualified options may be granted pursuant to the TARSOP Plan. The exercise
price of such options is no less than the fair market value of the Common Stock
at the time of grant. These options vest at the end of the ninth year, but are
subject to accelerated vesting based on achievement of certain performance
measures. The total number of shares subject to the TARSOP is 360,360. Options
to purchase all such shares have been granted and became exercisable at the
completion of the IPO.
1996 Affiliate Stock Option Plan
The Company's 1996 Affiliate Stock Option Plan, as amended (the "Affiliate
Plan"), provides for the grant of stock options to certain persons associated
with the affiliated dental practices. Only non-qualified options may be granted
pursuant to the Affiliate Plan. The exercise price of such options is no less
than the fair market value of the Common Stock at the time of grant. Options
granted pursuant to the Affiliate Plan expire ten years after the date of grant.
At December 31, 1998, options for a total of 110,000 shares were reserved for
issuance and options for 89,586 shares were outstanding under this Plan.
1996 Directors Stock Option Plan
The Company's 1996 Directors Stock Option Plan, as amended (the "Directors
Plan"), provides for the granting of options to outside directors. Only non-
qualified options may be granted pursuant to the Directors Plan. The exercise
price of such options is no less than the fair market value of the Common Stock
at the time of grant. Options granted pursuant to the Directors Plan expire ten
years after the date of grant. At December 31, 1998, options for a total of
60,000 shares were reserved for issuance and options for 24,800 shares were
outstanding under this Plan.
Stock Option Activity
A summary of stock option activity under all the Company's stock option plans
for the years ended December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- ----------------------- ---------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 566,670 $ 3.50 1,118,166 $ 8.69
Granted 571,170 3.50 552,096 14.04 101,518 12.01
Cancelled (4,500) 0.33 (600) 14.17 (13,706) 13.42
------- -------- --------- -------- --------- --------
Outstanding at end of year 566,670 $ 3.50 1,118,166 $ 8.69 1,205,978 $ 8.92
======= ======== ========= ======== ========= ========
Exercisable at end of year 16,320 $ 7.59 72,098 $ 6.90 638,573 $ 5.77
======= ======== ========= ======== ========= ========
</TABLE>
42
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
The Company accounts for stock options in accordance with APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
stock options issued been determined consistent with SFAS No. 123, the Company's
net earnings in 1998 would have been reduced by approximately $28,000 with no
impact on diluted net earnings per share. There would have been no impact to the
Company's net earnings (loss) and diluted net loss per share in 1996 and 1997.
The weighted average fair value of options granted during 1998 was $3.02. The
fair values of the options granted were estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for grants in
1998: risk-free interest rate of 5.0%, expected life of four years, expected
volatility of 56% and no dividends. The following assumptions for grants in
1996 and 1997 were used: risk-free interest rate of 6.7%, expected life of four
years, no volatility and no dividends.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ---------------------------------
Weighted Average
Remaining Weighted Average
Range of Number Contractual Life Exercise Number Weighted Average
Exercise Prices Outstanding (in years) Price Exercisable Exercise Price
- ----------------------- ----------- --------------------- ------------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.33 352,770 6.3 $ 0.33 322,770 $ 0.33
$ 8.06 - $11.50 223,700 7.6 $ 8.47 147,346 $ 8.33
$12.50 - $13.00 125,242 8.6 $12.76 23,233 $12.51
$14.17 504,266 8.5 $14.17 145,224 $14.17
--------- --- ------ ------- ------
1,205,978 7.7 $ 8.92 638,573 $ 5.77
========= === ====== ======= ======
</TABLE>
(10) EMPLOYEE BENEFIT PLANS
1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan, as amended (the "Employee Stock
Purchase Plan"), enables eligible employees to purchase shares of Common Stock
at a discount on a periodic basis through payroll deductions and is intended to
meet the requirements of Section 423 of the Internal Revenue Code. Purchases
occur at the end of option periods, each of six months' duration, except that
the first such option period began concurrent with the completion of the IPO and
ended on December 31, 1998. The purchase price of Common Stock under the
Employee Stock Purchase Plan is 85% of the lesser of the value of the Common
Stock at the beginning or the end of the option period. Prior to each option
period, participants may elect to have from 2% to 10% of their pay withheld and
applied to the purchase of shares at the end of the option period. The Employee
Stock Purchase Plan imposes a maximum of $10,000 on the amount that may be
withheld from any participant in any option period. A total of 200,000 shares
of Common Stock has been reserved for issuance under the Employee Stock Purchase
Plan, of which 30,814 shares were committed for issuance as of December 31,
1998.
Under SFAS No. 123, compensation cost would have been recognized for the fair
value of the employees' purchase rights, which was estimated using the Black-
Scholes model with the following assumptions for 1998: risk-free interest rate
of 5.6%, expected life of 0.71 years, expected volatility of 56% and no
dividends. The fair value of those purchase rights granted in 1998 was $4.82
per share.
43
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Retirement Plans
The Company has a Savings and Retirement Plan (401(k) Plan), adopted October
1, 1996, which is the Company's principal defined contribution retirement plan,
which provides for a match of up to 3% of an employee's compensation.
Additionally, at December 31, 1998, the Company had seven other defined
contribution retirement plans which were acquired in connection with affiliation
transactions. Total plan expense for the years ended December 31, 1996, 1997 and
1998 was $20,000, $189,000 and $423,000, respectively.
(11) EARNINGS PER SHARE
Earnings per share are computed based on Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128 requires
presentation of basic earnings per share ("Basic EPS") and diluted earnings per
share ("Diluted EPS") by all entities that have publicly traded common stock or
potential common stock (options, warrants, convertible securities or contingent
stock arrangements). Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period. The computation of Diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted loss per share computations for the years
ended December 31 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Net earnings (loss).............................................. $(2,443) $1,070 $3,886
Less: Dividends on Series A Convertible Preferred Stock......... (109) (632) (200)
Dividends on Series B Redeemable Preferred Stock.......... (96) (560) (195)
------- ------ ------
Net earnings (loss) available to common stockholders............. $(2,648) $ (122) $3,491
======= ====== ======
Weighted average common shares outstanding....................... 768 2,273 5,907
======= ====== ======
Net earnings (loss) per share.................................... $ (3.45) $(0.05) $0.59
======= ====== ======
DILUTED EARNINGS (LOSS) PER SHARE:
Net earnings (loss).............................................. $(2,443) $1,070 $3,886
Less: Dividends on Series A Convertible Preferred Stock......... (109) (632) -
Dividends on Series B Redeemable Preferred Stock.......... (96) (560) (195)
------- ------ ------
Net earnings (loss) available to common stockholders............. $(2,648) $ (122) $3,691
======= ====== ======
Weighted average common shares outstanding....................... 768 2,273 5,907
Add: Dilutive effect of options (1)............................. - - 237
Assumed conversion of Series A Convertible
Preferred Stock (1)(2).................................... - - 723
------- ------ ------
Weighted average common shares as adjusted....................... 768 2,273 6,867
======= ====== ======
Net earnings (loss) per share.................................... $(3.45) $(0.05) $0.54
======= ====== ======
</TABLE>
____________________
(1) The assumed conversion of Series A Convertible Preferred Stock and the
dilutive effect of stock options were not included in the calculation of
Diluted EPS for the years ended December 31, 1996 and 1997, as the
inclusion of these items would have been antidilutive.
(2) In connection with the IPO, all 400,000 shares of Series A Convertible
Preferred Stock were converted into 2,399,995 shares of Common Stock on
April 21, 1998. The Diluted EPS calculation for the year ended December
31, 1998 assumes conversion of the Series A Convertible Preferred Stock to
Common Stock as of January 1, 1998.
44
<PAGE>
AMERICAN DENTAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(12) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth summary quarterly results of operations for the
Company for the years ended December 31, 1997 and 1998 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
- ----
Net revenue......................................................... $11,226 $12,076 $13,318 $16,650
Operating expenses.................................................. 11,081 11,751 12,848 15,833
Earnings from operations............................................ 145 325 470 817
Earnings before income taxes........................................ 172 218 355 449
Income taxes........................................................ -- 7 74 43
Net earnings........................................................ $ 172 $ 211 $ 281 $ 406
Net earnings (loss) per share:
Basic............................................................. $ (0.06) $ (0.04) $ (0.01) $ 0.04
Diluted........................................................... $ (0.06) $ (0.04) $ (0.01) $ 0.04
Weighted average common shares outstanding:
Basic............................................................. 2,213 2,228 2,255 2,394
Diluted........................................................... 2,213 2,228 2,255 2,593
1998
- ----
Net revenue......................................................... $18,171 $20,217 $22,334 $23,368
Operating expenses.................................................. 16,963 18,637 20,248 20,791
Earnings from operations............................................ 1,208 1,580 2,086 2,577
Earnings before income taxes........................................ 769 1,374 1,893 2,330
Income taxes........................................................ 300 536 738 906
Net earnings........................................................ $ 469 $ 838 $ 1,155 $ 1,424
Net earnings per share:
Basic............................................................. $ 0.06 $ 0.12 $ 0.16 $ 0.19
Diluted........................................................... $ 0.06 $ 0.11 $ 0.15 $ 0.19
Weighted average common shares outstanding:
Basic............................................................. 2,429 6,265 7,428 7,436
Diluted........................................................... 2,632 7,103 7,660 7,671
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the executive officers of the Company is included
under the caption "Executive Officers" in Part I of this Report.
The information set forth under the captions "Elections of Directors" and
"Compliance with Section 16(a) of the Exchange Act" in the American Dental
Partners, Inc. Proxy Statement to be filed with the Commission in connection
with the 1999 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The information set forth under the caption "Executive Compensation" in the
Proxy Statement, except for the Report of the Compensation Committee and the
Performance Graph, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" and the
information set forth under the caption "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement are incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(A)(1) CONSOLIDATED FINANCIAL STATEMENTS (See Item 8)
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted as the required information is not applicable or is
included in the consolidated financial statements or related notes.
(A)(3) EXHIBITS
The exhibits which are filed with this Form 10-K or which are incorporated
herein by reference are set forth in the Exhibit Index which appears in this
report beginning at page 48.
(B) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed during the three-month period ended
December 31, 1998.
46
<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 Town of Wakefield,
Commonwealth of Massachusetts, on the 5th day of March, 1999.
American Dental Partners, Inc.
/s/ Gregory A. Serrao
By:-----------------------------------------
GREGORY A. SERRAO
Chairman, President and Chief Executive
Officer
Pursuant to the requirement of the Securities 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 CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<S> <C> <C>
/s/ Gregory A. Serrao Chairman, President and Chief March 5, 1999
- ---------------------------------
GREGORY A. SERRAO Executive Officer and Director
(principal executive officer)
/s/ Ronald M. Levenson Senior Vice President, Chief Financial March 5, 1999
- ---------------------------------
RONALD M. LEVENSON Officer and Treasurer (principal
financial and accounting officer)
/s/ Dr. Gregory T. Swenson Director March 5, 1999
- ---------------------------------
DR. GREGORY T. SWENSON
/s/ Martin J. Mannion Director March 5, 1999
- ---------------------------------
MARTIN J. MANNION
/s/ James T. Kelly Director March 5, 1999
- ---------------------------------
JAMES T. KELLY
/s/ Derril W. Reeves Director March 5, 1999
- ---------------------------------
DERRIL W. REEVES
</TABLE>
47
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------- -------------------
+3(a) Second Amended and Restated Certificate of Incorporation of American
Dental Partners, Inc.
+3(b) Amended and Restated By-laws of American Dental Partners, Inc.
+4(a) Form of Stock Certificate.
**4(b) Form of Subordinated Promissory Note and Form of Subordination
Agreement.
+10(a) American Dental Partners, Inc. Series A and Series B Preferred Stock
Purchase Agreement dated January 8, 1996, among American Dental
Partners, Inc., Summit Ventures IV, L.P., Summit Investors, III,
L.P., and Gregory A. Serrao, as amended by First Amendment to Series
A and Series B Preferred Stock Purchase Agreement dated February 19,
1996, Second Amendment to Series A and Series B Preferred Stock
Purchase Agreement dated May 1, 1996, and Third Amendment to Series A
and Series B Preferred Stock Purchase Agreement dated November 1,
1996.
+10(b) American Dental Partners, Inc. Subordinated Debenture Purchase
Agreement dated January 8, 1996, among American Dental Partners,
Inc., Summit Subordinated Debt Fund, L.P., and Summit Investors III,
L.P., as amended by First Amendment to Subordinated Debenture
Purchase Agreement dated May 1, 1996, and Second Amendment to
Subordinated Debenture Purchase Agreement dated November 1, 1996.
+10(c) Registration Rights Agreement dated January 8, 1996, among American
Dental Partners, Inc., Summit Venture IV, L.P., Summit Investors III,
L.P., Gregory A. Serrao, and others, as amended by Amendment to
Registration Rights Agreement dated November 1, 1996.
+10(d) Reformation Agreement dated December 23, 1996, among American Dental
Partners, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.,
Summit Investors II, L.P., and Gregory A. Serrao.
*#10(e) American Dental Partners, Inc. Amended and Restated 1996 Stock Option
Plan, as amended by Amendments No. 1, No. 2 and No. 3.
+#10(f) American Dental Partners, Inc. 1996 Time Accelerated Stock Option
Plan, as amended by Amendment No. 1.
*#10(g) American Dental Partners, Inc. Amended and Restated 1996 Affiliate
Stock Option Plan, as amended by Amendments No.1 and No. 2.
*#10(h) American Dental Partners, Inc. Amended and Restated 1996 Directors
Stock Option Plan, as amended by Amendments No. 1, No. 2 and No. 3.
+#10(i) Employment and Non-Competition Agreement dated January 8, 1996,
between American Dental Partners, Inc. and Gregory A. Serrao.
+#10(j) Employment Agreement dated April 22, 1996, between American Dental
Partners, Inc. and Ronald M. Levenson.
*#10(k) Employment and Noncompetition Agreement dated October 21, 1998,
between American Dental Partners, Inc. and Lee S. Feldman.
+#10(l) Employment and Noncompetition Agreement dated November 12, 1996,
between PDHC, Ltd. and Gregory T. Swenson, D.D.S.
+10(m) Registration Rights Agreement dated November 11, 1996, among American
Dental Partners, Inc. and certain of its stockholders (the former
stockholders of PDHC, Ltd.).
+10(n) Registration Rights Agreement dated December 13, 1996, between
American Dental Partners, Inc. and Les L. Crane, D.D.S.
+10(o) Registration Rights Agreement dated December 23, 1996, among American
Dental Partners, Inc. and certain of its stockholders (the former
stockholders of Smileage Dental Care, Inc.).
+10(p) Registration Rights Agreement dated March 31, 1997, between American
Dental Partners, Inc. and Lakeside Dental Group.
+10(q) Registration Rights Agreement dated May 22, 1997, between American
Dental Partners, Inc. and Abel J. Soster, DMD.
48
<PAGE>
Exhibit
Number Exhibit Description
- ------- -------------------
*10(r) Amended and Restated Service Agreement dated January 1, 1999,
between PDHC, Ltd. and PDG, P.A.
*10(s) Amended and Restated Service Agreement dated January 1, 1999,
between Smileage Dental Care, Inc. and Wisconsin Dental Group, S.C.
*10(t) Amended and Restated Revolving Credit Agreement dated December 4,
1998, among American Dental Partners, Inc., the Lenders Party
Thereto and Fleet National Bank as Agent and BankBoston, N.A. as Co-
Agent.
+10(u) Acquisition and Exchange Agreement dated November 11, 1996, among
American Dental Partners, Inc., PDHC, Ltd., and the Shareholders of
PDHC, Ltd.
+10(v) Asset Purchase Agreement dated December 13, 1996, among American
Dental Partners, Inc., Texas Dental Partners, Inc., Les L. Crane,
D.D.S., P.C., and Les L. Crane, D.D.S.
+10(w) Agreement and Plan of Merger and Reorganization dated December 23,
1996, among American Dental Partners, Inc., American Dental Partners
of Wisconsin, Inc., Smileage Dental Care, Inc., and the Shareholders
of Smileage Dental Care, Inc.
+10(x) Registration Rights Agreement dated July 1, 1997, among American
Dental Partners, Inc. and John M. Werwie, D.D.S., James F. Ruzicka,
D.D.S., and Jon J. Pagenkopf, D.D.S.
+10(y) Registration Rights Agreement dated October 1, 1997, among American
Dental Partners, Inc. and Karl H. Biewald, D.D.S., J.E. Cutliffe,
D.D.S., Timothy J. Montgomery, D.D.S., Curtis R. Dunn, D.D.S., and
Christopher S. Hipp, D.D.S.
+10(z) Registration Rights Agreement dated October 1, 1997, among American
Dental Partners, Inc. and Karl H. Biewald, D.D.S. and Terri M.
Lawler.
+10(aa) Asset Purchase Agreement dated October 1, 1997, among American
Dental Partners, Inc., Apple Park Associates, Inc., APAM, Inc., OC
Specialists, Ltd., and the Shareholders of APAM, Inc. and OC
Specialists, Ltd.
+10(bb) Asset Purchase Agreement dated October 1, 1997 among American Dental
Partners, Inc., American Dental Partners of Wisconsin, Inc.,
Terrance R. Wilkens, D.D.S., Terrance R. Wilkens, D.D.S., S.C.,
Brookfield Dental Center, S.C., Waukesha Dental Center, S.C., Hales
Corners Dental Center, S.C., and West Allis Dental Center, S.C.
+#10(cc) Employment and Noncompetition Agreement dated November 12, 1996,
between American Dental Partners, Inc., and Forrest M. Flint.
++10(dd) Asset Purchase Agreement dated June 3, 1998, among American Dental
Partners, Inc., American Dental Partners of Virginia, Inc., Reston
Dental Group, P.C., and the shareholders of Reston Dental Group,
P.C.
@10(ee) Amended and Restated Asset Purchase Agreement dated February 8,
1999, among American Dental Partners, Inc., Innovative Practice
Concepts, Inc., Associated Dental Care Providers, P.C., CIGNA
HealthCare of Arizona, Inc. and CIGNA Dental Health, Inc.
*#10(ff) Employment and Noncompetition Agreement dated January 1, 1999,
between American Dental Partners, Inc. and Joseph V. Errante, D.D.S.
*21 Subsidiaries of American Dental Partners, Inc.
*23 Consent of KPMG Peat Marwick LLP.
49
<PAGE>
Exhibit
Number Exhibit Description
- ------- -------------------
*27 Financial Data Schedule.
____________
* Filed herewith. For Exhibits 10(r) and 10(s), certain portions of these
exhibits have been omitted pursuant to confidential treatment granted under
Rule 406 of the Securities Act.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (Registration No. 333-56941) and incorporated herein by reference.
+ Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (Registration No. 333-39981) and incorporated herein by reference.
++ Previously filed as Exhibit 2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 11, 1998 and
incorporated herein by reference.
@ Previously filed as Exhibit 2 to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 18, 1999 and
incorporated herein by reference.
# Management contracts or compensatory plans or arrangements.
50
<PAGE>
EXHIBIT 10(E)
AMENDMENT NO. 2
TO
AMERICAN DENTAL PARTNERS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
-------------------------------------------
The American Dental Partners, Inc. Amended and Restated 1996 Stock Option
Plan, as previously amended (the "Plan"), is hereby amended pursuant to the
following provisions:
1. Definitions
-----------
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
2. Manner of Exercise
------------------
Section 8(b) of the Plan is hereby deleted from the Plan in its entirety
and replaced with the following:
(b) To the extent that the right to purchase shares under an option
has accrued and is in effect, options may be exercised in full at one time
or in part from time to time, by giving written notice, signed by the
person or persons exercising the option, to the Company, stating the number
of shares with respect to which the option is being exercised, accompanied
by payment in full for such shares as provided in subparagraph (a) above.
Upon such exercise, delivery of a certificate for paid-up non-assessable
shares shall be made at the principal office of the Company to the person
or persons exercising the option at such time, during ordinary business
hours, not more than thirty (30) days from the date of receipt of the
notice by the Company, as shall be designated in such notice, or at such
time, place and manner as may be agreed upon by the Company and the person
or persons exercising the option. Upon exercise of the option and payment
as provided above, the optionee shall become a shareholder of the Company
as to the shares acquired upon such exercise.
3. Change in Control
-----------------
Section 13 of the Plan is hereby deleted from the Plan in its entirety and
replaced with the following:
13. Change in Control.
-----------------
(a) Accelerated Vesting and Company Purchase Option. Notwithstanding
-----------------------------------------------
any provision of the Plan or any Agreement to the contrary (unless such
Agreement contains a provision referring specifically to this Section 13
and stating that this Section 13 shall not be applicable to the option
evidenced by such Agreement), if a Change in Control (as defined below)
occurs, then:
<PAGE>
(i) Any and all options theretofore granted under the Plan and not
fully vested shall thereupon become vested and exercisable in full and
shall remain so exercisable in accordance with their terms; provided that
no option which has previously been exercised or otherwise terminated shall
become exercisable; and
(ii) The Company may, at its option, terminate any or all unexercised
options and portions thereof not more than 30 days after such Change in
Control; provided that the Company shall, upon such termination and with
respect to each option so terminated, pay to the optionee (or such
optionee's transferee, if applicable) theretofore holding such option cash
in an amount equal to the difference between the fair market value (as
defined in Section 7, above) of the shares of Common Stock subject to the
option at the time the Company exercises its option under this Section
13(a)(ii) and the exercise price of the option, less applicable withholding
taxes; and provided further that if such fair market value is less than
such exercise price, then the Board may, in its sole discretion, terminate
such option without any payment.
(b) Definition of Change in Control. For purposes of the Plan, a "Change
-------------------------------
in Control" shall mean the happening of any of the following:
(i) The direct or indirect acquisition by any "person" as defined in
(S)3(a)(9) of the 1934 Act and as used in (S)(S)13(d) and 14(d) thereof,
including a "group" within the meaning of (S)13(d) of the 1934 Act
(hereinafter, simply a "Person"), of "beneficial ownership" (within the
meaning of Rule 13d-3 under the 1934 Act) of securities of the Company
representing more than 50% of the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the
election of directors of the Company (the "Company Voting Securities");
provided that: (A) for purposes of this subsection (i), the term "Person"
shall not include the Company, any subsidiary of the Company, any employee
benefit plan sponsored or maintained by the Company or any subsidiary of
the Company (including any trustee of such plan acting as trustee), any
person who was a stockholder of the Company on the effective date of the
Plan (an "Existing Stockholder"), and any affiliate of an Existing
Stockholder; and (B) the provisions of this subsection (i) shall not apply
to (1) any acquisition of securities from the Company or any of its
subsidiaries, or (2) any acquisition of securities pursuant to a Business
Combination (as defined below) which satisfies clauses (A), (B), and (C) of
subsection (iii) of this Section 13(b);
(ii) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning of such period
constitute the Board (the "Incumbent Directors") cease for any reason other
than death to constitute at least at least a majority of the Board;
provided, however, that a director who was not a director at the beginning
of such 24-month period shall be deemed to have satisfied such 24-month
requirement (and be an
-2-
<PAGE>
Incumbent Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds of the
directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 24-month period)
or by prior operation of this Section 13 (b)(ii); or
(iii) Approval by the stockholders of the Company of a
reorganization, merger, consolidation, or recapitalization of the
Company, or a sale or other disposition of all or substantially all of
the assets of the Company, or the acquisition of the assets of another
corporation (any such transaction, a "Business Combination"), or the
consummation of a Business Combination for which stockholder approval
is not obtained, unless, in any such case, following such Business
Combination: (A) all or substantially all of the individuals and
entities who were the beneficial owners of the Company Voting
Securities outstanding immediately prior to such Business Combination
beneficially own, directly or indirectly, immediately following such
Business Combination, more than 50% of the combined voting power of
the then outstanding voting securities entitled to vote generally in
the election of directors of the corporation resulting from such
Business Combination in substantially the same proportions as their
ownership of the Company Voting Securities immediately prior to such
Business Combination, and (B) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were Incumbent Directors at the time of the execution of
the initial agreement, or of the action of the Board, providing for
such Business Combination; or
(iv) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
4. Effective Date; Construction
----------------------------
The effective date of this amendment is November 6, 1998, and this
amendment shall be deemed to be a part of the Plan as of such date and shall be
applicable to all options granted under the Plan prior to that date, as well as
options hereafter granted under the Plan. In the event of any inconsistencies
between the provisions of the Plan and this amendment, the provisions of this
amendment shall control. Except as modified by this amendment, the Plan shall
continue in full force and effect without change.
-3-
<PAGE>
EXHIBIT 10(E)
AMENDMENT NO. 3
TO
AMERICAN DENTAL PARTNERS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
-------------------------------------------
The American Dental Partners, Inc. Amended and Restated 1996 Stock Option
Plan, as previously amended by Amendment No. 1 dated February 27, 1998
("Amendment No. 1") and Amendment No. 2 dated November 6, 1998 (collectively,
the "Plan"), is hereby amended pursuant to the following provisions:
1. Definitions
-----------
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
2. Shares Subject To Plan
----------------------
The total number of shares of Common Stock for which options may be granted
under the Plan, as provided under Section 2(a) of the Plan, as previously
adjusted pursuant to Section 12 of the Plan and increased by Amendment No. 1, is
increased by 300,000 shares to a total of 1,273,246 shares of Common Stock.
3. Effective Date; Construction
----------------------------
The effective date of this amendment is February 26, 1999, and this
amendment shall be deemed to be a part of the Plan as of such date. In the
event of any inconsistencies between the provisions of the Plan and this
amendment, the provisions of this amendment shall control. Except as modified
by this amendment, the Plan shall continue in full force and effect without
change.
This amendment shall be submitted to the stockholders of the Company for
approval as soon as reasonably practicable, but in any event not later than 12
months after the date of this amendment. Notwithstanding the preceding
paragraph or any other provisions of this amendment to the contrary, if this
amendment is not approved by the stockholders of the Company within such 12-
month period, this amendment and all options granted with respect to the
additional shares of Common Stock subject to the Plan as a result of this
amendment shall automatically become null and void and have no further force or
effect.
<PAGE>
EXHIBIT 10(G)
AMENDMENT NO. 2
TO
AMERICAN DENTAL PARTNERS, INC.
AMENDED AND RESTATED 1996 AFFILIATE STOCK OPTION PLAN
-----------------------------------------------------
The American Dental Partners, Inc. Amended and Restated 1996 Affiliate
Stock Option Plan, as previously amended (the "Plan"), is hereby amended
pursuant to the following provisions:
1. Definitions
-----------
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
2. Change in Control
-----------------
Section 10 of the Plan is hereby deleted from the Plan in its entirety and
replaced with the following:
(S)10. Change in Control.
-----------------
(a) Accelerated Vesting and Company Purchase Option.
-----------------------------------------------
Notwithstanding any provision of the Plan or any Stock Option
Agreement to the contrary (unless such Stock Option Agreement contains
a provision referring specifically to this (S)10 and stating that this
(S)10 shall not be applicable to the Option evidenced by such Stock
Option Agreement), if a Change in Control (as defined below) occurs,
then
(i) Any and all Options theretofore granted and not fully vested
shall thereupon become vested and exercisable in full and
shall remain so exercisable in accordance with their terms;
provided that no Option which has previously been exercised
or otherwise terminated shall become exercisable; and
(ii) The Company may, at its option, terminate any or all
unexercised Options and portions thereof not more than 30
days after such Change in Control; provided that the Company
shall, upon such termination and with respect to each Option
so terminated, pay to the Participant (or such Participant's
transferee, if applicable) theretofore holding such Option
cash in an amount equal to the difference between the fair
market value (as defined in (S)5(a), above) of the Shares
subject to the Option at the time the Company exercises its
option under this (S)10(a)(ii) and the exercise price of
<PAGE>
the Option, less applicable withholding taxes; and provided
further that if such fair market value is less than such
exercise price, then the Board may, in its sole discretion,
terminate such Option without any payment.
(b) Definition of Change in Control.
-------------------------------
For purposes of the Plan, a "Change in Control" shall mean the
happening of any of the following:
(i) The direct or indirect acquisition by any "person" as
defined in (S)3(a)(9) of the 1934 Act and as used in
(S)(S)13(d) and 14(d) thereof, including a "group" within
the meaning of (S)13(d) of the 1934 Act (hereinafter,
simply a "Person"), of "beneficial ownership" (within the
meaning of Rule 13d-3 under the 1934 Act) of securities of
the Company representing more than 50% of the combined
voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of
directors of the Company (the "Company Voting
Securities"); provided that: (A) for purposes of this
subsection (i), the term "Person" shall not include the
Company, any subsidiary of the Company, any employee
benefit plan sponsored or maintained by the Company or any
subsidiary of the Company (including any trustee of such
plan acting as trustee), any person who was a stockholder
of the Company on the effective date of the Plan (an
"Existing Stockholder"), and any affiliate of an Existing
Stockholder; and (B) the provisions of this subsection (i)
shall not apply to (1) any acquisition of securities from
the Company or any of its subsidiaries, or (2) any
acquisition of securities pursuant to a Business
Combination (as defined below) which satisfies clauses
(A), (B), and (C) of subsection (iii) of this (S)10(b);
(ii) When, during any period of 24 consecutive months during
the existence of the Plan, the individuals who, at the
beginning of such period constitute the Board (the
"Incumbent Directors") cease for any reason other than
death to constitute at least at least a majority of the
Board; provided, however, that a director who was not a
director at the beginning of such 24-month period shall be
deemed to have satisfied such 24-month requirement (and be
an Incumbent Director) if such director was elected by, or
on the recommendation of or with the approval of, at least
two-thirds of the directors who then qualified as
Incumbent Directors either actually (because they were
directors at the beginning of such 24-month period) or by
prior operation of this (S)10(b)(ii); or
(iii) Approval by the stockholders of the Company of a
reorganization, merger, consolidation, or recapitalization
of the Company, or a sale
-2-
<PAGE>
or other disposition of all or substantially all of the
assets of the Company, or the acquisition of the assets of
another corporation (any such transaction, a "Business
Combination"), or the consummation of a Business
Combination for which stockholder approval is not
obtained, unless, in any such case, following such
Business Combination: (A) all or substantially all of the
individuals and entities who were the beneficial owners of
the Company Voting Securities outstanding immediately
prior to such Business Combination beneficially own,
directly or indirectly, immediately following such
Business Combination, more than 50% of the combined voting
power of the then outstanding voting securities entitled
to vote generally in the election of directors of the
corporation resulting from such Business Combination in
substantially the same proportions as their ownership of
the Company Voting Securities immediately prior to such
Business Combination, and (B) at least a majority of the
members of the board of directors of the corporation
resulting from such Business Combination were Incumbent
Directors at the time of the execution of the initial
agreement, or of the action of the Board, providing for
such Business Combination; or
(iv) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
3. Effective Date; Construction
----------------------------
The effective date of this amendment is November 6, 1998, and this
amendment shall be deemed to be a part of the Plan as of such date and shall be
applicable to all Options granted prior to that date, as well as Options
hereafter granted. In the event of any inconsistencies between the provisions
of the Plan and this amendment, the provisions of this amendment shall control.
Except as modified by this amendment, the Plan shall continue in full force and
effect without change.
-3-
<PAGE>
EXHIBIT 10(H)
AMENDMENT NO. 2
TO
AMERICAN DENTAL PARTNERS, INC.
AMENDED AND RESTATED 1996 DIRECTORS STOCK OPTION PLAN
-----------------------------------------------------
The American Dental Partners, Inc. Amended and Restated 1996 Directors
Stock Option Plan, as previously amended (the "Plan"), is hereby amended
pursuant to the following provisions:
1. Definitions
-----------
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
2. Change in Control.
-----------------
Section 10 of the Plan is hereby deleted from the Plan in its entirety and
replaced with the following:
(S)10. Change in Control.
-----------------
(a) Accelerated Vesting and Company Purchase Option.
-----------------------------------------------
Notwithstanding any provision of the Plan or any Stock Option
Agreement to the contrary (unless such Stock Option Agreement contains a
provision referring specifically to this (S)10 and stating that this (S)10
shall not be applicable to the Option evidenced by such Stock Option
Agreement), if a Change in Control (as defined below) occurs, then:
(i) Any and all Options theretofore granted and not fully vested
shall thereupon become vested and exercisable in full and shall remain
so exercisable in accordance with their terms; provided that no Option
which has previously been exercised or otherwise terminated shall
become exercisable; and
(ii) The Company may, at its option, terminate any or all
unexercised Options and portions thereof not more than 30 days after
such Change in Control; provided that the Company shall, upon such
termination and with respect to each Option so terminated, pay to the
optionee (or such optionee's transferee, if applicable) theretofore
holding such Option cash in an amount equal to the difference between
the fair market value (as defined in (S)5(b), above) of the Shares
subject to the Option at the time the Company exercises its option
under this (S)10(a)(ii) and the exercise price of the Option, less
applicable withholding taxes; and provided further that if such fair
market value is less than such exercise price, then the Board may, in
its sole discretion, terminate such Option without any payment.
<PAGE>
(b) Definition of Change in Control.
-------------------------------
For purposes of the Plan, a "Change in Control" shall mean the happening of
any of the following:
(i) The direct or indirect acquisition by any "person" as defined in
(S)3(a)(9) of the 1934 Act and as used in (S)(S)13(d) and 14(d) thereof,
including a "group" within the meaning of (S)13(d) of the 1934 Act
(hereinafter, simply a "Person"), of "beneficial ownership" (within the
meaning of Rule 13d-3 under the 1934 Act) of securities of the Company
representing more than 50% of the combined voting power of the Company's
then outstanding voting securities entitled to vote generally in the
election of directors of the Company (the "Company Voting Securities");
provided that: (A) the Company, any subsidiary of the Company, any employee
benefit plan sponsored or maintained by the Company or any subsidiary of
the Company (including any trustee of such plan acting as trustee), any
person who was a stockholder of the Company on the effective date of the
Plan (an "Existing Stockholder"), and any affiliate of an Existing
Stockholder; and (B) the provisions of this subsection (i) shall not apply
to (1) any acquisition of securities from the Company or any of its
subsidiaries, or (2) any acquisition of securities pursuant to a Business
Combination (as defined below) which satisfies clauses (A), (B), and (C) of
subsection (iii) of this (S)10(b);
(ii) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning of such period
constitute the Board (the "Incumbent Directors") cease for any reason other
than death to constitute at least at least a majority of the Board;
provided, however, that a director who was not a director at the beginning
of such 24-month period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director was elected by,
or on the recommendation of or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 24-month period) or
by prior operation of this (S)10 (b)(ii); or
(iii) Approval by the stockholders of the Company of a
reorganization, merger, consolidation, or recapitalization of the Company,
or a sale or other disposition of all or substantially all of the assets of
the Company, or the acquisition of the assets of another corporation (any
such transaction, a "Business Combination"), or the consummation of a
business Combination for which stockholder approval is not obtained,
unless, in any such case, following such Business Combination: (A) all or
substantially all of the individuals and entities who were the beneficial
owners of the Company Voting Securities outstanding immediately prior to
such Business Combination beneficially own, directly or indirectly,
immediately following such Business Combination, more than 50% of the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors of the corporation resulting
from such Business Combination in substantially the same proportions as
their ownership of the Company Voting Securities immediately prior to such
Business Combination,
-2-
<PAGE>
and (B) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were Incumbent
Directors at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(iv) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
4. Effective Date; Construction
----------------------------
The effective date of this amendment is November 6, 1998, and this
amendment shall be deemed to be a part of the Plan as of such date and shall be
applicable to all Options granted prior to that date, as well as Options
hereafter granted. In the event of any inconsistencies between the provisions of
the Plan and this amendment, the provisions of this amendment shall control.
Except as modified by this amendment, the Plan shall continue in full force and
effect without change.
-3-
<PAGE>
EXHIBIT 10(H)
AMENDMENT NO. 3
TO
AMERICAN DENTAL PARTNERS, INC.
AMENDED AND RESTATED 1996 DIRECTORS STOCK OPTION PLAN
-----------------------------------------------------
The American Dental Partners, Inc. Amended and Restated 1996 Directors
Stock Option Plan, as previously amended by Amendment No. 1 dated October 27,
1997 and Amendment No. 2 dated November 6, 1998 (collectively, the "Plan"), is
hereby amended pursuant to the following provisions:
1. Definitions
-----------
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
2. Shares Subject To Plan
----------------------
The total number of Shares for which Options may be granted under the Plan,
as provided under (S)4 of the Plan, as previously adjusted pursuant to (S)9 of
the Plan, is increased by 25,000 Shares to a total of 85,000 Shares.
3. Effective Date; Construction
----------------------------
The effective date of this amendment is February 26, 1999, and this
amendment shall be deemed to be a part of the Plan as of such date. In the
event of any inconsistencies between the provisions of the Plan and this
amendment, the provisions of this amendment shall control. Except as modified
by this amendment, the Plan shall continue in full force and effect without
change.
This amendment shall be submitted to the stockholders of the Company for
approval as soon as reasonably practicable, but in any event not later than 12
months after the date of this amendment. Notwithstanding the preceding
paragraph or any other provisions of this amendment to the contrary, if this
amendment is not approved by the stockholders of the Company within such 12-
month period, this amendment and all options granted with respect to the
additional shares of Common Stock subject to the Plan as a result of this
amendment shall automatically become null and void and have no further force or
effect.
<PAGE>
EXHIBIT 10(K)
EMPLOYMENT AND NONCOMPETITION AGREEMENT
---------------------------------------
This agreement is made effective October 21, 1998, between American Dental
Partners, Inc., a Delaware corporation (the "Company"), and Lee S. Feldman (the
"Employee"), who hereby agree as follows:
(S)1. Employment. Upon the terms and subject to the conditions described in
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this agreement, the Company hereby employs the Employee and the Employee hereby
accepts employment by the Company.
(S)2. Term. The Employee's employment with the Company pursuant to this
----
agreement shall be for the period beginning on November 16, 1998 (the
"Commencement Date") and ending on the third anniversary of the Commencement
Date (the "Initial Term"), unless sooner terminated pursuant to 8 of this
agreement. This agreement may be extended or renewed after the expiration of
the Initial Term, but only by mutual written agreement of the Parties. When
permitted by the context, any reference in this agreement to the "term of this
agreement" shall include the Initial Term and the period of any such extensions
or renewals.
(S)3. Services. The Employee shall serve as Vice President, General Counsel
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of the Company, shall report directly to the Chief Executive Officer of the
Company (the "CEO), and shall devote his full business and professional time,
attention, energy, loyalty, and skill to the Company's business, performing such
executive or administrative tasks and having such responsibilities as may be
assigned to him from time to time by the CEO or the Board of Directors of the
Company (the "Board").
(S)4. Compensation. As compensation for his services under this agreement,
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the Company shall pay the Employee a base salary at the annual rate of $130,000
(the "Base Salary"), payable in bi-weekly installments, in arrears, and in
accordance with the Company's general policies and procedures for payment of
salaries to its executive personnel. The Employee's performance shall be
reviewed not less often than annually for the purpose, among others, of
considering potential increases in the Base Salary, but the Company shall not be
obligated to make any such increases.
In addition, the Employee may earn an annual bonus for each calendar year
during the term of this agreement, beginning with calendar year 1999, in an
amount up to 25% of the Base Salary (as in effect from time to time), which
bonus shall be based upon and tied to the achievement of various objectives to
be prepared annually by the CEO. For the first full calendar year of the
Initial Term, the Employee shall in fact be paid a bonus equal to 25% of his
Base Salary so long as the Employee remains employed for such full year and has
not received written notice of a Performance Failure as set forth in 8(i)(B) of
this agreement. Any such annual bonuses earned shall be paid in cash.
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(S)5. Fringe Benefits and Perquisites. During the term of this agreement,
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the Employee shall also be entitled to the following fringe benefits and
perquisites:
(a) Group health and welfare benefits comparable to those offered
generally to the Company's executive personnel from time to time;
(b) Three weeks paid vacation during each year of this agreement;
(c) Participation in such stock option plans of the Company as may
be designated from time to time by the board of directors of the Company
(or a duly authorized committee of such board), in its discretion, subject
to all terms and conditions of such plans; and
(d) Such other benefits and perquisites as may be offered generally
to the Company's executive personnel from time to time pursuant to such
terms, conditions, and policies as may be approved by the Board.
(S)6. Initial Stock Option. As additional consideration for the Employee's
--------------------
covenants contained in this agreement, the Company shall grant to the Employee,
as of the date of this agreement, an option (the "Option") to purchase a total
of up to 15,000 shares of common stock, par value $.01 a share, of the Company
(the "Shares"), pursuant to the Company's Amended and Restated 1996 Stock Option
Plan, as amended (the "Plan"). The Option shall be evidenced by a separate
option agreement in the form approved for use in connection with the Plan, which
agreement shall provide, among other terms, that the Option shall vest with
respect to 25% of the Shares on each of the first four anniversaries of the
Commencement Date (subject to the other terms of the Plan and such agreement).
(S)7. Confidentiality; Noncompetition. The Employee shall not, directly or
-------------------------------
indirectly, at any time (whether during the term of this agreement or
thereafter), disclose any Confidential Information (defined below) to any
person, association, or other entity (other than the Affiliated Companies, as
defined below), or use, or permit or assist any person, association, or other
entity (other than the Affiliated Companies) to use, any Confidential
Information, excepting only: (i) Confidential Information which (A) is then
generally available to or obtainable by the public and which did not become so
available or obtainable through the breach of any provision of this agreement by
the Employee, or (B) is obtained by the Employee on a non-confidential basis
from a source other than an Affiliated Company or any agent or other
representative of an Affiliated Company and such source had the right to
disclose such Confidential Information to the Employee without violating any
legal, contractual, fiduciary, or other obligation; and (ii) disclosures
required by applicable law.
Upon termination of his employment by the Company (for any reason), the
Employee shall immediately deliver to the Company all documents and other
materials containing any Confidential Information which are in his possession or
under his control.
During the Restricted Period (defined below), the Employee shall not,
directly or indirectly
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(whether individually or as a shareholder or other owner, partner, member,
director, officer, employee, consultant, creditor or agent of any person,
association, or other entity):
(a) Enter into, engage in, or promote or assist (financially or
otherwise), directly or indirectly, any business which competes with the
business of any Affiliated Company (the "Business") anywhere in the
Restricted Territory, provided that the foregoing shall not preclude the
Employee from owning less than 1% of the outstanding capital stock of any
corporation whose shares are publicly traded on a national securities
exchange or system;
(b) Solicit or attempt to solicit business in competition with the
Business from any insurance company, any dental plan provider, any person
or entity which provides professional dental care services to the public,
or any other third party to which any Affiliated Company provides
management, consulting, or other services (in any such case, a "Restricted
Company"), or interfere or attempt to interfere with any relationship of
any Affiliated Company with any Restricted Company;
(c) Induce or encourage any employee, officer, director, agent,
supplier, or independent contractor of any Affiliated Company to terminate
its relationship with any such Affiliated Company, or otherwise interfere
or attempt to interfere in any way with any Affiliated Company's
relationships with its employees, officers, directors, agents, suppliers,
independent contractors, or others;
(d) Employ or engage any person who, at any time within the one-year
period immediately preceding such employment or engagement, was an
employee, officer, director, or agent of any Affiliated Company; or
(e) Make any statement (oral or written) or take any other action
which would tend to disparage or diminish the reputation of any Affiliated
Company.
For purposes of this agreement:
(i) "Affiliated Companies" shall include the Company and all
subsidiaries or affiliates of the Company other than Summit Ventures IV,
L.P. and any of its affiliates which are not engaged in a business similar
to that of the Company or any of its subsidiaries;
(ii) "Confidential Information" shall mean all trade secrets,
proprietary data, and other confidential information of any Affiliated
Company, including without limitation financial information, information
relating to business operations, services, promotional practices, and
relationships with Restricted Companies, suppliers, employees, independent
contractors, or other parties, and any information which any Affiliated
Company is obligated to treat as confidential pursuant to any course of
dealing or any agreement to which it is a party or otherwise bound;
(iii) "Restricted Period" shall mean the period beginning on the
Commencement
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Date and ending on the later of (A) the third anniversary of the
Commencement Date or (B) the second anniversary of the date (the
"Termination Date") of termination (for any reason) of Employee's
employment with the Company (whether pursuant to this agreement or
otherwise); and
(iv) "Restricted Territory" shall mean all cities and metropolitan
statistical areas in which any Affiliated Company has owned, leased,
managed, or operated an office or other facility at any time during the 12-
month period immediately preceding the Termination Date.
The Employee acknowledges that (1) the provisions of this section are
fundamental and essential for the protection of the Company's legitimate
business and proprietary interests, (2) such provisions are reasonable and
appropriate in all respects, and (3) in the event of any violation by the
Employee of any of such provisions, the Company would suffer irreparable harm
and its remedies at law would be inadequate. In the event of any violation or
attempted violation of such provisions by the Employee, the Company shall be
entitled to a temporary restraining order, temporary and permanent injunctions,
specific performance, and other equitable relief, without any showing of
irreparable harm or damage or the posting of any bond, in addition to any other
rights or remedies which may then be available to the Company.
(S)8. Termination. The Employee's employment with the Company shall
-----------
terminate automatically upon the death of the Employee and may be terminated by
the Company, without any further obligation on the part of the Company (except
as provided in clause (c), below), immediately upon notice to the Employee under
any of the following circumstances:
(a) At any time for Cause (defined below);
(b) At any time when the Employee is under a Long-Term Disability
(defined below); or
(c) At any time without Cause; provided that if the Company terminates
the Employee's employment pursuant to this clause (c) and no other basis for
termination exists under this agreement, then the Employee shall be entitled to
severance payments in an aggregate amount equal to the Base Salary for a period
of one year. Any such severance payments shall be payable periodically in the
same manner as the Base Salary is payable under 4 of this agreement, and,
notwithstanding any other provisions of this agreement to the contrary, such
severance payments shall be payable only so long as the Employee is in full
compliance with the provisions of 7 of this agreement.
For purposes of this agreement:
(i) "Cause" shall mean:
(A) any act constituting (1) a felony under the federal laws of the
United States, the laws of any state, or any other applicable law, (2) fraud,
embezzlement, misappropriation of assets,
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willful misfeasance, or dishonesty, or (3) other criminal conduct which in any
way materially and adversely affects the reputation, goodwill, or business
position of the Company;
(B) the failure of the Employee to perform and observe all material
obligations and conditions to be performed and observed by the Employee under
this agreement, or to perform his duties in accordance with the policies,
programs, budgets, procedures, and directions established from time to time by
the CEO or the Board (any such failure, a "Performance Failure"), and to correct
such Performance Failure promptly following written notice from the Company to
do so; or
(C) having corrected (or the Company having waived the correction
of) a Performance Failure, the occurrence of any subsequent Performance Failure;
and
(ii) "Long-Term Disability" shall mean that, because of physical or
mental incapacity, it is more likely than not that the Employee will be unable,
within 180 days after such incapacity commenced, to perform the essential
functions of his position with the Company, with or without reasonable
accommodation. In the event of any disagreement about whether or when the
Employee is under a Long-Term Disability, the question shall be determined: (A)
by a physician selected by agreement between the Employee and the Company if
such a physician is selected within 10 days after either of them requests the
other so to agree; or, if not, (B) by two physicians, the first of whom shall be
selected by the Employee and the second of whom shall be selected by the Company
or, if the Employee fails to make a selection within 10 days after being
requested to do so by the Company, the second physician shall be selected by the
first physician; or, if the two physicians fail to agree, (C) by a third
physician selected by the first two physicians. The Employee shall submit to all
reasonable examinations requested by any such physicians.
(S)9. Capacity. The Employee represents and warrants to the Company that
--------
he has the capacity and right to enter into this agreement and perform all of
his obligations under this agreement without any restriction.
(S)10. Remedies. All rights and remedies of either Party under this
--------
agreement are cumulative and in addition to all other rights and remedies which
may be available to that Party from time to time, whether under any other
agreement, at law, or in equity.
(S)11. Survival. The termination of the Employee's employment with the
--------
Company (for any reason) shall not relieve either Party of any of that Party's
obligations under this agreement existing at, arising as a result of, or
relating to acts or omissions occurring prior to, such termination. Without
limiting the generality of the preceding sentence, in no event shall the
termination of such employment modify or affect any obligations of the Employee
or rights of the Company under 7 of this agreement, all of which shall survive
the termination of such employment.
(S)12. Notices. All notices and other communications under this agreement
-------
to either Party shall be in writing and shall be deemed given when delivered
personally, telecopied (which is confirmed) to that Party at the telecopy number
for that Party set forth below, mailed by certified mail (return receipt
requested) to that Party at the address for that Party (or at such other address
for such Party as such Party shall have specified in notice to the other Party)
or delivered to Federal
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<PAGE>
Express, UPS, or any similar express delivery service for delivery to that Party
at that address:
(a) If to the Company:
American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880-1249
Attention: Gregory A. Serrao, Chief Executive
Officer
Telecopy No.: (617) 224-4216
with a copy to
Baker & Hostetler
65 East State Street
Columbus, Ohio 43215
Attention: Gary A. Wadman, Esq.
Telecopy No.: (614) 462-2616
(b) If to the Employee:
Lee S. Feldman, Esq.
30 Hancock St., #3
Boston, Massachusetts 02114
Telecopy No.: _______________
(S)13. Severability. The intention of the Parties is to comply with all
------------
rules, laws, and public policies to the fullest extent possible. If and to the
extent that any court of competent jurisdiction is unable so to construe any
provision of this agreement and holds that provision to be invalid, such
invalidity shall not affect the remaining provisions of this agreement, which
shall remain in full force and effect. With respect to any provision in this
agreement finally determined by such a court to be invalid or unenforceable,
such court shall have jurisdiction to reform this agreement to the extent
necessary to make such provision valid and enforceable, and, as reformed, such
provision shall be binding on the Parties.
(S)14. Non-Waiver. No failure by either Party to insist upon strict
----------
compliance with any term of this agreement, to exercise any option, to enforce
any right, or to seek any remedy upon any default of the other Party shall
affect, or constitute a waiver of, the other Party's right to insist upon such
strict compliance, exercise that option, enforce that right, or seek that remedy
with respect to that default or any prior, contemporaneous, or subsequent
default. No custom or practice of the Parties at variance with any provision of
this agreement shall affect, or constitute a waiver of, either Party's right to
demand strict compliance with all provisions of this agreement.
(S)15. Complete Agreement. This agreement and all documents referred to in
------------------
this agreement, all of which are hereby incorporated herein by reference,
contain the entire agreement
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<PAGE>
between the Parties and supersede all other agreements and understandings
between the Parties with respect to the subject matter of this agreement. No
alterations, additions, or other changes to this agreement shall be made or be
binding unless made in writing and signed by both Parties.
(S)16. Governing Law. This agreement shall be governed by and construed in
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accordance with the laws of the Commonwealth of Massachusetts without regard to
principles of conflicts of law.
(S)17. Captions. The captions of the various sections of this agreement
--------
are not part of the context of this agreement, are only guides to assist in
locating those sections, and shall be ignored in construing this agreement.
(S)18. Genders and Numbers. Where permitted by the context, each pronoun
-------------------
used in this agreement includes the same pronoun in other genders and numbers,
and each noun used in this agreement includes the same noun in other numbers.
(S)19. Successors. This agreement shall be personal to the Employee, and
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neither this agreement nor any rights or obligations of the Employee under this
agreement may be assigned by the Employee to any third party. Any assignment or
attempted assignment by the Employee in violation of the preceding sentence
shall be null and void. Subject to the foregoing, this agreement shall be
binding upon, inure to the benefit of, and be enforceable by and against the
heirs, personal representatives, successors, and assigns of each Party.
AMERICAN DENTAL PARTNERS, INC.
By /s/ Gregory A. Serrao /s/ Lee S. Feldman
-------------------------- ------------------
Gregory A. Serrao, Chairman LEE S. FELDMAN
of the Board and Chief
Executive Officer
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<PAGE>
Exhibit 10(r)
AMENDED AND RESTATED
SERVICE AGREEMENT
BETWEEN
PDHC, LTD.
and
PDG, P.A.
January 1, 1999
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C>
ARTICLE I. DEFINITIONS........................................................................................... 1
ARTICLE II. APPOINTMENT AND AUTHORITY OF SERVICE COMPANY......................................................... 1
(S)2.1 Appointment.......................................................................................... 1
(S)2.2 Authority............................................................................................ 1
(S)2.3 Patient Referrals.................................................................................... 2
(S)2.4 Internal Management of Provider...................................................................... 2
(S)2.5 Practice of Dentistry................................................................................ 2
ARTICLE III. POLICY BOARD........................................................................................ 2
(S)3.1 Formation and Operation of Policy Board.............................................................. 2
(S)3.2 Responsibilities of the Policy Board................................................................. 3
(a) Capital Improvements and Expansion................................................................... 3
(b) Budgeting............................................................................................ 3
(i) Annual Budgets.................................................................................. 3
(ii) Effect of Certain Changes........................................... Error! Bookmark not defined.
(iii)Variances........................................................... Error! Bookmark not defined.
(d) Patient Fees; Collection Policies.................................................................... 4
(e) Provider and Payor Relationships..................................................................... 4
(f) Strategic and Operational Planning................................................................... 4
(g) Capital Expenditures................................................................................. 4
(h) Personnel Planning................................................................................... 4
(i) Grievance Referrals.................................................................................. 4
(j) Patient Concerns and Claims.......................................................................... 4
(k) Environmental Health and Safety...................................................................... 4
(l) Emergency Care Services.............................................................................. 5
(m) Financial Review..................................................................................... 5
(n) Provider Acquisitions................................................................................ 5
(o) Other................................................................................................ 5
(S)3.3 Dental Decisions..................................................................................... 5
ARTICLE IV. RESPONSIBILITIES OF SERVICE COMPANY.................................................................. 5
(S)4.1 Clinics.............................................................................................. 5
(S)4.2 Equipment............................................................................................ 6
(S)4.3 Laboratory Services.................................................................................. 6
(S)4.4 Supplies............................................................................................. 6
(S)4.5 Capital Investment................................................................................... 7
(S)4.6 Support Services..................................................................................... 7
(S)4.7 Quality Assurance, Risk Management, and Utilization Review........................................... 7
(S)4.8 Licenses and Permits................................................................................. 7
(S)4.9 Personnel............................................................................................ 7
(S)4.10 Contract Negotiations................................................................................ 8
(S)4.11 Billing and Collection............................................................................... 8
(S)4.12 Provider Account..................................................................................... 9
</TABLE>
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<TABLE>
<S> <C> <C>
(a) Power of Attorney.................................................................................... 9
(b) Priority of Payments...................................................... Error! Bookmark not defined.
(c) Further Assurances................................................................................... 9
(S)4.13 Financial Matters.................................................................................... 9
(a) Annual Budget........................................................................................ 9
(b) Accounting and Financial Records..................................................................... 10
(c) Review of Expenditures............................................................................... 10
(d) Tax Matters.......................................................................................... 10
(i) General......................................................................................... 10
(ii)Sales and Use Taxes............................................................................. 10
(S)4.14 Reports and Records.................................................................................. 10
(a) Dental Records....................................................................................... 11
(b) Other Reports and Records............................................................................ 11
(S)4.15 Recruitment of Provider Dentists..................................................................... 11
(S)4.16 Service Company's Insurance.......................................................................... 11
(S)4.17 License of Name and Marks............................................................................ 11
(S)4.18 No Warranty.......................................................................................... 11
ARTICLE V. RESPONSIBILITIES OF PROVIDER.......................................................................... 11
(S)5.1 Organization and Operations.......................................................................... 12
(S)5.2 Provider Personnel................................................................................... 13
(a) Dentist Personnel.................................................................................... 13
(b) Provider and Patient Scheduling...................................................................... 13
(c) Paid Hours Reporting................................................................................. 13
(d) Non-Dentist Dental Care Personnel.................................................................... 13
(S)5.3 Professional Standards............................................................................... 14
(S)5.4 Dental Care.......................................................................................... 14
(S)5.5 Peer Review and Quality Assurance.................................................................... 14
(S)5.6 Provider's Insurance................................................................................. 15
(S)5.7 Noncompetition....................................................................................... 15
(S)5.8 Use of Name.......................................................................................... 16
ARTICLE VI. CONFIDENTIALITY...................................................................................... 16
(S)6.1 Confidential and Proprietary Information............................................................. 16
(S)6.2 Use of Practice Statistics........................................................................... 17
ARTICLE VII. FINANCIAL ARRANGEMENTS.............................................................................. 17
(S)7.1 Clinic Expense Reimbursement......................................................................... 17
(S)7.2 Repayment of Advances................................................................................ 17
(S)7.3 Fees................................................................................................. 17
(a) Service Fee.......................................................................................... 17
(b) Performance Fee...................................................................................... 17
(S)7.4 Adjustment to Performance Fee........................................................................ 17
(S)7.5 Reasonable Value..................................................................................... 18
(S)7.6 Payment.............................................................................................. 18
(S)7.7 Accounts Receivable.................................................................................. 18
ARTICLE VIII. TERM AND TERMINATION............................................................................... 19
(S)8.2 Termination.......................................................................................... 19
</TABLE>
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<TABLE>
<S> <C> <C>
(a) Termination By Service Company....................................................................... 19
(b) Termination By Provider.............................................................................. 20
(c) Termination by Agreement............................................................................. 20
(d) Legislative, Regulatory or Administrative Change..................................................... 20
(S)8.3 Effects of Termination............................................................................... 21
(S)8.4 Purchase Obligation.................................................................................. 21
(S)8.5 Closing of Purchase.................................................................................. 22
ARTICLE IX. GENERAL.............................................................................................. 23
(S)9.1 Administrative Services Only......................................................................... 23
(S)9.2 Relationship of Parties.............................................................................. 24
(S)9.3 Notices.............................................................................................. 24
(S)9.4 Execution of Documents............................................................................... 25
(S)9.5 Governing Law........................................................................................ 25
(S)9.6 Severability......................................................................................... 25
(S)9.7 Setoff............................................................................................... 25
(S)9.8 Remedies............................................................................................. 25
(S)9.9 Non-waiver........................................................................................... 25
(S)9.10 Indemnification...................................................................................... 26
(S)9.11 No Third Party Benefit............................................................................... 26
(S)9.12 Captions............................................................................................. 26
(S)9.13 Genders and Numbers.................................................................................. 26
(S)9.14 Complete Agreement................................................................................... 26
(S)9.15 Counterparts......................................................................................... 26
(S)9.16 Assignment........................................................................................... 26
(S)9.17 Successors........................................................................................... 27
(S)9.18 Force Majeure........................................................................................ 27
(S)9.19 Interpretation....................................................................................... 27
</TABLE>
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AMENDED AND RESTATED
SERVICE AGREEMENT
This agreement is made effective January 1, 1999, between PDHC, Ltd., a
Minnesota corporation ("Service Company"), and PDG, P.A., a Minnesota
professional association ("Provider").
Background Information
----------------------
A. Provider operates as a dental practice providing dental services to
the general public in and around the Minneapolis-St. Paul area through
individual dentists who are licensed to practice dentistry in the state of
Minnesota and who are employed or otherwise retained by Provider.
B. Service Company is engaged in the business of providing assets,
personnel, and services to dental practices other than such services as are
directly related to the provision of dental care or the practice of dentistry.
Service Company's services are intended to improve the efficiency and
profitability of dental practices and permit the dentists in such practices to
focus their efforts solely on rendering quality dental care.
C. Provider desires to focus its energies, expertise and time on the
practice of dentistry and on the delivery of dental services to patients. To
accomplish this goal, Provider has engaged Service Company to provide such
services as are necessary and appropriate for the day-to-day administration of
the non-dental aspects of Provider's dental practice pursuant to a Service
Agreement dated November 12, 1996, as amended (the "Original Service
Agreement"). Provider and Service Company (the "Parties") desire to continue
such engagement and amend and restate the Original Service Agreement to
incorporate prior amendments to such agreement and to provide for certain other
modifications, all as set forth in this agreement.
Statement of Agreement
----------------------
The Parties hereby acknowledge the accuracy of the foregoing Background
Information and agree as follows:
ARTICLE I. DEFINITIONS
Capitalized terms used in this agreement but not otherwise defined
herein shall have the respective meanings given those terms in the attached
Exhibit A.
ARTICLE II. APPOINTMENT AND AUTHORITY OF SERVICE COMPANY
(S)2.1 Appointment. Provider hereby appoints Service Company as its
-----------
sole and exclusive agent for the performance of the Services, and Service
Company hereby accepts such appointment, subject at all times to the provisions
of this agreement.
(S)2.2 Authority. Service Company shall have all power, authority,
---------
and responsibility reasonably necessary to provide the Services and carry out
Service Company's other obligations under this agreement. Without limiting the
foregoing, Service Company shall have the authority
<PAGE>
to provide the Services in any reasonable manner Service Company deems
appropriate to meet the day-to-day requirements of the business functions of
Provider. Subject to Article III of this agreement, Service Company is also
expressly authorized to negotiate and execute on behalf of Provider contracts
that do not relate to the provision of Dental Care. Provider shall give Service
Company 30 days prior written notice of Provider's intent to execute any
agreement obligating Provider to perform Dental Care or otherwise creating a
binding legal obligation on Provider. Unless an expense is expressly designated
as a Service Company Expense in this agreement, all expenses incurred by Service
Company in providing services pursuant to this agreement shall be Clinic
Expenses.
(S)2.3 Patient Referrals. The Parties agree that the benefits to
-----------------
Provider hereunder do not require, are not payment for, and are not in any way
contingent upon the referral, admission, treatment, or any other arrangement for
the provision of any item or service offered by Service Company to patients of
Provider in any facility, laboratory, or dental care operation controlled,
managed, or operated by Service Company.
(S)2.4 Internal Management of Provider. Matters involving the tax
-------------------------------
planning, investment planning, and internal management, control, or finances of
Provider, including without limitation the compensation of dentist employees of
Provider, shall remain the sole and exclusive responsibility of Provider and its
shareholders.
(S)2.5 Practice of Dentistry. The Parties acknowledge and agree
---------------------
that: (a) Service Company is not authorized or qualified to engage in any
activity that may be construed or deemed to constitute the practice of
dentistry; and (b) notwithstanding anything in this agreement to the contrary
(i) Provider, through its dentists, shall be solely responsible for and shall
have complete authority, responsibility, supervision, and control over the
provision of all Dental Care and that all Dental Care shall be provided and
performed exclusively by or under the supervision of dentists as such dentists,
in their sole discretion, deem appropriate, (ii) Service Company shall not have
or exercise any control or supervision over the provision of Dental Care, and
(iii) to the extent any act or service required of Service Company under this
agreement is reasonably likely to be construed by a court of competent
jurisdiction or by any applicable governmental agency to constitute the practice
of dentistry, the requirement to perform that act or service by Service Company
shall be deemed waived and unenforceable. For purposes of this agreement and as
the context permits, the term "dentist" shall be deemed to include those
individuals licensed by the State of Minnesota to practice general dentistry or
a dental care specialty such as orthodontics, endodontics, periodontics,
prosthodontics, pediatric dentistry, oral surgery, and oral medicine.
ARTICLE III. POLICY BOARD
(S)3.1 Formation and Operation of Policy Board. The Parties hereby
---------------------------------------
establish a policy board (the "Policy Board") which shall be responsible for
developing and implementing management and administrative policies for the
overall operation of Clinics. The Policy Board shall consist of an even number
of members, not more than eight, of which one-half of the members shall be
designated by Service Company, in its sole discretion, and the other half of the
members shall be designated by Provider; provided that, unless otherwise agreed
by the Parties, the Policy Board members designated by Provider shall be
licensed dentists employed by Provider. The total number of Policy Board members
may be established or changed from time to time by the agreement of the Parties.
Each Party shall have the right to designate, remove, and
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replace its Policy Board designees at any time and from time to time upon notice
to the other Party.
Except as may otherwise be expressly provided in this agreement or any
rules, bylaws, or regulations adopted by the Policy Board, the act of a majority
of the members of the Policy Board shall be the act of the Policy Board. The
Policy Board's decisions may be evidenced by either minutes of a Policy Board
meeting or written action taken by the Policy Board members making the decision;
provided that no written action signed by less than all of the Policy Board
members shall be effective unless notice of such action is given to the Policy
Board member who is not signing such action at least two business days prior to
the effective date of such action. The decisions, resolutions, and actions of
the Policy Board shall be binding on both Parties and, together with the
recommendations of the Policy Board, shall be implemented by the Parties, as
appropriate.
The Policy Board shall hold regular meetings at such places and at such
times (not less often than quarterly) as the Policy Board may determine from
time to time. Special Policy Board meetings may be called by either Party or any
two Policy Board members; provided that notice of any meeting which is not a
regularly scheduled meeting shall be given to all Policy Board members at least
five business days prior to the meeting, unless such notice is waived by the
Policy Board members. Policy Board meetings may be held through the use of
telecommunications equipment so long as all members can hear each other clearly.
(S)3.2 Responsibilities of the Policy Board. The Policy Board shall
------------------------------------
have the following duties, responsibilities, and authority:
(a) Capital Improvements and Expansion. Any renovation and
----------------------------------
expansion plans and capital equipment expenditures with respect to Clinics shall
be reviewed and approved by the Policy Board and shall be based upon economic
feasibility, dentist support, productivity, and then-current market conditions.
(b) Budgeting.
---------
(i) Annual Budgets. All annual capital and operating
--------------
budgets prepared in accordance with (S)4.13(a) by Service Company (in
consultation with Provider) shall be subject to the review, comment, and
approval of the Policy Board. Notwithstanding the foregoing sentence, such
budgets shall be subject to the review, comment, and approval of Parent. The
Policy Board shall, upon approving any budget pursuant to this section, deliver
a copy of such approved budget to the Chief Financial Officer of Parent for
Parent's approval.
(ii) [*]
(iii) [*]
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
-3-
<PAGE>
(c) Marketing and Advertising. All advertising and other marketing of
-------------------------
the dental services performed at any Clinic shall be subject to the prior review
and approval of the Policy Board.
(d) Patient Fees; Collection Policies. Subject to (S)3.3, as a part of
---------------------------------
the annual operating budget, in consultation with Provider and Service Company,
the Policy Board shall review and make recommendations concerning the fee
schedules and collection policies for all dental and ancillary services rendered
by Provider. Approval of the fee schedules shall be a Dental Decision.
(e) Provider and Payor Relationships. Subject to (S)3.3, decisions
--------------------------------
regarding the establishment or maintenance of contractual relationships between
Provider and outside or institutional dental care providers and third-party
payors shall be subject to the review and recommendations of the Policy Board.
Subject to (S)3.3, all discounted fee practices and schedules, including
individual provider or specialty discount arrangements, preferred provider
organization discounts and capitated fee arrangements, shall be subject to the
review and recommendations of the Policy Board. Where there is no clear
methodology for the allocation of capitated fees among Provider's Dental Care
Professionals, the Policy Board shall recommend the methodology intended to
result in the equitable and appropriate allocation of all related fees
consistent with the type and utilization of Dental Care covered under the
capitation arrangement.
(f) Strategic and Operational Planning. The Policy Board shall review
----------------------------------
and approve the long-term strategic and short-term operational goals, objectives
and plans developed by Service Company.
(g) Capital Expenditures. The Policy Board shall determine the priority
--------------------
of major capital expenditures.
(h) Personnel Planning. The Policy Board shall review and approve
------------------
Provider and support personnel manpower plans developed by Service Company. The
Policy Board shall review and approve any variations to the restrictive
covenants in the dentists' employment or other agreements.
(i) Grievance Referrals. The Policy Board shall consider and make
-------------------
recommendations to the Parties regarding grievances pertaining to matters not
specifically addressed in this agreement as referred to it by key Provider or
Service Company management and supervisory personnel.
(j) Patient Concerns and Claims. The Policy Board shall review, approve
---------------------------
and monitor a patient claims tracking, monitoring and recovery procedure which
shall provide, without limitation, for (i) the timely and appropriate resolution
of all claims and related patient and Provider reimbursement decisions, and (ii)
the distribution of a summary report setting forth the status and proposed
actions with respect to each such claim to Provider and Service Company on a
regular basis. All Dental Care related patient concerns and claims reimbursement
decisions shall be a Provider Expense.
(k) Environmental Health and Safety. The Policy Board shall review,
-------------------------------
approve and monitor environmental and workplace health and safety guidelines,
the goal of which is to
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<PAGE>
achieve compliance with current national, state and local laws and regulations
regarding environmental and workplace health and safety.
(l) Emergency Care Services. The Policy Board shall review, approve and
-----------------------
periodically make suggestions for improving (i) the organization and delivery of
emergency Dental Care by Provider, and (ii) the process and guidelines for
ensuring an appropriate response by Provider to dental and in-Clinic medical
emergencies as they may occur from time to time.
(m) Financial Review. The Policy Board shall review and monitor the
----------------
financial performance of Provider with respect to the attainment of its budgeted
goals.
(n) Provider Acquisitions. The Policy Board shall have the authority to
---------------------
approve or disapprove any merger or combination with or acquisition of any
dental practice by Provider.
(o) Other. The Policy Board shall have such other duties,
-----
responsibilities, and authority as may be set forth in this agreement or agreed
upon by the Parties from time to time.
(S)3.3 Dental Decisions. Notwithstanding the preceding section or
----------------
any other provisions of this agreement to the contrary, all Dental Decisions
(defined below) will be made solely by the dentist members of the Policy Board;
provided that non-dentist members of the Policy Board may participate in the
analysis and discussion process. For purposes of this agreement, "Dental
Decisions" shall mean decisions relating directly to: (a) types and levels of
Dental Care to be provided; (b) recruitment of dentists for Provider, including
the evaluation of the background, experience, qualifications, specialties, and
other credentials of recruited dentists; (c) fee schedules for Provider's
services, including without limitation Provider's usual and customary fee
schedule; (d) any other Dental Care related functions or decisions agreed upon
by the Parties; and (e) to the extent required by applicable law, third party
payor contracting.
ARTICLE IV. RESPONSIBILITIES OF SERVICE COMPANY
During the Term, Service Company shall provide all such Services as are
necessary and appropriate for the day-to-day administration of the business
aspects of Provider's operations, including without limitation those services
set forth in this Article, provided that all such services shall be subject to
the applicable Budget.
(S)4.1 Clinics
-------
(a) Service Company shall lease, acquire or otherwise procure a Clinic
in such locations as are approved by the Policy Board, taking into consideration
the professional concerns of Provider. The expenses associated with any such
leasing, acquisition, or procurement shall be Clinic Expenses. Any Clinic
procured by Service Company for use by Provider shall be procured at
commercially reasonable rates. Any move from a present Provider practice
location shall be made only after Service Company has received Provider Consent.
(b) In the event Provider is the lessee of a Clinic under a lease with
an unrelated and nonaffiliated lessor, Service Company may require Provider to
assign such lease to Service Company upon receipt of consent from the lessor.
Provider shall exercise all reasonable efforts
-5-
<PAGE>
to assist in obtaining the lessor's consent to the assignment. Any expenses
incurred in the assignment shall be Clinic Expenses.
(c) Service Company shall be responsible for the repair and maintenance
of each Clinic, in a manner consistent with Service Company's responsibilities
under the terms of any lease or other use arrangement relating to that Clinic,
the costs and expenses of which shall be a Clinic Expense; provided that the
costs and expenses of any repairs or maintenance necessitated by the negligence
or willful misconduct of Provider or its dentists, other personnel, agents, or
invitees shall be a Provider Expense.
(S)4.2 Equipment.
---------
(a) Service Company shall provide all non-dental equipment, fixtures,
office supplies, furniture and furnishings deemed reasonably necessary by
Service Company for the operation of each Clinic and reasonably necessary for
the provision of Dental Care.
(b) Service Company shall provide, finance, or cause to be provided or
financed such dental related equipment as is reasonably required by Provider.
Subject to economic feasibility as set forth in the budgets approved pursuant to
this agreement, Provider shall have final authority in all dental equipment
selections. Service Company may, however, advise Provider on the relationship
between its dental equipment decisions and the overall administrative and
financial operations of the Clinics. Except for Special Dental Supplies (defined
in (S) 4.3, below), all dental and non-dental equipment acquired for the use of
Provider shall be owned by Service Company.
(c) Service Company shall be responsible for repairing, maintaining,
and keeping in reasonably good condition (ordinary wear and tear excepted), and
replacing (as necessary) all equipment provided by Service Company under this
agreement, the cost and expense of which shall be a Clinic Expense; and provided
that the cost and expense for any repairs, maintenance and replacement
necessitated by the negligence or willful misconduct of Provider or its
dentists, other personnel, or agents shall be a Provider Expense.
(S)4.3 Laboratory Services. Service Company shall arrange for
-------------------
laboratory services, including without limitation dental appliance laboratory
service, pathology laboratory service, medical laboratory service, and such
other laboratory services as are reasonably necessary and appropriate for the
operation of each Clinic and the provision of Dental Care therein.
(S)4.4 Supplies. Service Company shall order, procure, purchase,
--------
own, and provide to Provider a reasonable inventory of Ordinary Dental Supplies
and office supplies as are reasonably necessary and appropriate for the
operation of each Clinic and the provision of Dental Care therein. Unless
otherwise prohibited by federal and/or state law, Service Company shall also
order, procure, purchase and provide on behalf of and as agent for Provider all
reasonable Special Dental Supplies required by Provider to provide Dental Care,
the cost of which shall be a Clinic Expense. Service Company shall ensure that
each Clinic is at all times adequately stocked with all such supplies. The
ultimate oversight, supervision and ownership of (a) all office and Ordinary
Dental Supplies is and shall remain the sole responsibility of Service Company,
and (b) all Special Dental Supplies is and shall remain the sole responsibility
of Provider.
-6-
<PAGE>
(S)4.5 Capital Investment. Access to all needed working capital
------------------
and capital expenditures approved by the Policy Board will be provided by
Service Company. Service Company shall determine the source of capital to be
invested, which may include (a) intercompany borrowings from Parent (at the rate
set forth in clause (j) in the definition of "Clinic Expenses"), and (b)
borrowings, leases, or other financing methods through independent third-party
financial institutions.
(S)4.6 Support Services. Service Company shall provide or arrange
----------------
for all printing, stationery, forms, postage, duplication, facsimile,
photocopying, and data transmission and processing services, information
services (including providing a computer system for clinic functions, billing,
communications, and management), and other support services as are reasonably
necessary and appropriate for the operation of each Clinic and the provision of
Dental Care therein.
(S)4.7 Quality Assurance, Risk Management, and Utilization Review.
----------------------------------------------------------
Service Company shall assist Provider in Provider's establishment and
implementation of procedures to ensure the consistency, quality,
appropriateness, and necessity of Dental Care provided by Provider, and shall
provide administrative support for Provider's overall quality assurance, risk
management, and utilization review programs. Service Company shall have the
authority to monitor Provider's level of conformance with such procedures and to
report its findings to Provider.
(S)4.8 Licenses and Permits. Although Provider shall be solely
--------------------
responsible for obtaining and maintaining all federal, state, and local licenses
and regulatory permits required for or in connection with the operation of
Provider and in connection with the operation of all dental equipment located in
each Clinic, Service Company shall assist Provider with the implementation of a
plan designed to ensure that all such licenses and permits are obtained and
shall provide reasonable assistance to Provider in obtaining the same. Service
Company also shall maintain all licenses and permits required for all equipment
(existing and future) located at each Clinic.
(S)4.9 Personnel. Except as provided in (S)5.2(d) of this
---------
agreement and subject to (S)3.3, Service Company shall employ or otherwise
retain and shall be responsible for recruiting, hiring, and terminating all
management, administrative, supervisory, clerical, secretarial, bookkeeping,
accounting, payroll, dental assistants, hygienists, laboratory technicians and
personnel, and other non-dentist personnel as Service Company deems necessary
and appropriate for Service Company's performance of its duties and obligations
under this agreement. The selection, training, and supervision of: (a) dental
assistants, hygienists, and other clinical personnel to be employed by Service
Company shall be the responsibility of Provider; and (b) all other personnel to
be employed by Service Company shall be the responsibility of Service Company.
Consistent with reasonably prudent personnel management policies, Service
Company shall seek and consider the advice, input, and requests of Provider in
regard to personnel matters. Service Company shall have sole responsibility for
determining the salaries and fringe benefits of such non-professional personnel,
and for withholding all appropriate amounts for income taxes, unemployment
insurance, social security, workers' compensation, and any other withholding
required by applicable law.
-7-
<PAGE>
(S)4.10 Contract Negotiations. Service Company shall advise
---------------------
Provider with respect to and negotiate, either directly or on Provider's behalf,
as appropriate, such contractual arrangements with third parties as are
reasonably necessary and appropriate for Provider's provision of Dental Care,
including without limitation negotiated price agreements with third party
payors, alternative delivery systems, or other purchasers of group dental care
services; provided that no contract or arrangement regarding the provision of
Dental Care shall be entered into without Provider Consent.
(S)4.11 Billing and Collection. On behalf of and for the account of
----------------------
Provider, Service Company shall establish and maintain credit and billing and
collection policies and procedures, and shall exercise reasonable efforts to
bill and collect in a timely manner (and to the extent permitted by applicable
law) all professional and other fees for all billable Dental Care provided by
Dental Care Professionals. Service Company shall advise and consult with
Provider regarding the fees for Dental Care provided by Provider (including any
related discounting policy), it being understood, however, that Provider shall
establish the fees (subject to (S)3.2(d), above) to be charged for Dental Care
and that Service Company shall have no authority whatsoever with respect to the
establishment of such fees. In connection with the billing and collection
services to be provided hereunder, Provider hereby grants to Service Company, to
the extent permitted by applicable law, throughout the Term (and thereafter as
provided in (S)8.3), an exclusive special power of attorney and appoints Service
Company, to the extent permitted by applicable law, as Provider's exclusive true
and lawful agent and attorney-in-fact, and Service Company hereby accepts such
special power of attorney and appointment, for the following purposes:
(a) To bill Provider's patients, in Provider's name and on Provider's
behalf, for all billable Dental Care provided by or on behalf of Provider to
patients.
(b) To bill, in Provider's name and on Provider's behalf, all claims
for reimbursement or indemnification from insurance companies and plans, all
state or federally funded dental benefit plans, and all other third party payors
or fiscal intermediaries for all covered billable Dental Care provided by or on
behalf of Provider to patients.
(c) To collect and receive, in Provider's name and on Provider's
behalf, all accounts receivable generated by such billings and claims for
reimbursement, to administer such accounts including, but not limited to,
extending the time of payment of any such accounts for cash, credit or
otherwise; discharging or releasing the obligors of any such accounts; suing,
assigning or selling at a discount such accounts to collection agencies; or
taking other measures to require the payment of any such accounts; provided,
however, that extraordinary collection measures, such as filing lawsuits,
discharging or releasing obligors, or assigning or selling accounts at a
discount to collection agencies shall not be undertaken without Provider
Consent.
(d) To deposit all amounts collected into the Provider Account which
shall be and at all times remain in Provider's name. Provider shall transfer and
deliver to Service Company all funds received by Provider from patients or third
party payors for Dental Care. Upon receipt by Service Company of any funds from
patients or third party payors or from Provider for Dental Care pursuant to this
agreement, Service Company shall promptly deposit the same into the Provider
Account.
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<PAGE>
(e) To take possession of, endorse in the name of Provider, and deposit
into the Provider Account any notes, checks, money orders, insurance payments,
and any other instruments received in payment of accounts receivable for Dental
Care.
(f) To sign checks, drafts, bank notes or other instruments on behalf
of Provider, and to make withdrawals from the Provider Account for payments
specified in this agreement and as requested from time to time by Provider.
Upon request of Service Company, Provider shall execute and deliver to
the financial institution at which the Provider Account is maintained such
additional documents or instruments as Service Company may reasonably request to
evidence or effect the special power of attorney granted to Service Company by
Provider pursuant to this section and (S)4.12. The special power of attorney
granted herein is coupled with an interest and shall be irrevocable except with
Service Company's written consent. The irrevocable power of attorney shall
expire when this agreement has been terminated, all accounts receivable
purchased by Service Company pursuant to (S)7.7, if any, have been collected,
and all amounts due to Service Company as described in Article VII have been
paid.
(S)4.12 Provider Account.
----------------
(a) Power of Attorney. Service Company shall have access to the
-----------------
Provider Account solely for the purposes stated herein and shall use all funds
on deposit therein to pay all Clinic Expenses in accordance with the terms of
this agreement. Provider hereby grants to Service Company an exclusive special
power of attorney and appoints Service Company as Provider's true and lawful
agent and attorney-in-fact, throughout the Term (and thereafter as provided in
(S)8.3), and Service Company hereby accepts such special power of attorney and
appointment, to make withdrawals from Provider Account for payments specified in
this agreement and as requested from time-to-time by Provider. Notwithstanding
this exclusive special power of attorney, Provider may, upon reasonable advance
notice to Service Company, request that Service Company draw checks on the
Provider Account for Provider Expenses and such other amounts as may be due to
Provider under this agreement, subject to (S)4.12(b) of this agreement.
Disbursements shall be related to and in such amount so as to ensure that
disbursements made without prior Provider Consent are consistent with the
expenditures authorized by the Budget.
(b) [*]
* This information has been omitted pursuant to the Securities and Exchange
Commission's Grant of confidential treatment.
(c) Further Assurances. Promptly upon request by Service Company,
------------------
Provider shall execute a separate power of attorney in form reasonably
satisfactory to Service Company for the purpose of further confirming or
evidencing the rights granted to Service Company under (S)(S)4.11 and 4.12.
(S)4.13 Financial Matters.
-----------------
(a) Annual Budget. At least 30 days prior to the commencement of each
-------------
calendar year, Service Company, in consultation with Provider, shall prepare and
deliver to the Policy
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<PAGE>
Board for its approval a proposed Budget, setting forth an estimate of
Provider's revenue and expenses for the upcoming calendar year (including
without limitation the Service and Performance Fees associated with the services
provided by Service Company hereunder). The Budget shall provide that the
percentages of Adjusted Gross Revenue established pursuant to item 1 of Exhibit
A-1 attached to this agreement shall be allocated to Provider Expense
In the event a proposed Budget is disapproved by either the Policy
Board or Parent (pursuant to (S)3.2(b)(i)) or the Policy Board recommends
revisions to the then-current Budget (pursuant to (S)3.2(b)(ii)), Service
Company, in consultation with Provider, shall promptly revise such Budget,
taking into consideration the comments of the Policy Board or Parent, as
applicable, and shall deliver such revised Budget to the Policy Board for
approval. In the event that a proposed Budget has not been approved by both the
Policy Board and Parent by the beginning of the calendar year, then, subject to
the provisions of Exhibits A and A-1 attached to this agreement, the Budget for
the prior year shall be deemed to be adopted as the Budget for the current year
until a new Budget has been approved by both the Policy Board and Parent.
(b) Accounting and Financial Records. Service Company shall establish
--------------------------------
and administer accounting policies and procedures, internal controls, and
systems for the development, preparation, and safekeeping of administrative or
financial records and books of account relating to the business and financial
affairs of Provider, all of which shall be prepared and maintained in accordance
with GAAP. Service Company shall prepare and deliver to Provider, within 45 days
of the end of each calendar quarter, a balance sheet and an income statement
reflecting the financial status of Provider in regard to the provision of Dental
Care as of the end of such calendar quarter, all of which shall be prepared in
accordance with GAAP. In addition, Service Company shall prepare or assist in
the preparation of any other financial statements or records as Provider may
reasonably request.
(c) Review of Expenditures. One of Provider's representatives to the
----------------------
Policy Board shall review all expenditures related to the operation of Provider,
but such representative shall not have the power to prohibit or invalidate any
expenditure.
(d) Tax Matters.
-----------
(i) General. Service Company shall prepare or arrange for
-------
the preparation of all tax returns and reports of Provider required by
applicable law, which returns and reports shall be prepared by an accountant
reasonably acceptable to Provider.
(ii) Sales and Use Taxes. Service Company and Provider
-------------------
acknowledge and agree that to the extent that any of the services to be provided
by Service Company hereunder may be subject to any state sales and use taxes,
Service Company may have a legal obligation to collect such taxes from Provider
and to remit the same to the appropriate tax collection authorities. Provider
agrees to pay any and all applicable state sales, use, gross receipts, and other
similar taxes and charges (other than taxes on Service Company's net income)
with respect to any amount paid to Service Company hereunder and that such
amounts shall be a Provider Expense.
(S)4.14 Reports and Records.
-------------------
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<PAGE>
(a) Dental Records. Service Company shall establish, monitor, and
--------------
maintain procedures and policies for the timely creation, preparation, filing
and retrieval of all dental records generated by Provider in connection with
Provider's provision of Dental Care; and, subject to applicable law, shall
ensure that dental records are promptly available to dentists and any other
appropriate persons. All such dental records shall be retained and maintained in
accordance with all applicable state and federal laws relating to the
confidentiality and retention thereof. All dental records shall be and remain
the property of Provider.
(b) Other Reports and Records. Service Company shall timely create,
-------------------------
prepare, and file such additional reports and records as are reasonably
necessary and appropriate for Provider's provision of Dental Care, and shall be
prepared to analyze and interpret such reports and records upon the request of
Provider.
(S)4.15 Recruitment of Provider Dentists. Upon Provider's request,
--------------------------------
Service Company shall perform all services reasonably necessary and appropriate
in connection with the recruitment of professional dental personnel. Service
Company shall provide Provider with model agreements to document Provider's
employment, retention or other service arrangements with such individuals.
However, it shall be and remain the sole and complete responsibility of Provider
to interview, select, contract with (subject to (S)5.2, below), supervise,
control and terminate all dentists performing Dental Care or other professional
services, and Service Company shall have no authority whatsoever with respect to
such activities.
(S)4.16 Service Company's Insurance. Throughout the Term, Service
---------------------------
Company shall, as a Clinic Expense, obtain and maintain with commercial
carriers, or through self-insurance, or some combination thereof: (a)
appropriate worker's compensation coverage for the employees of Service Company
provided pursuant to this agreement; and (b) professional and comprehensive
general liability insurance covering Service Company, Service Company's
personnel, and all of Service Company's equipment in such amounts and on such
terms and conditions as Service Company deems appropriate. Service Company shall
cause Provider to be named as an additional insured on Service Company's
property and casualty insurance policies. Upon the request of Provider, Service
Company shall provide Provider with a certificate evidencing such insurance
coverage. Service Company may also carry, at Service Company's option and as a
Clinic Expense, key person life and disability insurance on any shareholder or
dentist employee of Provider in amounts determined as reasonable and sufficient
by Service Company. Service Company shall be the owner and beneficiary of any
such insurance.
(S)4.17 License of Name and Marks. Service Company hereby grants to
-------------------------
Provider, for the Term, a non-exclusive royalty-free license to use the name
"Park Dental" and all related marks and logos owned by Service Company for the
purpose of fulfilling its obligations hereunder, including without limitation
providing Dental Care to its patients.
(S)4.18 No Warranty. Provider acknowledges that Service Company has
-----------
not made and will not make any representations or warranties, express or
implied, regarding Service Company's services under this agreement or the
results of those services, including without limitation any representations or
warranties that the services provided by Service Company will result in any
particular amount or level of dental practice or income to Provider.
ARTICLE V. RESPONSIBILITIES OF PROVIDER
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<PAGE>
(S)5.1 Organization and Operations. As a continuing condition of
---------------------------
Service Company's obligations under this agreement, Provider shall at all times
during the Term: (a) be and remain legally organized and operated to provide
Dental Care in a manner consistent with all state and federal laws; (b) operate
and maintain within the Practice Territory a full time practice of dentistry
providing Dental Care in compliance with all applicable federal, state, and
local laws, rules, regulations, ordinances, and orders; (c) maintain and use its
best efforts to enforce its articles or certificate of incorporation (or other
instrument of organization), bylaws, shareholder agreements, and other
organizational documents (hereafter in this (S)5.1 simply "organizational
documents") in the respective forms provided to Service Company prior to
execution of this agreement; (d) have at least three executive officers at the
level of vice president or above who are also dentist employees of Provider; (e)
maintain and use its best efforts to enforce the written employment agreements
and independent contractor agreements described in (S)5.2(a), below; and (f)
not, without Service Company Consent, (i) amend any of its employment agreements
or organizational documents in any material respect or waive any material rights
thereunder, or (ii) engage in any transaction constituting a merger,
consolidation, reorganization, sale or purchase of assets outside of the
ordinary course of business, liquidation, or dissolution (a "Reorganization").
Provider hereby acknowledges that Service Company would not have entered into
this agreement but for Provider's covenant to maintain such organizational
documents and employment agreements, and Provider shall pay to Service Company,
in addition to the amounts set forth in Article VII, any damages, compensation,
payment, or settlement amounts received by Provider from a dentist who
terminates his employment agreement without cause or whose employment agreement
is terminated by Provider for cause.
If, with Service Company Consent, Provider engages in a Reorganization,
or a transaction approved by the Policy Board under (S)3.2(n) of this Agreement
(an "Acquisition"), which in either case results in the dental practice
involving Provider (or its successor) after such Reorganization or Acquisition
being operated in an affiliated group of two or more entities, including without
limitation a group consisting of Provider and new subsidiaries of Provider or
new entities under common control with Provider, then: (A) this Agreement shall
be interpreted to the fullest extent possible to apply to the entire
post-Reorganization or post-Acquisition business of all such entities (the
"Business Group"); and (B) Provider (or its successor) shall, and shall cause
all such other entities to, execute such documents and take such other actions
as are requested from time to time by Service Company to evidence or carry out
the intent of the preceding clause (A), including without limitation one or more
amendments to this Agreement, the agreement of all entities in the Business
Group to be bound by this Agreement, as so amended, and a new budget for the
operation of the Business Group under this Agreement, and the Service Company
Consent may be conditioned upon the execution of such documents or such other
actions. Without limiting the foregoing: (1) all revenues and expenses of the
Business Group shall be categorized as provided in this Agreement; (2) the terms
Actual Margin, Budgeted Margin, and Calculated Margin shall be calculated and
applied with respect to the Business Group's operations; (3) the Services to be
provided by Service Company shall be provided to the Business Group; and (4) the
obligations of Provider under this Agreement shall be joint and several
obligations of all entities included in the Business Group; provided that,
notwithstanding the foregoing, all rights, decisions, consents, approvals, or
other actions to be taken, given, made, or exercised by "Provider" under this
Agreement shall be taken, given, made, or exercised solely by Provider (or its
successor in interest) for and on behalf of the Business Group and shall be
binding on all entities in the Business Group.
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<PAGE>
(S)5.2 Provider Personnel.
------------------
(a) Dentist Personnel. Provider shall retain, as a Provider Expense and
-----------------
not as a Clinic Expense, that number of dentists during the Term which are
necessary and appropriate, in Provider's sole discretion, to provide Dental Care
to reasonably meet the demand therefor. Provider shall cause each dentist
retained by Provider to hold and maintain a valid and unrestricted license to
practice dentistry in the State of Minnesota, including without limitation any
licenses required for the provision of any specialty dental services, together
with all necessary or appropriate board or other certifications. Throughout the
Term, Provider shall enter into and maintain a written employment agreement
substantially in the form of Exhibit D for all dentists now and hereafter
employed by Provider; provided that: (i) Provider shall not be obligated to
enter into an employment agreement in the form of Exhibit D with any dentist
whose employment agreement was assigned by Service Company to Provider
contemporaneous with the execution of this agreement, so long as such dentist's
employment agreement remains in effect; (ii) Provider shall, throughout the
Term, enter into and maintain a written employment agreement substantially in
the form of Exhibit C with each dentist of Provider who now or hereafter is
either an executive officer (at a level of vice president or above) of, or
Policy Board member designated by, Provider; and (iii) Provider shall,
immediately upon execution of this agreement, enter into and maintain a written
employment agreement substantially in the form of Exhibit C with each of the
dentists set forth in Exhibit E. Throughout the Term, Provider shall enter into
and maintain a written agreement with each independent contractor retained by
Provider, which agreements shall contain confidentiality provisions
substantially similar to those contained in the employment agreement in the form
of Exhibit D. Provider shall be responsible for paying the compensation and
benefits as applicable, for all dentists and any other dentist personnel or
other contracted or affiliated dentists, and for withholding all sums for income
tax, unemployment insurance, social security, or any other withholding required
by applicable law. Service Company may, on behalf of Provider, administer the
compensation and benefits with respect to such individuals in accordance with
the written agreement between Provider and each dentist. Service Company shall
neither control nor direct any dentist in the performance of Dental Care for
patients. Provider shall provide to Service Company evidence of such licensing,
certifications, and other credentials of the dentists retained by Provider as
Service Company may request from time to time.
(b) Provider and Patient Scheduling. Provider shall, with the
-------------------------------
reasonable assistance of Service Company, (i) develop a set of Provider and
patient scheduling guidelines and a corresponding scheduling system, and (ii)
support Service Company in the implementation of such guidelines and effective
operation of such system.
(c) Paid Hours Reporting. Provider shall support the development and
--------------------
effective operation by Service Company of a dentist paid hours reporting and
monitoring system.
(d) Non-Dentist Dental Care Personnel. All non-dentist personnel who
---------------------------------
provide Dental Care, including without limitation dental hygienists, denturists,
dental assistants, and other licensed or certified personnel shall be under such
control, supervision and direction of Provider and the dentists retained by
Provider in the performance of or in connection with Dental Care for patients as
is required under applicable state law and regulations.
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(S)5.3 Professional Standards. As a continuing condition of
----------------------
Service Company's obligations hereunder, each dentist retained by Provider to
provide Dental Care must: (i) have and maintain a valid and unrestricted license
to practice dentistry in the state; and (ii) comply with, be controlled and
governed by, and otherwise provide Dental Care in accordance with applicable
federal, state and municipal laws, rules, regulations, ordinances and orders,
and the ethics and standard of care of the dental profession.
(S)5.4 Dental Care. Provider shall ensure that dentists and non-
-----------
dentist dental care personnel are available in sufficient numbers as are
necessary or appropriate to provide Dental Care to reasonably meet the demand
for such Dental Care. In the event that dentists employed by, or shareholders
of, Provider are not available to provide Dental Care coverage, Provider shall
engage and retain dentists on a temporary coverage basis, which dentists shall
meet or exceed the qualifications required for Provider's Dental Care
Professionals under this agreement. All costs and expenses associated with the
retention of such temporary coverage shall be Provider Expenses. With the
assistance of the Service Company, Provider and the dentists shall be
responsible for scheduling dentist and non-dentist dental care personnel
coverage of all dental procedures. Provider shall cause all dentists to exert
their best efforts to develop and promote Provider in such a manner as to ensure
Provider is able to serve the diverse needs of the community. Provider shall
organize and maintain a high quality, cost-effective process for ensuring that
patients will have timely access to emergency Dental Care on a 24-hour, seven
day per week basis.
(S)5.5 Peer Review and Quality Assurance. Provider shall conduct
---------------------------------
its peer review and quality assurance activities in a manner that is consistent
with maintaining the confidentiality of the related processes, actions, and
documentation.
(a) Provider shall designate a committee of dentists to function as a
dental peer review committee to review credentials of potential dentist
recruits, periodically review the credentials of Provider's existing dentists,
determine the practice privileges of the dentists retained by Provider, perform
quality assurance, utilization review, and Provider profiling functions, and
otherwise resolve dental competency issues. The dental peer review committee
shall function pursuant to formal written policies and procedures established by
Provider upon consultation with and the assistance of Service Company.
(b) Provider also shall adopt a quality assurance program to monitor
and evaluate the quality and cost-effectiveness of the Dental Care provided by
the dentist personnel of Provider and other non-dentist personnel providing
Dental Care under the supervision of Provider's dentists. Upon request of
Provider, Service Company shall provide administrative assistance to Provider in
performing its quality assurance activities.
(c) Provider shall cooperate fully with Service Company in an effort to
achieve and maintain full accreditation status for Provider. For purposes of
facilitating accreditation and other related processes and without limiting
Provider's responsibilities under the preceding sentence, Provider shall develop
and maintain a philosophy of practice and a set of practice guidelines which are
acceptable to the Policy Board. Provider shall cause all personnel retained by
it to abide by such philosophy and guidelines at all times.
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<PAGE>
(d) Provider shall, at the direction of the Policy Board, support the
development, maintenance, and operation of a patient concerns and claims
recording, reporting, review, resolution, and tracking process which is
acceptable to the Policy Board. Provider shall cause all personnel retained by
it to comply fully with such process at all times.
(e) Provider shall, with the assistance of Service Company, develop a
set of quality standards and utilization, process monitoring, and reporting
guidelines. Provider shall cause all personnel retained by it to comply with
such standards and guidelines.
(S)5.6 Provider's Insurance. Provider shall maintain with
--------------------
commercial carriers reasonably acceptable to Service Company or through self
insurance or some combination thereof (reasonably acceptable to Service Company)
appropriate workers' compensation coverage for Provider's employed personnel
(which shall be a Provider Expense) and professional and comprehensive general
liability insurance covering Provider and each of the dentists Provider retains
to provide Dental Care (which shall be a Clinic Expense). All costs, expenses,
and liabilities incurred by Provider or Service Company in excess of the limits
of such policies shall be a Provider Expense. Provider shall actively support
the participation of all dentists retained by Provider in training and
continuing education programs in order to reduce the risk of exposure to and the
related cost of obtaining and maintaining such coverage. The comprehensive
general liability coverage and professional liability coverage shall be in such
minimum amounts as Service Company may establish from time to time. In addition,
Provider shall cause each dentist retained by Provider as an independent
contractor to obtain comparable professional and comprehensive general liability
insurance coverage. All such insurance policies shall (a) name Service Company
as an additional insured and, with respect to policies provided by independent
contractors under the preceding sentence, name Provider as an additional insured
as well, and (b) provide for at least 30 days advance written notice to Provider
and Service Company from the insurer with respect to any alteration of coverage,
cancellation, or proposed cancellation for any reason. Provider shall cause to
be issued to Service Company by such insurer or insurers a certificate
reflecting such coverage. Upon the termination of this agreement for any reason,
Provider shall continue to carry professional liability insurance in the amounts
specified in this section for 10 years after termination, or if Provider
dissolves or ceases to practice dentistry, Provider shall obtain and maintain as
a Provider Expense "tail" professional liability coverage, in the amounts
specified in this section for an extended reporting period of 10 years. Provider
shall be responsible for paying all premiums for "tail" insurance coverage. In
no event shall the professional liability insurance carrier be replaced or
changed without Service Company Consent. Service Company shall provide
reasonable assistance to Provider to obtain such coverage.
(S)5.7 Noncompetition. Provider acknowledges that Service Company
--------------
will incur substantial costs in providing the equipment, support services,
personnel, and other items and services that are the subject matter of this
agreement and that in the process of providing services under this agreement,
Provider will learn or have access to financial and other Confidential
Information of Service Company to which Provider would not otherwise be exposed.
Provider also recognizes that the services to be provided by Service Company
will be feasible only if Provider operates an active practice to which the
dentists associated with Provider devote their full time and attention.
Accordingly, Provider further agrees as follows:
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(a) During the Term, except for its obligations under this agreement,
Provider shall not establish, operate, or provide Dental Care at any dental
office, clinic or other dental care facility anywhere within the Practice
Territory nor have an ownership interest, direct or indirect, in any entity, or
participate in any joint venture, which operates any such office, clinic, or
facility; and
(b) Except as specifically approved by Service Company in writing,
during the Term and for a period of five years immediately following the date
this agreement is terminated for any reason, Provider shall not directly or
indirectly own (excluding ownership of less than five percent (5%) of the equity
of any publicly traded entity), manage, operate, control, lend funds to, lend
its name to, or maintain any interest in any entity, business, or enterprise
which (i) provides, distributes, or promotes any type of management or
administrative services or products to third parties in competition with Service
Company in the Practice Territory or (ii) offers any type of service or product
to third parties substantially similar to those offered by Service Company to
Provider in the Practice Territory. Notwithstanding the above restriction,
nothing herein shall prohibit Provider or any of its shareholders from providing
management and administrative services to its or their own dental practices
after the termination of this agreement, and nothing herein shall prohibit
Provider or its shareholders from contracting with a third party manager to
provide administrative or management services for its or their dental practices
after termination of this agreement as long as such relationship complies with
the provisions of this section.
(S)5.8 Use of Name. At all times during the Term, Provider shall,
-----------
unless otherwise directed by the Policy Board pursuant to (S)3.2(c), operate its
dental practice under the name "Park Dental", including without limitation using
all related marks and logos as are licensed to Provider pursuant to (S)4.17,
above, and filing an assumed or fictitious name application with the Minnesota
Secretary of State or other appropriate governmental agency; provided that
Provider shall, immediately upon the expiration of the Term, abstain from using
such name, marks, and logos and shall take such steps as are necessary to
terminate such applications and Provider's rights thereunder.
ARTICLE VI. CONFIDENTIALITY
(S)6.1 Confidential and Proprietary Information. Neither Party
----------------------------------------
shall, in any manner or at any time, directly or indirectly, disclose any of the
Confidential Information of the other Party to any person, firm, association,
organization, or entity, or use, or permit or assist any person, firm,
association, organization, or entity to use any such Confidential Information,
excepting only: (a) disclosures (i) required by law, as reasonably determined by
the disclosing Party or its legal counsel, or (ii) made on a confidential basis
to the disclosing Party's shareholders, directors, officers, employees (limited
to those who need to know such Confidential Information), and legal, accounting,
and other professional advisors (collectively, the "Permitted Recipients"); or
(b) use of such Confidential Information by Permitted Recipients in connection
with this agreement; provided that each Party shall (i) make its Permitted
Recipients aware of the requirements of this agreement, (ii) take reasonable
steps to prohibit disclosure of such Confidential Information by any Permitted
Recipient to any other person or entity except another Permitted Recipient,
including without limitation taking such steps as that Party customarily takes
to protect its own Confidential Information, and (iii) be responsible and liable
for any disclosure or use of such Confidential Information by any of its
Permitted Recipients, except disclosures or uses permitted by this agreement.
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<PAGE>
(S)6.2 Use of Practice Statistics. Notwithstanding (S)6.1, above,
--------------------------
but subject to the restrictions of this section and applicable law, Service
Company may: (a) share with other professional corporations, associations,
dental practices, or dental care delivery entities the practice statistics of
Provider, including utilization review data, quality assurance data, cost data,
outcomes data, or other practice data, provided that such information shall only
be disclosed to (i) affiliates of Service Company, (ii) other dental groups with
whom Service Company has a management relationship, (iii) managed care dental
benefit providers and other third party payors for the purpose of obtaining or
maintaining third party payor contracts, (iv) financial analysts and
underwriters, (v) employers and employee benefit associations, (vi) quality
assurance and accrediting organizations, or (vii) financial institutions; and
(b) disclose all practice-related information necessary or desirable in
connection with any public or private offering of any security of Service
Company. In addition, Service Company may disclose practice-related information
and data in connection with any survey, presentation, published material, study,
or research project which Service Company deems appropriate for the purpose of
gaining insight into existing and changing patterns in the organization and
delivery of Dental Care and related issues. In no event will any such data
disclose or divulge the identity of any patient or, to the extent reasonably
practicable, any dentist.
ARTICLE VII. FINANCIAL ARRANGEMENTS
(S)7.1 Clinic Expense Reimbursement. Service Company shall be
----------------------------
reimbursed for the amount of all Clinic Expenses incurred by Service Company.
(S)7.2 Repayment of Advances. Service Company shall be reimbursed
---------------------
for any and all amounts advanced to Provider by Service Company.
(S)7.3 Fees. Provider and Service Company acknowledge and agree
----
that the compensation set forth in this Article is being paid to Service Company
in consideration of the substantial commitment being made by Service Company
hereunder and that such fees are fair and reasonable in all respects in
consideration of (i) the services performed by Service Company hereunder and
(ii) the capital being made available by Service Company. Service Company shall
be paid the following service fees:
(a) Service Fee. Service Company shall receive an annual Service Fee
-----------
equal to the amount set forth in item 2 of Exhibit A-1 attached to this
agreement or such other greater amount as may be agreed upon by the Parties,
payable in twelve equal monthly installments; and
(b) Performance Fee. Service Company shall receive a Performance Fee
---------------
equal to the amount, if any, by which [*]. The Performance Fee shall be
calculated monthly and payable quarterly.
(S)7.4 Adjustment to Performance Fee. The Performance Fee may be
--------------------------------
adjusted for any calendar quarter during the Term pursuant to the following
provisions:
(a) [*]
(b) [*]
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<PAGE>
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
(c) The adjustment, if any, under this (S)7.4 shall be calculated
monthly and payable quarterly.
(S)7.5 Reasonable Value. Payment of the Service Fee or Performance
----------------
Fee is not intended to be and shall not be interpreted or applied as permitting
Service Company to share in Provider's fee for Dental Care or any other
services, but is acknowledged as the Parties' negotiated agreement as to the
reasonable fair market value of the equipment, contract analysis and support,
other support services, purchasing, personnel, office space, management,
administration, strategic management, and other items and services furnished by
Service Company pursuant to this agreement, considering the nature and volume of
the services required and the risks assumed by Service Company. Provider and
Service Company acknowledge that: (a) Service Company's administrative expertise
will contribute great value to Provider's performance; (b) Service Company will
incur substantial costs and business risks in arranging for Provider's use of
each Clinic and in providing the equipment, support services, personnel,
marketing, office space, management, administration, and other items and
services that are the subject matter of this agreement; and (c) certain of such
costs and expenses can vary to a considerable degree according to the extent of
Provider's business and services. It is the intent of the Parties that the
Service Fee and Performance Fee reasonably compensate Service Company for the
value to Provider of Service Company's administrative expertise, given the
considerable business risk to Service Company in providing the items and
services that are the subject of this agreement.
(S)7.6 Payment. The amounts to be paid to Service Company under
-------
this Article shall be calculated by Service Company on the accrual basis of
accounting and paid monthly. To facilitate the payments due to Service Company
under this Article, Provider hereby expressly authorizes Service Company to make
withdrawals of such amounts from the Provider Account during the Term in
accordance with (S)4.12(b), and after termination as provided in (S)8.3.
(S)7.7 Accounts Receivable. To assure that Provider receives the
-------------------
entire amount of professional fees for its services and to assist Provider in
maintaining reasonable cash flow for the payment of Clinic Expenses, Service
Company may, during the Term, purchase, with recourse to Provider for the amount
of the purchase, the accounts receivable of Provider arising during the previous
month, except for any receivables due to Provider from Medicaid or any other
governmental health care reimbursement program which Service Company is not
permitted to receive under applicable law (the "Restricted Receivables"), by
transferring the amount set forth below into the Provider Account. The
consideration for the purchase shall be an amount equal to the Adjusted Gross
Revenue recorded each month, less the Adjusted Gross Revenue relating to
Restricted Receivables. Service Company shall be entitled to offset Clinic
Expense reimbursement plus all fees and advances due to Service Company under
this Article against the amount payable for such accounts receivable. Although
it is the intention of the Parties that Service Company purchase and thereby
become the owner of the accounts receivable of Provider, in the event such
purchase shall be ineffective or prohibited for any reason, Provider hereby
grants to Service Company a security interest in the accounts receivable to the
extent permitted by applicable law, and Provider shall cooperate with Service
Company and execute all
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documents which may be reasonably requested by Service Company in connection
with such security interest. All collections in respect of such accounts
receivable purchased by Service Company shall be received by Provider as the
agent of Service Company and shall be endorsed to Service Company and deposited
in a bank account at a bank designated by Service Company. To the extent
Provider comes into possession of any payments in respect of such accounts
receivable, Provider shall direct such payments to Service Company for deposit
in bank accounts designated by Service Company.
ARTICLE VIII. TERM AND TERMINATION
(S)8.1 Initial and Renewal Term. The Term of this agreement shall
------------------------
be a period which is equal to the remainder of the initial 40-year term of the
Original Service Agreement, beginning on the date of this agreement and ending
November 11, 2036, and shall renew automatically for successive five-year
periods thereafter unless and until either Party gives notice to the other Party
at least 120 days prior to the expiration of the then-current term of its intent
to terminate this agreement at the end of the then-current term or unless
otherwise terminated as provided in (S)8.2 of this agreement.
(S)8.2 Termination.
-----------
(a) Termination By Service Company. Service Company may terminate this
------------------------------
agreement immediately upon notice to Provider upon the occurrence of any one of
the following events:
(i) The dissolution of Provider;
(ii) Provider admits in writing its inability to pay
generally its debts as they become due or makes an assignment for the benefit of
creditors;
(iii) A receiver, trustee, liquidator, or conservator is
appointed for Provider or to take possession of all or substantially all of
Provider's property or a petition for insolvency, dissolution, liquidation, or
reorganization, or order for relief in which Provider is named as debtor, is
filed by, against, or with respect to Provider pursuant to any federal or state
statute, regulation, or law for the protection of debtors, and, with respect to
any such appointment or filing, Provider fails to secure a stay or discharge
thereof within 45 days after such appointment or filing;
(iv) Provider fails to pay when due any payment to be made
by Provider under this agreement, which failure continues for 10 days after
notice is given by Service Company to Provider thereof, provided that such
failure is not directly attributable to Service Company's failure to apply
available funds in the Provider Account according to (S)4.12(b); or
(v) Provider fails to comply with or perform any of its
other material duties or obligations under this agreement, which failure
continues for 30 days after notice is given by Service Company to Provider
thereof, or if because of the nature of such failure it cannot reasonably be
corrected within such 30 day period, failure by Provider to commence such
correction promptly following its receipt of notice from Service Company and
thereafter to expeditiously and continuously prosecute the correction to
completion.
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<PAGE>
(b) Termination By Provider. Provider may terminate this agreement
-----------------------
immediately upon notice to Service Company upon the occurrence of any of the
following events:
(i) A receiver, trustee, liquidator, or conservator is
appointed for Service Company or to take possession of all or substantially all
of Service Company's property or a petition for insolvency, dissolution,
liquidation, or reorganization, or order for relief in which Service Company is
named as debtor, is filed by, against, or with respect to Service Company
pursuant to any federal or state statute, regulation, or law for the protection
of debtors, and, with respect to any such appointment or filing, Service Company
fails to secure a stay or discharge thereof within 45 days after such
appointment or filing;
(ii) Service Company fails to comply with or perform any
of its material duties or obligations under this agreement, which failure
continues for 30 days after notice is given by Provider to Service Company
thereof, or if because of the nature of such failure it cannot reasonably be
corrected within such 30 day period, failure by Service Company to commence such
correction promptly following its receipt of notice from Provider and thereafter
to expeditiously and continuously prosecute the correction to completion; or
(iii) A court of competent jurisdiction makes a final
determination that Service Company has materially breached a fiduciary duty owed
to Provider.
Notwithstanding the foregoing, any termination by Provider under this
section shall require the affirmative vote of three-fourths of the
then-outstanding shares of Provider entitled to vote on such a matter and
Provider shall, upon request by Service Company, provide evidence reasonably
satisfactory to Service Company of such vote.
(c) Termination by Agreement. Provider and Service Company may mutually
------------------------
agree to terminate this agreement at any time, such agreement to be in writing
and signed by both Parties.
(d) Legislative, Regulatory or Administrative Change. In the event
------------------------------------------------
there is a change in any federal, state, or local statute, law, regulation,
legislation, rule, policy, or general instruction, a change in any third party
reimbursement system, or a ruling, judgment, or decree by any court, agency, or
other governing body having jurisdiction over either Party (hereafter in this
clause (d), a "ruling") which materially and adversely affects, or is reasonably
likely to affect, the manner in which either Party is to perform or be
compensated for its services under this agreement or which shall make this
agreement unlawful, the Parties shall immediately use their best efforts to
enter into a new service arrangement or basis for compensation for the services
furnished pursuant to this agreement that complies with that change or ruling
and approximates as closely as possible the economic position of the Parties
prior to such change or ruling.
If the Parties are unable to reach a new agreement within a reasonable
period of time following the date upon which it becomes reasonably certain that
such change will arise or ruling will be given, then either Party may submit the
issue to arbitration which shall be binding on the parties and subject to the
then-applicable Commercial Arbitration Rules of the American Arbitration
Association. In any such arbitration, the arbitrators shall be consist of a
panel of
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three arbitrators, which shall act by majority vote and which shall consist of
one arbitrator selected by the Party on one side of the issue subject to the
arbitration, one arbitrator selected by the Party on the other side of the
issue, and a third arbitrator selected by the two arbitrators so selected, who
shall be either a certified public accountant or an attorney at law licensed to
practice in the State of Minnesota and who shall act as chairman of the
arbitration panel; provided that if the Party on one side of the issue selects
its arbitrator for the panel and the other Party fails to so select its
arbitrator within 10 business days after being requested by the first Party to
do so, then the sole arbitrator shall be the arbitrator selected by the first
Party.
All costs and expenses of arbitration shall be borne by the Parties as
determined by the arbitrator or arbitration panel, except that the fees of any
arbitrator on an arbitration panel who is selected individually by a Party shall
be borne separately by the Party appointing him; provided that if one Party
fails to select an arbitrator for a panel, and the sole arbitrator is the
arbitrator selected by the other Party, then the fees of that arbitrator shall
be borne by the Parties as determined by that arbitrator.
(S)8.3 Effects of Termination. Upon termination of this agreement
----------------------
as herein provided, neither Party shall have any further obligations under this
agreement, except for: (a) obligations accruing prior to the date of
termination, including without limitation payment of the amounts set forth in
Article VII relating to services provided prior to the termination of this
agreement; (b) obligations set forth in this agreement that expressly extend
beyond the Term, including without limitation indemnities and noncompetition
provisions, which provisions shall survive the expiration or termination of this
agreement; (c) the obligations of each party set forth in Article VI; and (d)
the obligation of Provider described in (S)8.4. Provider specifically
acknowledges and agrees that Service Company shall continue to collect and
receive on behalf of Provider all cash collections from accounts receivable in
existence at the time this agreement is terminated (which have not otherwise
been purchased by Service Company pursuant to (S)7.7), it being understood that
such cash collections will be applied in accordance with (S)4.12(b), above,
until Service Company is compensated for the services rendered and reimbursed
for the expenditures made by it under this agreement up to the date of such
termination. Upon the expiration or termination of this agreement for any reason
or cause whatsoever, Service Company shall surrender to Provider all books and
records pertaining to Provider's dental practice; provided that Service Company
may retain copies of such documents to the extent reasonably necessary for
Service Company to complete its post-termination obligations and activities
under this agreement.
(S)8.4 Purchase Obligation. Upon termination of this agreement for
-------------------
any reason, Provider shall, at Service Company's option:
(a) Purchase from Service Company at book value the intangible assets,
deferred charges, goodwill, and all other amounts on the books of the Service
Company relating to this agreement or the items or services provided by Service
Company pursuant to this agreement, including without limitation the amount, if
any, for the covenants described in (S)5.7, above, as adjusted through the last
day of the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of all such
amounts;
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<PAGE>
(b) Purchase from Service Company any real estate owned by Service
Company and used as a Clinic at the greater of the appraised fair market value
thereof or the then book value thereof;
(c) Purchase, at the greater of the appraised fair market value or the
then book value, all improvements, additions, or leasehold improvements that
have been made by Service Company at any Clinic and that relate to the
performance of Service Company's obligations under this agreement;
(d) Assume all debt, and all contracts, payables, and leases that are
obligations of Service Company and that relate to the performance of Service
Company's obligations under this agreement or the properties leased or subleased
by Service Company in connection with its obligations under this agreement; and
(e) Purchase from Service Company, at the greater of the appraised fair
market value or the then book value, all of the equipment then being supplied by
Service Company pursuant to Service Company's obligations under this agreement,
and all other assets, including inventory and supplies, tangibles and
intangibles, set forth on the books of Service Company as adjusted through the
last day of the month most recently ended prior to the date of such termination
in accordance with GAAP to reflect operations of each Clinic, depreciation,
amortization, and other adjustments of assets shown on the books of the Service
Company.
For purposes of subsection (b), above, the appraised value shall be
determined by an appraiser mutually agreed upon by the Parties. In the event the
Parties are unable to agree upon an appraiser within 10 days following the date
upon which either Party requests the other Party to agree to an appraiser, then
each Party shall appoint an appraiser, who shall in turn select a third
appraiser who shall serve as the appraiser hereunder. In the event either Party
fails to select an appraiser within 15 days of the selection of an appraiser by
the other Party, the appraiser selected by the other Party shall serve as the
appraiser hereunder. The determination of the appraised value of the assets
identified in subsection (b), above, by the appraiser selected hereunder shall
be binding on both Parties.
(S)8.5 Closing of Purchase. If Provider purchases assets pursuant
-------------------
to (S)8.4, Provider shall pay cash for the purchased assets; provided that the
amount of the purchase price allocable to an asset shall be reduced by the
amount of debt and liabilities of Service Company, if any, relating directly to
that asset which are assumed by Provider in connection with such purchase.
Provider and any dentist associated with Provider shall execute such documents
as may be required to assume the liabilities set forth in (S)8.4(d) and to
remove Service Company from any liability with respect to such purchased asset
and with respect to any property leased or subleased by Service Company. The
closing date for the purchase shall be determined by the Parties, but shall in
no event occur later than 180 days from the date of the notice of termination.
Provider shall be released from the covenants described in (S)5.7, above, upon
the successful consummation of such closing.
Notwithstanding the foregoing, Provider may, at its option, pay all or
a portion of the purchase price at the closing in shares of common stock of
Parent ("Shares") for which Provider shall receive, as a credit to the purchase
price, an amount equal to the number of Shares transferred to Service Company by
Provider at the closing multiplied by the per Share fair
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market value (defined below); provided that each Share transferred to Service
Company is free and clear of all liens, security interests, encumbrances,
pledges, charges, claims, voting trusts and restrictions on transfer of any
nature whatsoever, except restrictions on transfer imposed by or pursuant to
federal and state securities laws and such other restrictions as were expressly
required by Parent in connection with the acquisition of Service Company by
Parent concurrently with the execution of this agreement. For purposes of this
section, the "per Share fair market value" shall mean, as of any given date, the
(i) last reported sale price on the New York Stock Exchange on the most recent
previous trading day, (ii) last reported sale price on the NASDAQ National
Market System on the most recent previous trading day, (iii) mean between the
high and low bid and ask prices, as reported by the National Association of
Securities Dealers, Inc. on the most recent previous trading day, (iv) last
reported sale price on any other stock exchange on which the Shares are listed
on the most recent previous trading day, whichever is applicable, or (v) if none
of the foregoing is applicable, then the per Share fair market value of the
Shares shall be the value determined by the Board of Directors of Parent, in its
discretion, based upon the then-current Share value assigned by the Board of
Directors of Parent in connection with Parent's other activities; provided that,
if Provider disagrees with the determination of Parent's Board of Directors as
to such value, the per Share fair market value shall be determined by:
(A) Agreement between Service Company and Provider, if they are able to
agree upon a value within ten business days after being requested to so
agree; or, if not,
(B) An appraiser selected by agreement between Service Company and
Provider, if they are able to agree upon an appraiser within ten
business days after requested to so agree; or, if not,
(C) The majority vote by an appraisal board consisting of three
appraisers, one member appointed by each of Service Company and
Provider and the third member appointed by the first two members so
appointed who shall act as chairman of the appraisal board, provided
that in the event either Party fails to so appoint its appointee to the
appraisal board within ten business days after being requested to do so
by the other Party, then the appraiser appointed by the requesting
Party shall be the sole appraiser.
ARTICLE IX. GENERAL
(S)9.1 Administrative Services Only. Nothing in this agreement is
----------------------------
intended or shall be construed to allow Service Company to exercise control or
direction over the manner or method by which Provider and its dentists perform
Dental Care or other professional dental care services. The rendition of all
Dental Care shall be the sole responsibility of Provider and its dentists, and
Service Company shall not interfere in any manner or to any extent therewith.
Nothing contained in this agreement shall be construed to permit Service Company
to engage in the practice of dentistry, it being the sole intention of the
Parties hereto that the services to be rendered to Provider by Service Company
are solely for the purpose of providing non-dental administrative services to
Provider so as to enable Provider to devote its full time and energies to the
professional conduct of its dental practice and provision of Dental Care to its
patients and not to administration, or practice management.
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(S)9.2 Relationship of Parties. The relationship of the Parties is
-----------------------
and shall be that of independent contractors, and nothing in this agreement is
intended, and nothing shall be construed to create an employer/employee,
partnership, or joint venture relationship between the Parties, or to allow
either to exercise control or direction over the manner or method by which the
other performs the services that are the subject matter of this agreement;
provided always that the services to be provided hereunder shall be furnished in
a manner consistent with the standards governing such services and the
provisions of this agreement.
(S)9.3 Notices. Any notice or other communication required or
-------
desired to be given to either Party shall be in writing and shall be deemed
given when deposited in the United States mail, first-class postage prepaid,
addressed:
(a) If to Service Company
PDHC, Ltd.
c/o American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880-1249
Attention: Gregory A. Serrao, President
and Chief Executive Officer
and
Baker & Hostetler
65 East State Street
Suite 2100
Columbus, Ohio 43215
Attention: Gary A. Wadman, Esq.
(b) If to Provider
PDG, P.A.
6415 Brooklyn Blvd.
Minneapolis, MN 55429-2181
Attention: President
With a copy to:
Fredrikson & Byron, P.A.
1100 International Center
900 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Neil A. Weikart, Esq.
Any Party may change the address to which notices and other
communications are to be given by giving the other Parties notice of such
change.
-24-
<PAGE>
(S)9.4 Execution of Documents. Each Party shall execute,
----------------------
acknowledge or verify, and deliver any and all documents, and take any and all
other actions, which from time to time may be reasonably requested by any other
Party to carry out the purposes and intent of this agreement.
(S)9.5 Governing Law. All questions concerning the validity,
-------------
intention, or meaning of this agreement or relating to the rights and
obligations of the Parties with respect to performance under this agreement
shall be construed and resolved under the laws of Minnesota, without reference
to conflict of law principles.
(S)9.6 Severability. The intention of the Parties is to comply
------------
fully with all applicable laws and public policies, and this agreement shall be
construed consistently with all laws and public policies to the extent possible.
If and to the extent that any court of competent jurisdiction determines that it
is impossible to construe any provision of this agreement consistently with any
law or public policy and consequently holds that provision is invalid, such
holding shall in no way affect the validity of the other provisions of this
agreement, which shall remain in full force and effect. With respect to any
provision in this agreement finally determined by such a court to be invalid or
unenforceable, such court shall have jurisdiction to reform this agreement
(consistent with the intent of the Parties) to the extent necessary to make such
provision valid and enforceable, and, as reformed, such provision shall be
binding on the Parties.
(S)9.7 Setoff. Notwithstanding any provision of this agreement to
------
the contrary, Service Company shall have the right from time to time to setoff
any amounts owed by Service Company to Provider under this agreement against any
amounts owed by Provider to Service Company, whether pursuant to this agreement
or otherwise.
(S)9.8 Remedies. All rights and remedies of each Party under this
--------
agreement are cumulative and in addition to all other rights and remedies which
may be available to that Party from time to time, whether under any other
agreement, at law, or in equity.
Each Party hereby acknowledges that: (a) the provisions of (S)(S)5.7
and 6.1 of this agreement are fundamental for the protection of the other
Party's legitimate business interests; (b) such provisions are reasonable and
appropriate in all respects; and (c) in the event it violates any such
provisions, the other Party would suffer irreparable harm and its remedies at
law would be inadequate. Accordingly, in the event either Party violates or
attempts to violate any such provisions, the other Party shall be entitled to a
temporary restraining order, temporary and permanent injunctions, specific
performance, and other equitable relief without any showing of irreparable harm
or damage or the posting of any bond, in addition to any other rights or
remedies which may then be available to the other Party.
(S)9.9 Non-waiver. No failure by any Party to insist upon strict
----------
compliance with any term of this agreement, to exercise any option, enforce any
right, or seek any remedy upon any default of any other Party shall affect, or
constitute a waiver of, the first Party's right to insist upon such strict
compliance, exercise that option, enforce that right, or seek that remedy with
respect to that default or any prior, contemporaneous, or subsequent default;
nor shall any custom or practice of the Parties at variance with any provision
of this agreement affect or constitute a waiver of, any Party's right to demand
strict compliance with all provisions of this agreement.
-25-
<PAGE>
(S)9.10 Indemnification. Each Party (the "Indemnifying Party")
---------------
shall indemnify and hold harmless the other Party and its shareholders,
directors, officers, employees, agents, representatives, and affiliates (the
"Indemnified Parties") from and against any and all losses, liabilities,
damages, demands, claims, suits, actions, judgments, assessments, costs and
expenses, including without limitation interest, penalties, attorneys' fees, any
and all expenses incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation (collectively, "Damages"),
asserted against, imposed upon, or incurred or suffered by the Indemnified
Parties as a result of or arising from: (i) any failure by the Indemnifying
Party to perform and observe fully all obligations and conditions to be
performed or observed by the Indemnifying Party under this agreement; or (ii)
the acts or omissions of the Indemnifying Party or its employees, contractors,
or other agents or representatives.
(S)9.11 No Third Party Benefit. This agreement is intended for the
----------------------
exclusive benefit of the Parties and their respective successors and assigns,
and nothing contained in this agreement shall be construed as creating any
rights or benefits in or to any third party.
(S)9.12 Captions. The captions of the various sections of this
--------
agreement are not part of the context of this agreement, are only labels to
assist in locating and reading those sections, and shall be ignored in
construing this agreement.
(S)9.13 Genders and Numbers. When permitted by the context, each
-------------------
pronoun used in this agreement includes the same pronoun in other genders or
numbers and each noun used in this agreement includes the same noun in other
numbers.
(S)9.14 Complete Agreement. This document (including its exhibits
------------------
and all other documents referred to herein, all of which are hereby incorporated
herein by reference) contains the entire agreement among the Parties with
respect to the subject matter of this agreement and, except as provided in
(S)9.19, below, supersedes all prior or contemporaneous discussions,
negotiations, representations, or agreements relating to the subject matter of
this agreement. No changes to this agreement shall be made or be binding upon
any Party unless made in writing and signed by each Party to this agreement.
(S)9.15 Counterparts. This agreement may be executed in multiple
------------
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
(S)9.16 Assignment. Provider may not assign this agreement without
----------
the prior written consent of Service Company, which consent may be withheld for
any reason. The sale, transfer, pledge, or assignment of any of the shares of
Provider held by any shareholder of Provider, the issuance by Provider of voting
shares to any other person, or any combination of such transactions within a
period of two years, such that the existing shareholders in Provider fail to
maintain a majority of the voting interest in Provider shall be deemed an
attempted assignment by Provider, and shall be null and void unless consented to
in writing by Service Company prior to any such transfer or issuance. Any breach
of this provision, whether or not void or voidable, shall constitute a material
breach of this agreement, and in the event of such breach, Service Company may
terminate this agreement upon 24 hours notice to Provider. Service Company
-26-
<PAGE>
shall have the right to (i) assign its rights and obligations hereunder to any
third party and (ii) collaterally assign its interest in this agreement and its
right to collect the amounts set forth in Article VII hereunder to any financial
institution or other third party without the consent of Provider.
(S)9.17 Successors. Subject to (S)9.16, above, this agreement shall
----------
be binding upon, inure to the benefit of, and be enforceable by and against the
successors and assigns of each Party.
(S)9.18 Force Majeure. Neither Party shall be liable or deemed to
-------------
be in default for any delay or failure in performance under this agreement or
other interruption of service deemed to result, directly or indirectly, from
acts of God, civil or military authority, acts of public enemy, war, accidents,
fires, explosions, earthquakes, floods, failure of transportation, strikes or
other work interruptions by either Party's employees, or any other similar cause
beyond the reasonable control of either Party unless such delay or failure in
performance is expressly addressed elsewhere in this agreement.
(S)9.19 Interpretation. This agreement supersedes the Original
--------------
Service Agreement, as previously amended, in its entirety from and after the
date of this agreement; provided that this agreement shall not modify or
otherwise affect any rights or obligations of the Parties under the Original
Service Agreement, as previously amended, which are based upon acts or omissions
occurring prior to the date of this agreement, which rights and obligations
shall survive the execution of this agreement.
PDG, P.A.
By /s/ Gregory T. Swenson, D.D.S.
--------------------------------
Gregory T. Swenson, D.D.S.
President
PDHC, LTD.
By /s/ Gregory A. Serrao
--------------------------------
Gregory A. Serrao
Chairman of the Board and
Chief Executive Officer
-27-
<PAGE>
INDEX TO EXHIBITS
Exhibit A Definitions
Exhibit A-1 Financial Terms
Exhibit B [Intentionally Left Blank]
Exhibit C Five-Year Employment Agreement
Exhibit D Standard Employment Agreement
<PAGE>
EXHIBIT A
DEFINITIONS
Actual Margin. The term "Actual Margin" shall mean, for any period:
-------------
(i) the actual Adjusted GrossRevenue for that period, less (ii) the sum of the
actual Clinic Expense and the actual Provider Expense for that period.
Adjusted Gross Revenue. The term "Adjusted Gross Revenue" shall mean
----------------------
Gross Revenue less Adjustments.
Adjustments. The term "Adjustments" shall mean all adjustments on the
-----------
accrual basis for (i) third party payor contractual allowances, adjustments,
discounts, professional courtesies, (ii) uncollectible accounts and related
expenses, and (iii) other activities that do not to result in collectible
charges.
Ancillary Revenue. The term "Ancillary Revenue" shall mean all other
-----------------
revenue actually recorded each month that is not Professional Service Revenue.
Budget. The term "Budget" shall mean an operating budget and capital
------
expenditure budget for each calendar year as prepared by Service Company, in
consultation with Provider, and approved by each of the Policy Board and Parent.
Budgeted Margin. The term "Budgeted Margin" shall mean, for any period
---------------
(i) the budgeted Adjusted Gross Revenue for that period, less (ii) the sum of
the budgeted Clinic Expense and budgeted Provider Expense for that period. The
Budgeted Margin for each calendar quarter shall be established pursuant to item
3 of Exhibit A-1 attached to this agreement.
Calculated Margin. The term "Calculated Margin" shall mean, for any
-----------------
period (i) the actual Adjusted Gross Revenue for that period, less (ii) the sum
of (A) the actual Clinic Expense for that period and (B) the actual Adjusted
Gross Revenue for that period multiplied by the budgeted Provider Expense
percentage for that period as established pursuant to item 1 of Exhibit A-1
attached to this agreement.
Capitation Revenue. The term "Capitation Revenue" shall mean all
------------------
revenue recorded under GAAP from managed care organizations or third party
payors where such revenue is recorded periodically on a per member basis for the
partial or total dental needs of an enrolled patient.
Clinic. The term "Clinic" shall mean any of the facilities, including
------
satellite facilities, that Service Company shall own, lease or otherwise procure
and provide for the use of Provider.
Clinic Expense. The term "Clinic Expense" shall mean all operating and
--------------
nonoperating expenses incurred by Service Company or Parent in the provision of
services to Provider and such expenses incurred by Provider which are expressly
identified in this agreement as Clinic Expense. Clinic Expense shall not include
any state or federal income tax, any expenses related to any Dental Assets or
the maintenance or protection of the same, or any other expense
-i-
<PAGE>
reasonably designated by Service Company as a Provider Expense. Clinic Expense
shall not include amortization of goodwill and noncompete covenants arising as a
result of the acquisition of Service Company by Parent concurrently with the
execution of this agreement, but shall include amortization of other intangible
assets obtained in that transaction. Without limiting the foregoing, Clinic
Expense shall include:
(a) The salaries, benefits, and other direct costs of all employees of
Service Company at a Clinic, but not the salaries, benefits, or other direct
costs of the dentists;
(b) The direct cost of any employee or consultant that provides
services at or in connection with a Clinic for improved clinic performance, such
as management, billing and collections, business office consultation, accounting
and legal services, but only when such services are coordinated by Service
Company;
(c) Reasonable recruitment costs and out-of-pocket expenses of Service
Company or Provider associated with the recruitment of additional dentist
employees of Provider;
(d) Dental malpractice liability insurance expenses for dentists,
Service Company employees, and non-dentist employees and comprehensive and
general liability insurance covering each Clinic and employees of Provider and
Service Company at each Clinic;
(e) The cost of laboratory services;
(f) The cost of dental supplies (including but not limited to products,
substances, items, or dental devices), and office supplies;
(g) The expense of using, leasing, purchasing or otherwise procuring
Clinics and related equipment, including utilities, depreciation, and repairs
and maintenance, provided that such expense shall not include the cost of
acquiring goodwill, noncompete covenants, or other intangible assets in
connection with such procurement;
(h) Personal property and intangible taxes assessed against Service
Company's assets which are provided or otherwise employed by Service Company for
the benefit of Provider;
(i) The reasonable travel expenses (except for the corporate staff of
Service Company and Parent) associated with attending meetings, conferences, or
seminars to benefit Provider;
(j) The cost of capital (whether as actual interest on indebtedness
incurred on behalf of Provider or as reasonable imputed interest on capital
advanced by Service Company or Parent) to finance or refinance obligations of
Provider, purchase dental and non-dental equipment, or finance new ventures of
Provider (interest expense will be charged for funds borrowed from outside
sources as well as from Parent; in the latter case, charges will be computed at
a floating rate that is equal to the current blended borrowing rate in effect
for actual and available outside borrowings of Parent; and such rate will be
computed as the sum of interest and related costs divided by the related total
of all borrowings), but specifically excluding any financing incurred by Parent
relating to the acquisition of Service Company by Parent concurrently with the
execution of this agreement;
-ii-
<PAGE>
(k) Other expenses incurred by Service Company or Parent in carrying
out its obligations under this agreement in accordance with the policies and
budgets established by the Policy Board, including without limitation the
write-off of any tangible or intangible assets on the balance sheet of Service
Company or any portion thereof other than costs incurred in connection with the
execution of this agreement and the issuance by Parent of stock options to
Provider or its dentists;
(l) Any tax assessed against Service Company in connection with the
services provided by Service Company hereunder; and
(m) Any other cost or expense designated as a Clinic Expense pursuant
to this agreement.
Confidential Information. The term "Confidential Information" shall
------------------------
mean, with respect to a Party, all trade secrets, proprietary data, and other
information (whether written or oral) of a confidential nature relating directly
or indirectly to that Party or its business, including without limitation all
business management, marketing, and economic studies and methods, patient lists,
proprietary forms, marketing data, fee schedules, customer lists, financial,
tax, accounting, and other information regarding business operations or
structure, business plans, ideas, concepts, policies, and procedures, and any
other information which that Party is obligated to treat as confidential
pursuant to any law, agreement, or course of dealing by which that Party is
bound, whether or not such Confidential Information is disclosed or otherwise
made available pursuant to this agreement. Confidential Information shall also
include the terms and provisions of this agreement and any transactions or
documents executed by the parties pursuant to this agreement. Confidential
Information shall not include any information which (i) is or becomes known or
available to the public and did not become so known through the breach of this
agreement by either Party, (ii) has been lawfully acquired from a third party
without any breach of any confidentiality restriction, or (iii) is already in
the possession of the receiving Party at the time it was disclosed to the
receiving Party by the disclosing Party.
Dental Assets. The term "Dental Assets" shall mean the following
-------------
assets of Provider:
(a) All of Provider's right, title and interest in, to or under, or
possession of, all drugs, pharmaceuticals, products, substances, items or
devices whose purchase, possession, maintenance, administration, prescription or
security requires the authorization or order of a Dental Care Professional or
requires a permit, registration, certification or any other governmental
authorization held by a Dental Care Professional as specified under any federal
or state law, or both;
(b) All of Provider's right, title and interest in and to records of
identity, diagnosis, evaluation or treatment of patients;
(c) All of Provider's right, title and interest in, to or under
insurance policies covering or relating to dental malpractice;
(d) The name of Provider;
-iii-
<PAGE>
(e) All franchises, licenses, permits, certificates, approvals and
other governmental authorizations necessary or desirable to own and operate any
of the other Dental Assets;
(f) All of Provider's right, title and interest in, to or under and
contract or agreement that requires performance by a licensed dental care
provider under federal or applicable state law.
Dental Care. The term "Dental Care" shall mean such intra-oral
-----------
diagnostic and therapeutic procedures, operations, and services as are included
under the definition of the "practice of dentistry" under the laws and
regulations of the state in which such procedures, operations, and services are
performed and which are provided by Provider to its patients through Provider's
dentists and other professional dental care personnel operating under the
supervision of Provider's dentists, including but not limited to the practice of
general dentistry, endodontics, periodontics, orthodontics, prosthodontics,
pediatric dental care, and oral surgery, and all dental care associated with any
of the foregoing.
Dental Care Professional. The term "Dental Care Professional" shall
------------------------
mean any individual holding a current, unrestricted license issued by the
appropriate dental licensing board in the state in which the Dental Care
Professional renders Dental Care, which permits such individual to provide
Dental Care, including without limitation dentists (as that term is defined in
(S)2.5) and denturists, dental assistants, and hygienists.
GAAP. The term "GAAP" shall mean generally accepted accounting
----
principles set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board and
the Securities and Exchange Commission or in such other statements by such other
entity or other practices and procedures as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of the determination.
Gross Revenue. The term "Gross Revenue" shall mean the sum of all
-------------
Professional Service Revenue and Ancillary Revenue before Adjustments.
Ordinary Dental Supplies. The term "Ordinary Dental Supplies" shall
------------------------
mean all products, substances, items, or devices which (i) are necessary or
appropriate for Provider's provision of Dental Care, and (ii) are not Special
Dental Supplies.
Parent. The term "Parent" shall mean American Dental Partners,
------
Inc., a Delaware corporation.
Performance Fee. The term "Performance Fee" shall mean the fee
----------------
paid to Service Company by Provider as described in (S)7.3(b).
Practice Territory. The term "Practice Territory" shall mean the
------------------
geographic area within which Provider provides Dental Care, which geographic
area shall include all of the following territories: (a) with respect to each
Clinic which offers general dentistry services only, the geographic area within
a radius of 30 miles of such Clinic, and (b) with respect to each Clinic
-iv-
<PAGE>
which offers specialty dental services, the geographic area within a radius of
50 miles of such Clinic.
Professional Service Revenue. The term "Professional Service Revenue"
----------------------------
shall mean the sum of all (i) professional fees actually recorded each month on
an accrual basis under GAAP as a result of the Dental Care rendered by the
Dental Care Professional retained by Provider, and (ii) Capitation Revenue.
Provider Account. The term "Provider Account" shall mean the bank
----------------
account of Provider established by Provider promptly following the execution of
this agreement at a financial institution reasonably acceptable to Service
Company, which account shall be administered by Service Company according to
(S)(S)4.11 and 4.12 of this agreement.
Provider Consent. The term "Provider Consent" shall mean the consent
----------------
granted by Provider's representatives (or either representative) who serve on
the Policy Board. When any provision of this agreement requires Provider
Consent, Provider Consent shall not be unreasonably withheld and shall be
binding on Provider.
Provider Expense. The term "Provider Expense" shall mean an expense
----------------
incurred by the Service Company or Provider and for which Provider, and not the
Service Company, is financially liable. Provider Expense shall include dentist
(as defined in (S)2.5) salaries, benefits (which includes workers' compensation
coverage), and other direct costs related to the dentists employed or otherwise
retained by Provider for the provision of its Dental Care (including
professional dues, subscriptions, continuing dental education expenses, and
travel costs for continuing dental education or other business travel, but
excluding business travel requested by Service Company, which shall be a Clinic
Expense), together with any expenses related to any Dental Assets or the
maintenance and protection of the same and such other costs and expenses
designated as Provider Expense in or pursuant to this agreement (including
without limitation the amounts described in (S)4.13(d)(ii)). In the event
Provider incurs consulting, accounting, legal or other similar fees without
Service Company's approval of such engagement through Service Company, all fees
and expenses so incurred shall be Provider Expenses.
Representatives. The term "Representatives" shall mean a Party's
---------------
officers, directors, employees, and other agents or representatives, and
attorneys, accountants, and other professional advisors.
Service Company Consent. The term "Service Company Consent" shall mean
-----------------------
the consent granted by Service Company's representatives (or either
representative) who serve on the Policy Board. When any provision of this
agreement requires Service Company Consent, Service Company Consent shall not be
unreasonably withheld and shall be binding on Service Company.
Service Company Expense. The term "Service Company Expense" shall mean
-----------------------
an expense or cost incurred by Service Company or Parent and for which Service
Company or Parent, and not Provider, is financially liable. Service Company
Expense shall specifically include the costs of Service Company and Parent's
corporate personnel and the travel costs of such corporate personnel and shall
specifically exclude expenses incurred by Service Company
-v-
<PAGE>
or Parent that directly benefit Provider or are otherwise incurred by Service
Company or Parent in providing services pursuant to this agreement.
Service Fee. The term "Service Fee" shall mean the fee paid to
-----------
Service Company by Provider as described in (S)7.3(a).
Services. The term "Services" shall mean the business, administrative,
--------
and management services to be provided for Provider by Service Company as set
forth in this agreement, including without limitation the provision of
equipment, supplies, support services, non-dentist personnel, office space,
financial recordkeeping and reporting, billing and collection and other business
office services. Services shall not include the provision of Dental Care to
patients of the Provider.
Special Dental Supplies. The term "Special Dental Supplies" shall mean
-----------------------
all products, substances, items or devices, the purchase, possession,
maintenance, administration, prescription or security of which requires the
authorization or order of a Dental Care Professional or requires a permit,
registration, certification or other governmental authorization held by a Dental
Care Professional as specified under any federal and/or state law.
Term. The term "Term" shall mean the initial term and any renewal
----
periods of this agreement as described in (S)8.1, subject to termination
pursuant to (S)8.2.
-vi-
<PAGE>
EXHIBIT A-1
FINANCIAL TERMS
1. Budgeted Provider Expense [(S)4.13(a)]. For purposes of the Budget
--------------------------------------
for calendar year 1999, the following percentages of Adjusted Gross Revenue
shall be allocated to Provider Expense for the following calendar quarters,
respectively:
<TABLE>
<CAPTION>
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Full Year
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
In each succeeding annual Budget, unless the Parties otherwise mutually agree,
such percentages of Adjusted Gross Revenue shall be allocated to Provider
Expense for the respective calendar quarters of the applicable calendar year.
2. Service Fee [(S)7.3(a)]. The annual Service Fee shall be [*].
-----------------------
3. Budgeted Margin [Exhibit A]. The Budgeted Margins for the respective
---------------------------
calendar quarters in calendar year 1999 are as follows:
<TABLE>
<CAPTION>
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Full Year
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
In the Budget for each subsequent calendar year, unless the Parties otherwise
mutually agree, such Budgeted Margins shall continue to be applicable to the
calendar quarters in such calendar year. Notwithstanding the foregoing or any
other provisions of this agreement to the contrary, if the Parties are unable to
agree on a Budget for any calendar year, then, for purposes of calculating the
Performance Fee, the Budgeted Margin for each calendar quarter of that calendar
year (the "Current Quarter") shall be the greater of (a) the Budgeted Margin for
the corresponding quarter of the prior calendar year (the "Corresponding Prior
Quarter"), or (b) an amount which is equal to the result obtained when the
Adjusted Gross Revenue for the Current Quarter is multiplied by a fraction
having as its numerator the Budgeted Margin for the Corresponding Prior Quarter
and having as its denominator the budgeted Adjusted Gross Revenue for the
Corresponding Prior Quarter.
4. Adjustments. Any or all of the percentages or amounts contained in
-----------
this exhibit my hereafter be changed from time to time by written agreement of
the Parties. Such agreement may be in the form of a new Exhibit A-1 to this
agreement, which, if signed by both Parties, shall supersede this exhibit for
all purposes thereafter.
<PAGE>
The effective date of this Exhibit A-1 is January 1, 1999.
PDG, P.A. PDHC, LTD.
By /s/ Gregory T. Swenson, D.D.S. By /s/ Gregory A. Serrao
------------------------------ ----------------------------
Gregory T. Swenson, D.D.S. Gregory A. Serrao
President Chairman of the Board and
Chief Executive Officer
<PAGE>
EXHIBIT B
[Intentionally Left Blank]
<PAGE>
Exhibit 10(s)
AMENDED AND RESTATED
SERVICE AGREEMENT
BETWEEN
SMILEAGE DENTAL CARE, INC.
and
WISCONSIN DENTAL GROUP, S.C.
January 1, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
ARTICLE I. DEFINITIONS........................................................................................... 1
ARTICLE II. APPOINTMENT AND AUTHORITY OF SERVICE COMPANY......................................................... 2
(S)2.1 Appointment.......................................................................................... 2
(S)2.2 Authority............................................................................................ 2
(S)2.3 Patient Referrals.................................................................................... 2
(S)2.4 Internal Management of Provider...................................................................... 2
(S)2.5 Practice of Dentistry................................................................................ 2
ARTICLE III. POLICY BOARD........................................................................................ 3
(S)3.1 Formation and Operation of Policy Board.............................................................. 3
(S)3.2 Responsibilities of the Policy Board................................................................. 3
(a) Capital Improvements and Expansion................................................................... 3
(b) Annual Budgets....................................................................................... 3
(c) Marketing and Advertising............................................................................ 4
(d) Patient Fees; Collection Policies.................................................................... 4
(e) Provider and Payor Relationships..................................................................... 4
(f) Strategic and Operational Planning................................................................... 4
(g) Capital Expenditures................................................................................. 4
(h) Personnel Planning................................................................................... 4
(i) Grievance Referrals.................................................................................. 4
(j) Patient Concerns and Claims.......................................................................... 4
(k) Environmental Health and Safety...................................................................... 5
(l) Emergency Care Services.............................................................................. 5
(m) Financial Review..................................................................................... 5
(n) Other................................................................................................ 5
(S)3.3 Dental Decisions..................................................................................... 5
ARTICLE IV. RESPONSIBILITIES OF SERVICE COMPANY.................................................................. 5
(S)4.1 Clinics.............................................................................................. 5
(S)4.2 Equipment............................................................................................ 6
(S)4.3 Laboratory Services.................................................................................. 6
(S)4.4 Supplies............................................................................................. 6
(S)4.5 Capital Investment................................................................................... 7
(S)4.6 Support Services..................................................................................... 7
(S)4.7 Quality Assurance, Risk Management, and Utilization Review........................................... 7
(S)4.8 Licenses and Permits................................................................................. 7
(S)4.9 Personnel............................................................................................ 7
(S)4.10 Contract Negotiations................................................................................ 8
(S)4.11 Billing and Collection............................................................................... 8
(S)4.12 Provider Account..................................................................................... 9
(a) Power of Attorney.................................................................................... 9
(b) Priority of Payments...................................................... Error! Bookmark not defined.
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
(c) Further Assurances................................................................................... 10
(S)4.13 Financial Matters.................................................................................... 10
(a) Annual Budget........................................................................................ 10
(b) Accounting and Financial Records..................................................................... 10
(c) Review of Expenditures............................................................................... 10
(d) Tax Matters.......................................................................................... 10
(S)4.14 Reports and Records.................................................................................. 11
(a) Dental Records....................................................................................... 11
(b) Other Reports and Records............................................................................ 11
(S)4.15 Recruitment of Provider Dentists..................................................................... 11
(S)4.16 Service Company's Insurance.......................................................................... 11
(S)4.17 License of Name and Marks............................................................................ 12
(S)4.18 No Warranty.......................................................................................... 12
ARTICLE V. RESPONSIBILITIES OF PROVIDER.......................................................................... 12
(S)5.1 Organization and Operations.......................................................................... 12
(S)5.2 Provider Personnel................................................................................... 12
(a) Dentist Personnel.................................................................................... 12
(b) Provider and Patient Scheduling...................................................................... 13
(c) Paid Hours Reporting................................................................................. 13
(d) Non-Dentist Dental Care Personnel.................................................................... 13
(S)5.3 Professional Standards............................................................................... 13
(S)5.4 Dental Care.......................................................................................... 14
(S)5.5 Peer Review and Quality Assurance.................................................................... 14
(S)5.6 Provider's Insurance................................................................................. 15
(S)5.7 Noncompetition....................................................................................... 15
(S)5.8 Use of Name.......................................................................................... 16
ARTICLE VI. CONFIDENTIALITY...................................................................................... 16
(S)6.1 Confidential and Proprietary Information............................................................. 16
(S)6.2 Use of Practice Statistics........................................................................... 17
ARTICLE VII. FINANCIAL ARRANGEMENTS.............................................................................. 17
(S)7.1 Clinic Expense Reimbursement......................................................................... 17
(S)7.2 Repayment of Advances................................................................................ 17
(S)7.3 Fees................................................................................................. 17
(a) Service Fee.......................................................................................... 17
(b) Performance Fee...................................................................................... 17
(S)7.4 Adjustment to Performance Fee........................................................................ 17
(S)7.5 Reasonable Value..................................................................................... 18
(S)7.6 Payment.............................................................................................. 18
(S)7.7 Accounts Receivable.................................................................................. 18
ARTICLE VIII. TERM AND TERMINATION............................................................................... 19
(S)8.1 Initial and Renewal Term............................................................................. 19
(S)8.2 Termination.......................................................................................... 19
(a) Termination By Service Company....................................................................... 19
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
(b) Termination By Provider.............................................................................. 20
(c) Termination by Agreement............................................................................. 20
(d) Legislative, Regulatory or Administrative Change..................................................... 20
(S)8.3 Effects of Termination............................................................................... 21
(S)8.4 Purchase Obligation.................................................................................. 21
(S)8.5 Closing of Purchase.................................................................................. 22
ARTICLE IX. GENERAL.............................................................................................. 23
(S)9.1 Administrative Services Only......................................................................... 24
(S)9.2 Relationship of Parties.............................................................................. 24
(S)9.3 Notices.............................................................................................. 24
(S)9.4 Execution of Documents............................................................................... 25
(S)9.5 Governing Law........................................................................................ 25
(S)9.6 Severability......................................................................................... 25
(S)9.7 Setoff............................................................................................... 25
(S)9.8 Remedies............................................................................................. 26
(S)9.9 Non-waiver........................................................................................... 26
(S)9.10 Indemnification...................................................................................... 26
(S)9.11 No Third Party Benefit............................................................................... 26
(S)9.12 Captions............................................................................................. 27
(S)9.13 Genders and Numbers.................................................................................. 27
(S)9.14 Complete Agreement................................................................................... 27
(S)9.15 Counterparts......................................................................................... 27
(S)9.16 Assignment........................................................................................... 27
(S)9.17 Successors........................................................................................... 27
(S)9.18 Force Majeure........................................................................................ 27
(S)9.19 Interpretation....................................................................................... 28
INDEX TO EXHIBITS................................................................................................. 29
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED
SERVICE AGREEMENT
This agreement is made effective January 1, 1999, between Smileage
Dental Care, Inc., a Wisconsin corporation ("Service Company"), and Wisconsin
Dental Group, S.C., a Wisconsin corporation ("Provider").
Background Information
----------------------
A. Provider operates as a dental practice providing dental services to
the general public in and around the Greater Milwaukee, Wisconsin area through
individual dentists who are licensed to practice dentistry in the state of
Wisconsin and who are employed or otherwise retained by Provider.
B. Service Company is engaged in the business of providing assets,
personnel, and services to dental practices other than such services as are
directly related to the provision of dental care or the practice of dentistry.
Service Company's services are intended to improve the efficiency and
profitability of dental practices and permit the dentists in such practices to
focus their efforts solely on rendering quality dental care.
C. Provider desires to focus its energies, expertise and time on the
practice of dentistry and on the delivery of dental services to patients. To
accomplish this goal, Provider has engaged Service Company to provide such
services as are necessary and appropriate for the day-to-day administration of
the non-dental aspects of Provider's dental practice pursuant to a Services
Agreement dated December 23, 1996, as amended (the "Original Service
Agreement"). Provider and Service Company (the "Parties") desire to continue
such engagement and amend and restate the Original Service Agreement to
incorporate prior amendments to such agreement and to provide for certain other
modifications, all as set forth in this agreement.
Statement of Agreement
----------------------
The Parties hereby acknowledge the accuracy of the foregoing Background
Information and agree as follows:
ARTICLE I. DEFINITIONS
Capitalized terms used in this agreement but not otherwise defined
herein shall have the respective meanings given those terms in the attached
Exhibit A.
1
<PAGE>
ARTICLE II. APPOINTMENT AND AUTHORITY OF SERVICE COMPANY
--------------------------------------------
(S)2.1 Appointment. Provider hereby appoints Service Company as its
-----------
sole and exclusive agent for the performance of the Services, and Service
Company hereby accepts such appointment, subject at all times to the provisions
of this agreement.
(S)2.2 Authority. Service Company shall have all power, authority,
---------
and responsibility reasonably necessary to provide the Services and carry out
Service Company's other obligations under this agreement. Without limiting the
foregoing, Service Company shall have the authority to provide the Services in
any reasonable manner Service Company deems appropriate to meet the day-to-day
requirements of the business functions of Provider. Subject to Article III of
this agreement, Service Company is also expressly authorized to negotiate and
execute on behalf of Provider contracts that do not relate to the provision of
Dental Care. Provider shall give Service Company 30 days prior written notice of
Provider's intent to execute any agreement obligating Provider to perform Dental
Care or otherwise creating a binding legal obligation on Provider. Unless an
expense is expressly designated as a Service Company Expense in this agreement,
all expenses incurred by Service Company in providing services pursuant to this
agreement shall be Clinic Expenses.
(S)2.3 Patient Referrals. The Parties agree that the benefits to
-----------------
Provider hereunder do not require, are not payment for, and are not in any way
contingent upon the referral, admission, treatment, or any other arrangement for
the provision of any item or service offered by Service Company to patients of
Provider in any facility, laboratory, or dental care operation controlled,
managed, or operated by Service Company.
(S)2.4 Internal Management of Provider. Matters involving the tax
-------------------------------
planning, investment planning, and internal management, control, or finances of
Provider, including without limitation the compensation of dentist employees of
Provider, shall remain the sole and exclusive responsibility of Provider and its
shareholders.
(S)2.5 Practice of Dentistry. The Parties acknowledge and agree
---------------------
that: (a) Service Company is not authorized or qualified to engage in any
activity that may be construed or deemed to constitute the practice of
dentistry; and (b) notwithstanding anything in this agreement to the contrary
(i) Provider, through its dentists, shall be solely responsible for and shall
have complete authority, responsibility, supervision, and control over the
provision of all Dental Care and that all Dental Care shall be provided and
performed exclusively by or under the supervision of dentists as such dentists,
in their sole discretion, deem appropriate, (ii) Service Company shall not have
or exercise any control or supervision over the provision of Dental Care, and
(iii) to the extent any act or service required of Service Company under this
agreement is reasonably likely to be construed by a court of competent
jurisdiction or by any applicable governmental agency to constitute the practice
of dentistry, the requirement to perform that act or service by Service Company
shall be deemed waived and unenforceable. For purposes of this agreement and as
the context permits, the term "dentist" shall be deemed to include those
individuals licensed by the State of Wisconsin to practice general dentistry or
a dental care specialty such as orthodontics, endodontics, periodontics,
prosthodontics, pediatric dentistry, oral surgery, and oral medicine.
2
<PAGE>
ARTICLE III. POLICY BOARD
------------
(S)3.1 Formation and Operation of Policy Board. The Parties hereby
---------------------------------------
establish an advisory policy board (the "Policy Board") which shall provide
consultation and advice to Service Company in support of Service Company
discharging its responsibility for developing and implementing management and
administrative policies for the overall operation of Clinics. The Policy Board
shall consist of six members, of which three members shall be designated by
Service Company, in its sole discretion, and three members shall be designated
by Provider; provided that, unless otherwise agreed by the Parties, the Policy
Board members designated by Provider shall be licensed dentists employed by
Provider. Each Party shall have the right to designate, remove, and replace its
Policy Board designees at any time and from time to time upon notice to the
other Party.
Except as may otherwise be expressly provided in this agreement or any
rules, bylaws, or regulations adopted by the Policy Board, the act of a majority
of the members of the Policy Board shall be the act of the Policy Board. The
Policy Board's decisions may be evidenced by either minutes of a Policy Board
meeting or written action taken by the Policy Board members making the decision;
provided that no written action signed by less than all of the Policy Board
members shall be effective unless notice of such action is given to the Policy
Board member who is not signing such action at least two business days prior to
the effective date of such action. The decisions, resolutions, or
recommendations of the Policy Board shall be reviewed by Service Company and, if
deemed necessary or appropriate by Service Company, in its sole discretion,
shall be implemented by Service Company or Provider, as appropriate.
The Policy Board shall hold regular meetings at such places and at such
times (not less often than quarterly) as the Policy Board may determine from
time to time. Special Policy Board meetings may be called by either Party or any
two Policy Board members; provided that notice of any meeting which is not a
regularly scheduled meeting shall be given to all Policy Board members at least
five business days prior to the meeting, unless such notice is waived by the
Policy Board members. Policy Board meetings may be held through the use of
telecommunications equipment so long as all members can hear each other clearly.
(S)3.2 Responsibilities of the Policy Board. The Policy Board shall
------------------------------------
have the following duties and responsibilities in its advisory capacity to the
Parties, provided, however, that no decision, resolution or recommendation of
the Policy Board shall be binding on either of the Parties unless specifically
agreed to by the Parties either pursuant to the express terms of this agreement
or in writing signed by the Party to be bound:
(a) Capital Improvements and Expansion. Any renovation and expansion
----------------------------------
plans and capital equipment expenditures with respect to Clinics shall be the
responsibility of Service Company, shall be reviewed by the Policy Board, and
shall be based upon economic feasibility, dentist support, productivity, and
then-current market conditions.
(b) Annual Budgets. All annual capital and operating budgets prepared
--------------
in accordance with (S)4.13(a) by Service Company (in consultation with Provider)
shall be subject to the review
3
<PAGE>
and comment of the Policy Board. Notwithstanding the foregoing sentence, such
budgets shall be subject to the review, comment, and approval of Parent. Service
Company shall deliver a copy of such approved budget to the Chief Financial
Officer of Parent for Parent's approval.
(c) Marketing and Advertising. The Policy Board shall review and make
-------------------------
recommendations regarding advertising and other marketing of the dental services
performed at any Clinic.
(d) Patient Fees; Collection Policies. Subject to (S)3.3, as a part of
---------------------------------
the annual operating budget, in consultation with Provider and Service Company,
the Policy Board shall review and make recommendations concerning the fee
schedules and collection policies for all dental and ancillary services rendered
by Provider. Approval of the fee schedules shall be a Dental Decision.
(e) Provider and Payor Relationships. Subject to (S)3.3, decisions
--------------------------------
regarding the establishment or maintenance of contractual relationships between
Provider and outside or institutional dental care providers and third-party
payors shall be subject to the review and recommendations of the Policy Board.
Subject to (S)3.3, all discounted fee practices and schedules, including
individual provider or specialty discount arrangements, preferred provider
organization discounts and capitated fee arrangements, shall be subject to the
review and recommendations of the Policy Board. Where there is no clear
methodology for the allocation of capitated fees among Provider's Dental Care
Professionals, the Policy Board shall recommend the methodology intended to
result in the equitable and appropriate allocation of all related fees
consistent with the type and utilization of Dental Care covered under the
capitation arrangement.
(f) Strategic and Operational Planning. The Policy Board shall review
----------------------------------
and make recommendations regarding the long-term strategic and short-term
operational goals, objectives and plans developed by Service Company.
(g) Capital Expenditures. The Policy Board shall review and make
--------------------
recommendations regarding the priority of major capital expenditures.
(h) Personnel Planning. The Policy Board shall review and make
------------------
recommendations regarding Provider and support personnel manpower plans
developed by Service Company. The Policy Board shall review and make
recommendations regarding any variations to the restrictive covenants in the
dentists' employment or other agreements.
(i) Grievance Referrals. The Policy Board shall consider and make
-------------------
recommendations to the Parties regarding grievances pertaining to matters not
specifically addressed in this agreement as referred to it by key Provider or
Service Company management and supervisory personnel.
(j) Patient Concerns and Claims. The Policy Board shall review and
---------------------------
monitor a patient claims tracking, monitoring and recovery procedure which shall
provide, without limitation, for (i) the timely and appropriate resolution of
all claims and related patient and Provider reimbursement decisions, and (ii)
the distribution of a summary report setting forth the
4
<PAGE>
status and proposed actions with respect to each such claim to Provider and
Service Company on a regular basis. All Dental Care related patient concerns and
claims reimbursement decisions shall be a Provider Expense.
(k) Environmental Health and Safety. The Policy Board shall review and
-------------------------------
monitor environmental and workplace health and safety guidelines, the goal of
which is to achieve compliance with current national, state and local laws and
regulations regarding environmental and workplace health and safety.
(l) Emergency Care Services. The Policy Board shall review and
-----------------------
periodically make suggestions for improving (i) the organization and delivery of
emergency Dental Care by Provider, and (ii) the process and guidelines for
ensuring an appropriate response by Provider to dental and in-Clinic medical
emergencies as they may occur from time to time.
(m) Financial Review. The Policy Board shall review and monitor the
----------------
financial performance of Provider with respect to the attainment of its budgeted
goals.
(n) Other. The Policy Board shall have such other duties,
-----
responsibilities, and authority as may be set forth in this agreement or agreed
upon by the Parties from time to time.
(S)3.3 Dental Decisions. Notwithstanding the preceding section or
----------------
any other provisions of this agreement to the contrary, all Dental Decisions
(defined below) will be made solely by Provider and shall be binding on the
Parties; provided that the Policy Board may participate in the analysis and
discussion process. For purposes of this agreement, "Dental Decisions" shall
mean decisions relating directly to: (a) types and levels of Dental Care to be
provided; (b) recruitment of dentists for Provider, including the evaluation of
the background, experience, qualifications, specialties, and other credentials
of recruited dentists; (c) fee schedules for Provider's services, including
without limitation Provider's usual and customary fee schedule; (d) any other
Dental Care related functions or decisions agreed upon by the Parties; and (e)
to the extent required by applicable law, third party payor contracting.
ARTICLE IV. RESPONSIBILITIES OF SERVICE COMPANY
-----------------------------------
During the Term, Service Company shall provide all such Services as are
necessary and appropriate for the day-to-day administration of the business
aspects of Provider's operations, including without limitation those services
set forth in this Article, provided that all such services shall be subject to
the applicable Budget.
(S)4.1 Clinics
-------
(a) Service Company shall locate, lease, acquire or otherwise procure a
Clinic, taking into consideration the professional concerns of Provider. The
expenses associated with any such leasing, acquisition, or procurement shall be
Clinic Expenses. Any Clinic procured by Service Company for use by Provider
shall be procured at commercially reasonable rates.
5
<PAGE>
(b) In the event Provider is the lessee of a Clinic under a lease with
an unrelated and nonaffiliated lessor, Service Company may require Provider to
assign such lease to Service Company upon receipt of consent from the lessor.
Provider shall exercise all reasonable efforts to assist in obtaining the
lessor's consent to the assignment. Any expenses incurred in the assignment
shall be Clinic Expenses.
(c) Service Company shall be responsible for the repair and maintenance
of each Clinic, in a manner consistent with Service Company's responsibilities
under the terms of any lease or other use arrangement relating to that Clinic,
the costs and expenses of which shall be a Clinic Expense; provided that the
costs and expenses of any repairs or maintenance necessitated by the negligence
or willful misconduct of Provider or its dentists, other personnel, agents, or
invitees shall be a Provider Expense.
(S)4.2 Equipment.
---------
(a) Service Company shall provide all non-dental equipment, fixtures,
office supplies, furniture and furnishings deemed reasonably necessary by
Service Company for the operation of each Clinic and reasonably necessary for
the provision of Dental Care.
(b) Service Company shall provide, finance, or cause to be provided or
financed such dental related equipment as is reasonably required by Provider.
Subject to economic feasibility as set forth in the budgets approved pursuant to
this agreement, Provider shall advise Service Company in all dental equipment
selections. Except for Special Dental Supplies (defined in (S)4.3, below), all
dental and non-dental equipment acquired for the use of Provider shall be owned
by Service Company.
(c) Service Company shall be responsible for repairing, maintaining,
and keeping in reasonably good condition (ordinary wear and tear excepted), and
replacing (as necessary) all equipment provided by Service Company under this
agreement, the cost and expense of which shall be a Clinic Expense; and provided
that the cost and expense for any repairs, maintenance and replacement
necessitated by the negligence or willful misconduct of Provider or its
dentists, other personnel, agents, or invitees shall be a Provider Expense.
(S)4.3 Laboratory Services. Service Company shall arrange for
-------------------
laboratory services, including withouT limitation dental appliance laboratory
service, pathology laboratory service, medical laboratory service, and such
other laboratory services as are reasonably necessary and appropriate for the
operation of each Clinic and the provision of Dental Care therein.
(S)4.4 Supplies. Service Company shall order, procure, purchase,
--------
own, and provide to Provider a reasonable inventory of Ordinary Dental Supplies
and office supplies as are reasonably necessary and appropriate for the
operation of each Clinic and the provision of Dental Care therein. Unless
otherwise prohibited by federal and/or state law, Service Company shall also
order, procure, purchase and provide on behalf of and as agent for Provider all
reasonable Special Dental Supplies required by Provider to provide Dental Care,
the cost of which shall be a Clinic Expense. Service Company shall ensure that
each Clinic is at all times adequately stocked with all such supplies. The
ultimate oversight, supervision and ownership of (a) all
6
<PAGE>
office and Ordinary Dental Supplies is and shall remain the sole responsibility
of Service Company, and (b) all Special Dental Supplies is and shall remain the
sole responsibility of Provider.
(S)4.5 Capital Investment. Access to all needed working capital and
------------------
capital expenditures in accordance with the budget as approved in accordance
with (S)4.13(a) will be provided by Service Company. Service Company shall
determine the source of capital to be invested, which may include (a)
intercompany borrowings from Parent (at the rate set forth in clause (j) in the
definition of "Clinic Expenses"), and (b) borrowings, leases, or other financing
methods through independent third-party financial institutions.
(S)4.6 Support Services. Service Company shall provide or arrange
----------------
for all printing, stationery, forms, postage, duplication, facsimile,
photocopying, and data transmission and processing services, information
services (including providing a computer system for clinic functions, billing,
communications, and management), and other support services as are reasonably
necessary and appropriate for the operation of each Clinic and the provision of
Dental Care therein.
(S)4.7 Quality Assurance, Risk Management, and Utilization Review.
----------------------------------------------------------
Service Company shall assist Provider in Provider's establishment and
implementation of procedures to ensure the consistency, quality,
appropriateness, and necessity of Dental Care provided by Provider, and shall
provide administrative support for Provider's overall quality assurance, risk
management, and utilization review programs. Service Company shall have the
authority to monitor Provider's level of conformance with such procedures and to
report its findings to Provider.
(S)4.8 Licenses and Permits. Although Provider shall be solely
--------------------
responsible for obtaining and maintaining all federal, state, and local licenses
and regulatory permits required for or in connection with the operation of
Provider and in connection with the operation of all dental equipment located in
each Clinic, Service Company shall assist Provider with the implementation of a
plan designed to ensure that all such licenses and permits are obtained and
shall provide reasonable assistance to Provider in obtaining the same. Service
Company also shall maintain all licenses and permits required for all equipment
(existing and future) located at each Clinic.
(S)4.9 Personnel. Except as provided in (S)5.2(d) of this agreement
---------
and subject to (S)3.3, Service Company shall employ or otherwise retain and
shall be responsible for recruiting, hiring, and terminating all management,
administrative, supervisory, clerical, secretarial, bookkeeping, accounting,
payroll, dental assistants, hygienists, laboratory technicians and personnel,
and other non-dentist personnel as Service Company deems necessary and
appropriate for Service Company's performance of its duties and obligations
under this agreement. The selection, training, and supervision of: (a) dental
assistants, hygienists, and other clinical personnel to be employed by Service
Company shall be the responsibility of Provider; and (b) all other personnel to
be employed by Service Company shall be the responsibility of Service Company.
Consistent with reasonably prudent personnel management policies, Service
Company shall seek and consider the advice, input, and requests of Provider in
regard to personnel matters. Service Company shall have sole responsibility for
determining the salaries and fringe benefits of such
7
<PAGE>
non-professional personnel, and for withholding all appropriate amounts for
income taxes, unemployment insurance, social security, workers' compensation,
and any other withholding required by applicable law.
(S)4.10 Contract Negotiations. Service Company shall advise Provider
---------------------
with respect to and negotiate, either directly or on Provider's behalf, as
appropriate, such contractual arrangements with third parties as are reasonably
necessary and appropriate for Provider's provision of Dental Care, including
without limitation negotiated price agreements with third party payors,
alternative delivery systems, or other purchasers of group dental care services;
provided that no contract or arrangement regarding the provision of Dental Care
shall be entered into without Provider Consent.
(S)4.11 Billing and Collection. On behalf of and for the account of
----------------------
Provider, Service Company shall establish and maintain credit and billing and
collection policies and procedures, and shall exercise reasonable efforts to
bill and collect in a timely manner all professional and other fees for all
billable Dental Care provided by Dental Care Professionals, including any such
fees paid directly to Provider by Service Company pursuant to the then-current
Membership Agreement (or similar agreement for providing professional services
to dental plans) between Service Company and Provider. Service Company shall
advise and consult with Provider regarding the fees for Dental Care provided by
Provider (including any related discounting policy); it being understood,
however, that Provider's consent shall be necessary to establish the fees
(subject to (S)3.2(d), above) to be charged for Dental Care. In connection with
the billing and collection services to be provided hereunder, Provider hereby
grants to Service Company, throughout the Term (and thereafter as provided in
(S)8.3), an exclusive special power of attorney and appoints Service Company as
Provider's exclusive true and lawful agent and attorney-in-fact, and Service
Company hereby accepts such special power of attorney and appointment, for the
following purposes:
(a) To bill Provider's patients, in either Provider's or Service
Company's name (as Service Company deems appropriate) and on Provider's behalf,
for all billable Dental Care provided by or on behalf of Provider to patients.
(b) To bill, in either Provider's or Service Company's name (as Service
Company deems appropriate) and on Provider's behalf, all claims for
reimbursement or indemnification from insurance companies and plans, all state
or federally funded dental benefit plans, and all other third party payors or
fiscal intermediaries for all covered billable Dental Care provided by or on
behalf of Provider to patients.
(c) To collect and receive, in either Provider's or Service Company's
name (as Service Company deems appropriate) and on Provider's behalf, all
accounts receivable generated by such billings and claims for reimbursement, to
administer such accounts including, but not limited to, extending the time of
payment of any such accounts for cash, credit or otherwise; discharging or
releasing the obligors of any such accounts; suing, assigning or selling at a
discount such accounts to collection agencies; or taking other measures to
require the payment of any such accounts; provided, however, that extraordinary
collection measures, such as filing lawsuits, discharging or releasing obligors
shall not be undertaken without Provider Consent.
8
<PAGE>
(d) To deposit all amounts collected into the Provider Account.
Provider shall transfer and deliver to Service Company all funds received by
Provider from patients or third party payors for Dental Care. Upon receipt by
Service Company of any funds from patients or third party payors or from
Provider for Dental Care pursuant to this agreement, Service Company shall
promptly deposit the same into the Provider Account.
(e) To take possession of, endorse in the name of Provider, and deposit
into the Provider Account any notes, checks, money orders, insurance payments,
and any other instruments received in payment of accounts receivable for Dental
Care.
(f) To sign checks, drafts, bank notes or other instruments on behalf
of Provider, and to make withdrawals from the Provider Account for payments
specified in this agreement and otherwise as agreed upon from time to time by
the Parties.
Upon request of Service Company, Provider shall execute and deliver to
the financial institution at which the Provider Account is maintained such
additional documents or instruments as Service Company may reasonably request to
evidence or effect the special power of attorney granted to Service Company by
Provider pursuant to this section and (S)4.12. The special power of attorney
granted herein is coupled with an interest anD shall be irrevocable except with
Service Company's written consent. The irrevocable power of attorney shall
expire when this agreement has been terminated, all accounts receivable
purchased by Service Company pursuant to (S)7.7, if any, have been collected,
and all amounts due to Service Company as described in Article VII have been
paid.
(S)4.12 Provider Account.
----------------
(a) Power of Attorney. Service Company shall have access to the
-----------------
Provider Account solely for the purposes stated herein and shall use all funds
on deposit therein to pay all Clinic Expenses in accordance with the terms of
this agreement. Provider hereby grants to Service Company an exclusive special
power of attorney and appoints Service Company as Provider's true and lawful
agent and attorney-in-fact, throughout the Term (and thereafter as provided in
(S)8.3), and Service Company hereby accepts such special power of attorney and
appointment, to make withdrawals from Provider Account for payments specified in
this agreement and as requested from time-to-time by Provider. Notwithstanding
this exclusive special power of attorney, Provider may, upon reasonable advance
notice to Service Company and subject to (S)4.12(b) of this agreement, request
that Service Company draw checks on the Provider Account for Provider Expenses
and such other amounts as may be due to Provider under this agreement.
Disbursements shall be related to and in such amount so as to ensure that
disbursements made without prior Provider Consent are consistent with the
expenditures authorized by the Budget.
(b) [*]
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
9
<PAGE>
(c) Further Assurances. Promptly upon request by Service Company from
------------------
time to time, Provider shall execute a separate power of attorney in form
reasonably satisfactory to Service Company for the purpose of further confirming
or evidencing the rights granted to Service Company under (S)(S)4.11 and 4.12.
(S)4.13 Financial Matters.
-----------------
(a) Annual Budget. At least 30 days prior to the commencement of each
-------------
calendar year, Service Company, in consultation with Provider, shall prepare and
deliver to the Policy Board for its review a proposed Budget, setting forth an
estimate of Provider's revenue and expenses for the upcoming calendar year
(including without limitation the Service and Performance Fees associated with
the services provided by Service Company hereunder). The Budget shall provide,
among other things, that the percentages of Adjusted Gross Revenue established
pursuant to item 1 of Exhibit A-1 attached to this agreement shall be allocated
to Provider Expense.
In the event a proposed Budget is disapproved by Parent (pursuant to
(S)3.2(b)), Service Company, in consultation with Provider, shall promptly
revise such Budget, taking into consideration the comments of Parent, and shall
deliver such revised Budget to the Policy Board for review and to Parent for
approval. In the event that a proposed Budget has not been approved by Parent by
the beginning of the calendar year, then, subject to the provisions of Exhibits
A and A-1 attached to this agreement, the Budget for the prior year shall be
deemed to be adopted as the Budget for the current year until a new Budget as
been approved by Parent.
(b) Accounting and Financial Records. Service Company shall establish
--------------------------------
and administer accounting policies and procedures, internal controls, and
systems for the development, preparation, and safekeeping of administrative or
financial records and books of account relating to the business and financial
affairs of Provider, all of which shall be prepared and maintained in accordance
with GAAP. Service Company shall prepare and deliver to Provider, within 45 days
of the end of each calendar quarter, a balance sheet and an income statement
reflecting the financial status of Provider in regard to the provision of Dental
Care as of the end of such calendar quarter, all of which shall be prepared in
accordance with GAAP. In addition, Service Company shall prepare or assist in
the preparation of any other financial statements or records as Provider may
reasonably request.
(c) Review of Expenditures. Provider's chief executive officer shall
----------------------
review from time to time all expenditures related to the operation of Provider,
but such officer shall not have the power to prohibit or invalidate any
expenditure.
(d) Tax Matters.
-----------
(i) General. Service Company shall prepare or arrange for
the preparation of all tax returns and reports of Provider required by
applicable law, which returns and reports shall be prepared by an accountant
reasonably acceptable to Provider.
10
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(ii) Sales and Use Taxes. Service Company and Provider
acknowledge and agree that to the extent that any of the services to be provided
by Service Company hereunder may be subject to any state sales and use taxes,
Service Company may have a legal obligation to collect such taxes from Provider
and to remit the same to the appropriate tax collection authorities. Provider
agrees to pay any and all applicable state sales, use, gross receipts, and other
similar taxes and charges (other than taxes on Service Company's net income)
with respect to any amount paid to Service Company hereunder and that such
amounts shall be a Provider Expense.
(S)4.14 Reports and Records.
-------------------
(a) Dental Records. Service Company shall establish, monitor, and
--------------
maintain procedures and policies for the timely creation, preparation, filing
and retrieval of all dental records generated by Provider in connection with
Provider's provision of Dental Care; and, subject to applicable law, shall
ensure that dental records are promptly available to dentists and any other
appropriate persons. All such dental records shall be retained and maintained in
accordance with all applicable state and federal laws relating to the
confidentiality and retention thereof. All dental records shall be and remain
the property of Provider.
(b) Other Reports and Records. Service Company shall timely create,
-------------------------
prepare, and file such additional reports and records as are reasonably
necessary and appropriate for Provider's provision of Dental Care, and shall be
prepared to analyze and interpret such reports and records upon the request of
Provider.
(S)4.15 Recruitment of Provider Dentists. Upon Provider's request,
--------------------------------
Service Company shall perform all services reasonably necessary and appropriate
in connection with the recruitment of professional dental personnel. Service
Company shall provide Provider with model agreements to document Provider's
employment, retention or other service arrangements with such individuals.
However, it shall be and remain the sole and complete responsibility of Provider
to interview, select, contract with (subject to (S)5.2, below), supervise,
control and terminate all dentists performing Dental Care or other professional
services, and Service Company shall have no authority whatsoever with respect to
such activities.
(S)4.16 Service Company's Insurance. Throughout the Term, Service
---------------------------
Company shall, as a Clinic Expense, obtain and maintain with commercial
carriers, or through self-insurance, or some combination thereof: (a)
appropriate worker's compensation coverage for the employees of Service Company
provided pursuant to this agreement; and (b) professional and comprehensive
general liability insurance covering Service Company, Service Company's
personnel, and all of Service Company's equipment in such amounts and on such
terms and conditions as Service Company deems appropriate. Service Company shall
cause Provider to be named as an additional insured on Service Company's
property and casualty insurance policies. Upon the request of Provider, Service
Company shall provide Provider with a certificate evidencing such insurance
coverage. Service Company may also carry, at Service Company's option and as a
Clinic Expense, key person life and disability insurance on any shareholder or
dentist employee of Provider in amounts determined as reasonable and sufficient
by Service Company. Service Company shall be the owner and beneficiary of any
such insurance.
11
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(S)4.17 License of Name and Marks. Service Company hereby grants the
-------------------------
Provider, for the Term, a non-exclusive royalty-free license to use the names
"Smileage" and "Smileage Dental Care" and all related marks and logos owned by
Service Company for the purpose of fulfilling its obligations hereunder,
including without limitation providing Dental Care to its patients.
(S)4.18 No Warranty. Provider acknowledges that Service Company has
-----------
not made and will not make any representations or warranties, express or
implied, regarding Service Company's services under this agreement or the
results of those services, including without limitation any representations or
warranties that the services provided by Service Company will result in any
particular amount or level of dental practice or income to Provider.
ARTICLE V. RESPONSIBILITIES OF PROVIDER
----------------------------
(S)5.1 Organization and Operations. As a continuing condition of
---------------------------
Service Company's obligations under this agreement, Provider shall at all times
during the Term: (a) be and remain legally organized and operated to provide
Dental Care in a manner consistent with all state and federal laws; (b) operate
and maintain within the Practice Territory a full time practice of dentistry
providing Dental Care in compliance with all applicable federal, state, and
local laws, rules, regulations, ordinances, and orders; (c) maintain and use its
best efforts to enforce its articles or certificate of incorporation (or other
instrument of organization), bylaws, shareholder agreements, and other
organizational documents (hereafter in this (S)5.1 simply "organizational
documents") in the respective forms provided to Service Company prior to
execution of this agreement; (d) have at least three executive officers at the
level of vice president or above who are also dentist employees of Provider; (e)
maintain and use its best efforts to enforce the written employment agreements
and independent contractor agreements described in (S)5.2(a), below; and (f)
not, without Service Company Consent, (i) amend any of its employment agreements
or organizational documents in any material respect or waive any material rights
thereunder, or (ii) engage in any transaction constituting a merger,
consolidation, reorganization, sale or purchase of assets outside of the
ordinary course of business, liquidation, or dissolution. Provider hereby
acknowledges that Service Company would not have entered into this agreement but
for Provider's covenant to maintain such organizational documents and employment
agreements, and Provider shall pay to Service Company, in addition to the
amounts set forth in Article VII, any damages, compensation, payment, or
settlement amounts received by Provider from a dentist who terminates his
employment agreement without cause or whose employment agreement is terminated
by Provider for cause.
(S)5.2 Provider Personnel.
------------------
(a) Dentist Personnel. Provider shall retain, as a Provider Expense and
-----------------
not as a Clinic Expense, that number of dentists during the Term which are
necessary and appropriate, in Provider's sole discretion after consultation with
Service Company, to provide Dental Care to reasonably meet the demand therefor.
Provider shall cause each dentist retained by Provider to
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hold and maintain a valid and unrestricted license to practice dentistry in the
State of Wisconsin, including without limitation any licenses required for the
provision of any specialty dental services, together with all necessary or
appropriate board or other certifications. Throughout the Term, Provider shall
enter into and maintain a written employment agreement substantially in the form
of Exhibit D for all dentists now and hereafter employed by Provider; provided
that Provider shall, throughout the Term, enter into and maintain a written
employment agreement substantially in the form of Exhibit C with each dentist of
Provider who now or hereafter is either an executive officer (at a level of vice
president or above) of or Policy Board member designated by Provider; and
provided further that Provider shall, immediately upon execution of this
agreement, enter into and maintain a written employment agreement substantially
in the form of Exhibit C with each of the dentists set forth on Exhibit E.
Throughout the Term, Provider shall enter into and maintain a written agreement
with each independent contractor retained by Provider, which agreements shall
contain confidentiality provisions substantially similar to those contained in
the employment agreement in the form of Exhibit D. Provider shall be responsible
for paying the compensation and benefits as applicable, for all dentists and any
other dentist personnel or other contracted or affiliated dentists, and for
withholding all sums for income tax, unemployment insurance, social security, or
any other withholding required by applicable law. Service Company may, on behalf
of Provider, administer the compensation and benefits with respect to such
individuals in accordance with the written agreement between Provider and each
dentist. Service Company shall neither control nor direct any dentist in the
performance of Dental Care for patients. Provider shall provide to Service
Company evidence of such licensing, certifications, and other credentials of the
dentists retained by Provider as Service Company may request from time to time.
(b) Provider and Patient Scheduling. Provider shall, with the
-------------------------------
reasonable assistance of Service Company, (i) develop a set of Provider and
patient scheduling guidelines and a corresponding scheduling system, and (ii)
support Service Company in the implementation of such guidelines and effective
operation of such system.
(c) Paid Hours Reporting. Provider shall support the development and
--------------------
effective operation by Service Company of a dentist paid hours reporting and
monitoring system.
(d) Non-Dentist Dental Care Personnel. All non-dentist personnel who
---------------------------------
provide Dental Care, including without limitation dental hygienists, denturists,
dental assistants, and other licensed or certified personnel shall be under such
control, supervision and direction of Provider and the dentists retained by
Provider in the performance of or in connection with Dental Care for patients as
is required under applicable state law and regulations.
(S)5.3 Professional Standards. As a continuing condition of Service
----------------------
Company's obligations hereunder, each dentist retained by Provider to provide
Dental Care must: (i) have and maintain a valid and unrestricted license to
practice dentistry in the state; and (ii) comply with, be controlled and
governed by, and otherwise provide Dental Care in accordance with applicable
federal, state and municipal laws, rules, regulations, ordinances and orders,
and the ethics and standard of care of the dental profession. All specialty
Dental Care shall be provided by a dentist who is either board certified or
board eligible in the related specialty or by another
13
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dentist licensed to provide such specialty Dental Care operating under the
general supervision of a dentist who is either board certified or board eligible
in that specialty.
(S)5.4 Dental Care. Provider shall ensure that dentists and non-
-----------
dentist dental care personnel are available in sufficient numbers as are
necessary or appropriate to provide Dental Care to reasonably meet the demand
for such Dental Care. In the event that dentists employed by, or shareholders
of, Provider are not available to provide Dental Care coverage, Provider shall
engage and retain dentists on a temporary coverage basis, which dentists shall
meet or exceed the qualifications required for Provider's Dental Care
Professionals under this agreement. All costs and expenses associated with the
retention of such temporary coverage shall be Provider Expenses. With the
assistance of the Service Company, Provider and the dentists shall be
responsible for scheduling dentist and non-dentist dental care personnel
coverage of all dental procedures. Provider shall cause all dentists to exert
their best efforts to develop and promote Provider in such a manner as to ensure
Provider is able to serve the diverse needs of the community. Provider shall
organize and maintain a high quality, cost-effective process for ensuring that
patients will have timely access to emergency Dental Care on a 24-hour, seven
day per week basis.
(S)5.5 Peer Review and Quality Assurance. Provider shall conduct
---------------------------------
its peer review and quality assurance activities in a manner that is consistent
with maintaining the confidentiality of the related processes, actions, and
documentation.
(a) Provider shall designate a committee of dentists to function as a
dental peer review committee to review credentials of potential dentist
recruits, periodically review the credentials of Provider's existing dentists,
determine the practice privileges of the dentists retained by Provider, perform
quality assurance, utilization review, and Provider profiling functions, and
otherwise resolve dental competency issues. The dental peer review committee
shall function pursuant to formal written policies and procedures established by
Provider upon consultation with and the assistance of Service Company.
(b) Provider also shall adopt a quality assurance program to monitor
and evaluate the quality and cost-effectiveness of the Dental Care provided by
the dentist personnel of Provider and other non-dentist personnel providing
Dental Care under the supervision of Provider's dentists. Upon request of
Provider, Service Company shall provide administrative assistance to Provider in
performing its quality assurance activities.
(c) Provider shall cooperate fully with Service Company in an effort to
achieve and maintain full accreditation status for Provider. For purposes of
facilitating accreditation and other related processes and without limiting
Provider's responsibilities under the preceding sentence, Provider shall develop
and maintain a philosophy of practice and a set of practice guidelines which are
acceptable to the Policy Board. Provider shall cause all personnel retained by
it to abide by such philosophy and guidelines at all times.
(d) Provider shall, after consultation with Service Company and
consideration of the recommendations of the Policy Board, support the
development, maintenance, and operation of a patient concerns and claims
recording, reporting, review, resolution, and tracking process which
14
<PAGE>
meets the quality standards of Service Company. Provider shall cause all
personnel retained by it to comply fully with such process at all times.
(e) Provider shall, with the assistance of Service Company, develop a
set of quality standards and utilization, process monitoring, and reporting
guidelines. Provider shall cause all personnel retained by it to comply with
such standards and guidelines.
(S)5.6 Provider's Insurance. Provider shall, obtain and maintain
--------------------
with commercial carriers reasonably acceptable to Service Company or through
self insurance or some combination thereof (reasonably acceptable to Service
Company) appropriate workers' compensation coverage for Provider's employed
personnel (which shall be a Provider Expense) and professional and comprehensive
general liability insurance covering Provider and each of the dentists Provider
retains to provide Dental Care (which shall be a Clinic Expense). All costs,
expenses, and liabilities incurred by Provider or Service Company in excess of
the limits of such policies shall be a Provider Expense. Provider shall actively
support the participation of all dentists retained by Provider in training and
continuing education programs in order to reduce the risk of exposure to and the
related cost of obtaining and maintaining such coverage. The comprehensive
general liability coverage and professional liability coverage shall be in such
minimum amounts as Service Company may establish from time to time. In addition,
Provider shall cause each dentist retained by Provider as an independent
contractor to obtain comparable professional and comprehensive general liability
insurance coverage. All such insurance policies shall (a) name Service Company
as an additional insured and, with respect to policies provided by independent
contractors under the preceding sentence, name Provider as an additional insured
as well, and (b) provide for at least 30 days advance written notice to Provider
and Service Company from the insurer with respect to any alteration of coverage,
cancellation, or proposed cancellation for any reason. Provider shall cause to
be issued to Service Company by such insurer or insurers a certificate
reflecting such coverage. Upon the termination of this agreement for any reason,
Provider shall continue to carry professional liability insurance in the amounts
specified in this section for 10 years after termination, or if Provider
dissolves or ceases to practice dentistry, Provider shall obtain and maintain as
a Provider Expense "tail" professional liability coverage, in the amounts
specified in this section for an extended reporting period of 10 years. Provider
shall be responsible for paying all premiums for "tail" insurance coverage. In
no event shall the professional liability insurance carrier be replaced or
changed without Service Company Consent. Service Company shall provide
reasonable assistance to Provider to obtain such coverage.
(S)5.7 Noncompetition. Provider acknowledges that Service Company
--------------
will incur substantial costs in providing the equipment, support services,
personnel, and other items and services that are the subject matter of this
agreement and that in the process of providing services under this agreement,
Provider will learn or have access to financial and other Confidential
Information of Service Company to which Provider would not otherwise be exposed.
Provider also recognizes that the services to be provided by Service Company
will be feasible only if Provider operates an active practice to which the
dentists associated with Provider devote their full time and attention.
Accordingly, Provider further agrees as follows:
15
<PAGE>
(a) During the Term, except for its obligations under this agreement,
Provider shall not establish, operate, or provide Dental Care at any dental
office, clinic or other dental care facility anywhere within the Practice
Territory nor have an ownership interest, direct or indirect, in any entity, or
participate in any joint venture, which operates any such office, clinic, or
facility; and
(b) Except as specifically approved by Service Company in writing,
during the Term and for a period of five years immediately following the date
this agreement is terminated for any reason, Provider shall not directly or
indirectly own (excluding ownership of less than five percent (5%) of the equity
of any publicly traded entity), manage, operate, control, lend funds to, lend
its name to, or maintain any interest in any entity, business, or enterprise
which (i) provides, distributes, or promotes any type of management or
administrative services or products to third parties in competition with Service
Company in the Practice Territory or (ii) offers any type of service or product
to third parties substantially similar to those offered by Service Company to
Provider in the Practice Territory. Notwithstanding the above restriction,
nothing herein shall prohibit Provider or any of its shareholders from providing
management and administrative services to its or their own dental practices
after the termination of this agreement, and nothing herein shall prohibit
Provider or its shareholders from contracting with a third party manager to
provide administrative or management services for its or their dental practices
after termination of this agreement as long as such relationship complies with
the provisions of this section.
(S)5.8 Use of Name. At all times during the Term, Provider shall,
-----------
unless otherwise directed by the Policy Board pursuant to (S)3.2(c), operate its
dental practice under the name "Wisconsin Dental Group", including without
limitation using all related marks and logos as are licensed to Provider
pursuant to (S)4.17, above, and filing an assumed or fictitious name application
with the Wisconsin Secretary of State or other appropriate governmental agency;
provided that Provider shall, immediately upon the expiration of the Term,
abstain from using such name, marks, and logos and shall take such steps as are
necessary to terminate such applications and Provider's rights thereunder.
ARTICLE VI. CONFIDENTIALITY
---------------
(S)6.1 Confidential and Proprietary Information. Neither Party
----------------------------------------
shall, in any manner or at any time, directly or indirectly, disclose any of the
Confidential Information of the other Party to any person, firm, association,
organization, or entity, or use, or permit or assist any person, firm,
association, organization, or entity to use any such Confidential Information,
excepting only: (a) disclosures (i) required by law, as reasonably determined by
the disclosing Party or its legal counsel, or (ii) made on a confidential basis
to the disclosing Party's shareholders, directors, officers, employees (limited
to those who need to know such Confidential Information), and legal, accounting,
and other professional advisors (collectively, the "Permitted Recipients"); or
(b) use of such Confidential Information by Permitted Recipients in connection
with this agreement; provided that each Party shall (i) make its Permitted
Recipients aware of the requirements of this agreement, (ii) take reasonable
steps to prohibit disclosure of such Confidential Information by any Permitted
Recipient to any other person or entity except another Permitted Recipient,
including without limitation taking such steps as that Party customarily takes
to protect its own Confidential Information, and (iii) be responsible and liable
for any
16
<PAGE>
disclosure or use of such Confidential Information by any of its Permitted
Recipients, except disclosures or uses permitted by this agreement.
(S)6.2 Use of Practice Statistics. Notwithstanding (S)6.1, above,
--------------------------
but subject to the restrictions of this section and applicable law, Service
Company may: (a) share with other professional corporations, associations,
dental practices, or dental care delivery entities the practice statistics of
Provider, including utilization review data, quality assurance data, cost data,
outcomes data, or other practice data, provided that such information shall only
be disclosed to (i) affiliates of Service Company, (ii) other dental groups with
whom Service Company has a management relationship, (iii) managed care dental
benefit providers and other third party payors for the purpose of obtaining or
maintaining third party payor contracts, (iv) financial analysts and
underwriters, (v) employers and employee benefit associations, (vi) quality
assurance and accrediting organizations, or (vii) financial institutions; and
(b) disclose all practice-related information necessary or desirable in
connection with any public or private offering of any security of Service
Company. In addition, Service Company may disclose practice-related information
and data in connection with any survey, presentation, published material, study,
or research project which Service Company deems appropriate for the purpose of
gaining insight into existing and changing patterns in the organization and
delivery of Dental Care and related issues. In no event will any such data
disclose or divulge the identity of any patient or, to the extent reasonably
practicable, any dentist.
ARTICLE VII. FINANCIAL ARRANGEMENTS
----------------------
(S)7.1 Clinic Expense Reimbursement. Service Company shall be
----------------------------
reimbursed for the amount of all Clinic Expenses incurred by Service Company.
(S)7.2 Repayment of Advances. Service Company shall be reimbursed
---------------------
for any and all amounts advanced to Provider by Service Company.
(S)7.3 Fees. Provider and Service Company acknowledge and agree
----
that the compensation set forth in this Article is being paid to Service Company
in consideration of the substantial commitment being made by Service Company
hereunder and that such fees are fair and reasonable in all respects in
consideration of (i) the services performed by Service Company hereunder and
(ii) the capital being made available by Service Company. Service Company shall
be paid the following service fees:
(a) Service Fee. Service Company shall receive an annual Service Fee
-----------
equal to the amount set forth in item 2 of Exhibit A-1 attached to this
agreement or such other greater amount as may be agreed upon by the Parties,
payable in twelve equal monthly installments; and
(b) Performance Fee. Service Company shall receive a Performance Fee
---------------
equal to the amount, if any [*]. The Performance Fee shall be calculated monthly
and payable quarterly.
(S)7.4 Adjustment to Performance Fee. The Performance Fee may be
-----------------------------
adjusted for any calendar quarter during the Term pursuant to the following
provisions:
17
<PAGE>
(a) [*]
(b) [*]
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
(c) The adjustment, if any, under this (S)7.4 shall be calculated
monthly and payable quarterly.
(S)7.5 Reasonable Value. Payment of the Service Fee or Performance
----------------
Fee is not intended to be and shall not be interpreted or applied as permitting
Service Company to share in Provider's fee for Dental Care or any other
services, but is acknowledged as the Parties' negotiated agreement as to the
reasonable fair market value of the equipment, contract analysis and support,
other support services, purchasing, personnel, office space, management,
administration, strategic management, and other items and services furnished by
Service Company pursuant to this agreement, considering the nature and volume of
the services required and the risks assumed by Service Company. Provider and
Service Company acknowledge that: (a) Service Company's administrative expertise
will contribute great value to Provider's performance; (b) Service Company will
incur substantial costs and business risks in arranging for Provider's use of
each Clinic and in providing the equipment, support services, personnel,
marketing, office space, management, administration, and other items and
services that are the subject matter of this agreement; and (c) certain of such
costs and expenses can vary to a considerable degree according to the extent of
Provider's business and services. It is the intent of the Parties that the
Service Fee and Performance Fee reasonably compensate Service Company for the
value to Provider of Service Company's administrative expertise, given the
considerable business risk to Service Company in providing the items and
services that are the subject of this agreement.
(S)7.6 Payment. The amounts to be paid to Service Company under
-------
this Article shall be calculated by Service Company on the accrual basis of
accounting and paid monthly. To facilitate the payments due to Service Company
under this Article, Provider hereby expressly authorizes Service Company to make
withdrawals of such amounts from the Provider Account during the Term in
accordance with (S)4.12(b), and after termination as provided in (S)8.3.
(S)7.7 Accounts Receivable. To assure that Provider receives the
-------------------
entire amount of professional fees for its services and to assist Provider in
maintaining reasonable cash flow for the payment of Clinic Expenses, Service
Company may, during the Term, purchase, with recourse to Provider for the amount
of the purchase, the accounts receivable of Provider arising during the previous
month, except for any receivables due to Provider from Medicaid or any other
governmental health care reimbursement program which Service Company is not
permitted to receive under applicable law (the "Restricted Receivables"), by
transferring the amount set forth below into the Provider Account. The
consideration for the purchase shall be an amount equal to the Adjusted Gross
Revenue recorded each month, less the Adjusted Gross Revenue relating to
Restricted Receivables. Service Company shall be entitled to offset Clinic
Expense
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<PAGE>
reimbursement plus all fees and advances due to Service Company under this
Article against the amount payable for such accounts receivable. Although it is
the intention of the Parties that Service Company purchase and thereby become
the owner of the accounts receivable of Provider, in the event such purchase
shall be ineffective for any reason, Provider hereby grants to Service Company a
security interest in the accounts receivable to the extent permitted by
applicable law, and Provider shall cooperate with Service Company and execute
all documents which may be reasonably requested by Service Company in connection
with such security interest. All collections in respect of such accounts
receivable purchased by Service Company shall be received by Provider as the
agent of Service Company and shall be endorsed to Service Company and deposited
in a bank account at a bank designated by Service Company. To the extent
Provider comes into possession of any payments in respect of such accounts
receivable, Provider shall direct such payments to Service Company for deposit
in bank accounts designated by Service Company.
ARTICLE VIII. TERM AND TERMINATION
--------------------
(S)8.1 Initial and Renewal Term. The Term of this agreement shall
------------------------
be a period which is equal to the remainder of the initial 40-year term of the
Original Service Agreement, beginning on the date of this agreement and ending
December 23, 2036, and shall renew automatically for successive five-year
periods thereafter unless and until either Party gives notice to the other Party
at least 120 days prior to the expiration of the then-current term of its intent
to terminate this agreement at the end of the then-current term or unless
otherwise terminated as provided in (S)8.2 of this agreement.
(S)8.2 Termination.
-----------
(a) Termination By Service Company. Service Company may terminate this
------------------------------
agreement immediately upon notice to Provider upon the occurrence of any one of
the following events:
(i) The dissolution of Provider;
(ii) Provider admits in writing its inability to pay
generally its debts as they become due or makes an assignment for the benefit of
creditors;
(iii) A receiver, trustee, liquidator, or conservator is
appointed for Provider or to take possession of all or substantially all of
Provider's property or a petition for insolvency, dissolution, liquidation, or
reorganization, or order for relief in which Provider is named as debtor, is
filed by, against, or with respect to Provider pursuant to any federal or state
statute, regulation, or law for the protection of debtors, and, with respect to
any such appointment or filing, Provider fails to secure a stay or discharge
thereof within 45 days after such appointment or filing;
(iv) Provider fails to pay when due any payment to be made
by Provider under this agreement, which failure continues for 10 days after
notice is given by Service Company to
19
<PAGE>
Provider thereof, provided that such failure is not directly attributable to
Service Company's failure to apply available funds in the Provider Account
according to (S)4.12(b); or
(v) Provider fails to comply with or perform any of its
other material duties or obligations under this agreement, which failure
continues for 30 days after notice is given by Service Company to Provider
thereof, or if because of the nature of such failure it cannot reasonably be
corrected within such 30 day period, failure by Provider to commence such
correction promptly following its receipt of notice from Service Company and
thereafter to expeditiously and continuously prosecute the correction to
completion.
(b) Termination By Provider. Provider may terminate this agreement
-----------------------
immediately upon notice to Service Company upon the occurrence of any of the
following events:
(i) A receiver, trustee, liquidator, or conservator is
appointed for Service Company or to take possession of all or substantially all
of Service Company's property or a petition for insolvency, dissolution,
liquidation, or reorganization, or order for relief in which Service Company is
named as debtor, is filed by, against, or with respect to Service Company
pursuant to any federal or state statute, regulation, or law for the protection
of debtors, and, with respect to any such appointment or filing, Service Company
fails to secure a stay or discharge thereof within 45 days after such
appointment or filing;
(ii) Service Company fails to comply with or perform any
of its material duties or obligations under this agreement, which failure
continues for 30 days after notice is given by Provider to Service Company
thereof, or if because of the nature of such failure it cannot reasonably be
corrected within such 30 day period, failure by Service Company to commence such
correction promptly following its receipt of notice from Provider and thereafter
to expeditiously and continuously prosecute the correction to completion; or
(iii) A court of competent jurisdiction makes a final
determination that Service Company has materially breached a fiduciary duty owed
to Provider.
Notwithstanding the foregoing, any termination by Provider under this
section shall require the affirmative vote of three-fourths of the
then-outstanding shares of Provider entitled to vote on such a matter.
(c) Termination by Agreement. Provider and Service Company may mutually
------------------------
agree to terminate this agreement at any time, such agreement to be in writing
and signed by both Parties.
(d) Legislative, Regulatory or Administrative Change. In the event
------------------------------------------------
there is a change in any federal, state, or local statute, law, regulation,
legislation, rule, policy, or general instruction, or a change in any third
party reimbursement system, or a ruling, judgment, or decree by any court,
agency, or other governing body having jurisdiction over either Party (hereafter
in this clause (d), a "ruling") which materially and adversely affects, or is
reasonably likely to affect, the manner in which either Party is to perform or
be compensated for its services under this agreement or which shall make this
agreement unlawful, the Parties shall immediately use
20
<PAGE>
their best efforts to enter into a new service arrangement or basis for
compensation for the services furnished pursuant to this agreement that complies
with that change and approximates as closely as possible the economic position
of the Parties prior to such change or ruling.
If the Parties are unable to reach a new agreement within a
reasonable period of time following the date upon which it becomes reasonably
certain that such change will arise or ruling will be given, then either Party
may submit the issue to arbitration which shall be binding on the parties and
subject to the then-applicable Commercial Arbitration Rules of the American
Arbitration Association. In any such arbitration, the arbitrators shall be
consist of a panel of three arbitrators, which shall act by majority vote and
which shall consist of one arbitrator selected by the Party on one side of the
issue subject to the arbitration, one arbitrator selected by the Party on the
other side of the issue, and a third arbitrator selected by the two arbitrators
so selected, who shall be either a certified public accountant or an attorney at
law licensed to practice in the State of Wisconsin and who shall act as chairman
of the arbitration panel; provided that if the Party on one side of the issue
selects its arbitrator for the panel and the other Party fails to so select its
arbitrator within 10 business days after being requested by the first Party to
do so, then the sole arbitrator shall be the arbitrator selected by the first
Party.
All costs and expenses of arbitration shall be borne by the
Parties as determined by the arbitrator or arbitration panel, except that the
fees of any arbitrator on an arbitration panel who is selected individually by a
Party shall be borne separately by the Party appointing him; provided that if
one Party fails to select an arbitrator for a panel, and the sole arbitrator is
the arbitrator selected by the other Party, then the fees of that arbitrator
shall be borne by the Parties as determined by that arbitrator.
(S)8.3 Effects of Termination. Upon termination of this agreement
----------------------
as herein provided, neither Party shall have any further obligations under this
agreement, except for: (a) obligations accruing prior to the date of
termination, including without limitation payment of the amounts set forth in
Article VII relating to services provided prior to the termination of this
agreement; (b) obligations set forth in this agreement that expressly extend
beyond the Term, including without limitation indemnities and noncompetition
provisions, which provisions shall survive the expiration or termination of this
agreement; (c) the obligations of each party set forth in Article VI; and (d)
the obligation of Provider described in (S)8.4. Provider specifically
acknowledges and agrees that Service Company shall continue to collect and
receive on behalf of Provider all cash collections from accounts receivable in
existence at the time this agreement is terminated (which have not otherwise
been purchased by Service Company pursuant to (S)7.7), it being understood that
such cash collections will represent, in part, compensation to Service Company
for Services already rendered and compensation on accounts receivable purchased
by Service Company, if any. Upon the expiration or termination of this agreement
for any reason or cause whatsoever, Service Company shall surrender to Provider
all books and records pertaining to Provider's dental practice; provided that
Service Company may retain copies of such documents to the extent reasonably
necessary for Service Company to complete its post-termination obligations and
activities under this agreement.
(S)8.4 Purchase Obligation. Upon termination of this agreement for
-------------------
any reason, Provider shall, at Service Company's option:
21
<PAGE>
(a) Purchase from Service Company at book value the intangible assets,
deferred charges, goodwill, and all other amounts on the books of the Service
Company relating to this agreement or the items or services provided by Service
Company pursuant to this agreement, including without limitation the amount, if
any, for the covenants described in (S)5.7, above, as adjusted through the last
day of the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of all such
amounts;
(b) Purchase from Service Company any real estate owned by Service
Company and used as a Clinic at the greater of the appraised fair market value
thereof or the then book value thereof;
(c) Purchase, at the greater of the appraised fair market value or the
then book value, all improvements, additions, or leasehold improvements that
have been made by Service Company at any Clinic and that relate to the
performance of Service Company's obligations under this agreement;
(d) Assume all debt, and all contracts, payables, and leases that are
obligations of Service Company and that relate to the performance of Service
Company's obligations under this agreement or the properties leased or subleased
by Service Company in connection with its obligations under this agreement; and
(e) Purchase from Service Company, at the greater of the appraised fair
market value or the then book value, all of the equipment then being supplied by
Service Company pursuant to Service Company's obligations under this agreement,
and all other assets, including inventory and supplies, tangibles and
intangibles, set forth on the books of Service Company as adjusted through the
last day of the month most recently ended prior to the date of such termination
in accordance with GAAP to reflect operations of each Clinic, depreciation,
amortization, and other adjustments of assets shown on the books of the Service
Company.
For purposes of subsection (b), above, the appraised value shall be
determined by an appraiser mutually agreed upon by the Parties. In the event the
Parties are unable to agree upon an appraiser within 10 days following the date
upon which either Party requests the other Party to agree to an appraiser, then
each Party shall appoint an appraiser, who shall in turn select a third
appraiser who shall serve as the appraiser hereunder. In the event either Party
fails to select an appraiser within 15 days of the selection of an appraiser by
the other Party, the appraiser selected by the other Party shall serve as the
appraiser hereunder. The determination of the appraised value of the assets
identified in subsection (b), above, by the appraiser selected hereunder shall
be binding on both Parties.
(S)8.5 Closing of Purchase. If Provider purchases assets pursuant
-------------------
to (S)8.4, Provider shall pay cash for the purchased assets; provided that the
amount of the purchase price allocable to an asset shall be reduced by the
amount of debt and liabilities of Service Company, if any, relating directly to
that asset which are assumed by Provider in connection with such purchase.
Provider and any dentist associated with Provider shall execute such documents
as may be required to
22
<PAGE>
assume the liabilities set forth in (S)8.4(d) and to remove Service Company from
any liability with respect to such purchased asset and with respect to any
property leased or subleased by Service Company. The closing date for the
purchase shall be determined by the Parties, but shall in no event occur later
than 180 days from the date of the notice of termination. Provider shall be
released from the covenants described in (S)5.7, above, upon the successful
consummation of such closing.
Notwithstanding the foregoing, Provider may, at its option, pay all or
a portion of the purchase price at the closing in shares of common stock of
Parent ("Shares") for which Provider shall receive, as a credit to the purchase
price, an amount equal to the number of Shares transferred to Service Company by
Provider at the closing multiplied by the per Share fair market value (defined
below); provided that each Share transferred to Service Company is free and
clear of all liens, security interests, encumbrances, pledges, charges, claims,
voting trusts and restrictions on transfer of any nature whatsoever, except
restrictions on transfer imposed by or pursuant to federal and state securities
laws and such other restrictions as were expressly required by Parent in
connection with the acquisition of Service Company by Parent concurrently with
the execution of this agreement. For purposes of this section, the "per Share
fair market value" shall mean, as of any given date, the (i) last reported sale
price on the New York Stock Exchange on the most recent previous trading day,
(ii) last reported sale price on the NASDAQ National Market System on the most
recent previous trading day, (iii) mean between the high and low bid and ask
prices, as reported by the National Association of Securities Dealers, Inc. on
the most recent previous trading day, (iv) last reported sale price on any other
stock exchange on which the Shares are listed on the most recent previous
trading day, whichever is applicable, or (v) if none of the foregoing is
applicable, then the per Share fair market value of the Shares shall be the
value determined by the Board of Directors of Parent, in its discretion, based
upon the then-current Share value assigned by the Board of Directors of Parent
in connection with Parent's other activities; provided that, if Provider
disagrees with the determination of Parent's Board of Directors as to such
value, the per Share fair market value shall be determined by:
(A) Agreement between Service Company and Provider, if they
are able to agree upon a value within ten business days after being
requested to so agree; or, if not,
(B) An appraiser selected by agreement between Service Company
and Provider, if they are able to agree upon an appraiser within ten
business days after requested to so agree; or, if not,
(C) The majority vote by an appraisal board consisting of
three appraisers, one member appointed by each of Service Company and
Provider and the third member appointed by the first two members so
appointed who shall act as chairman of the appraisal board, provided
that in the event either Party fails to so appoint its appointee to the
appraisal board within ten business days after being requested to do so
by the other Party, then the appraiser appointed by the requesting
Party shall be the sole appraiser.
ARTICLE IX. GENERAL
-------
23
<PAGE>
(S)9.1 Administrative Services Only. Nothing in this agreement is
----------------------------
intended or shall be construed to allow Service Company to exercise control or
direction over the manner or method by which Provider and its dentists perform
Dental Care or other professional dental care services. The rendition of all
Dental Care shall be the sole responsibility of Provider and its dentists, and
Service Company shall not interfere in any manner or to any extent therewith.
Nothing contained in this agreement shall be construed to permit Service Company
to engage in the practice of dentistry, it being the sole intention of the
Parties hereto that the services to be rendered to Provider by Service Company
are solely for the purpose of providing non-dental administrative services to
Provider so as to enable Provider to devote its full time and energies to the
professional conduct of its dental practice and provision of Dental Care to its
patients and not to administration, or practice management.
(S)9.2 Relationship of Parties. The relationship of the Parties is
-----------------------
and shall be that of independent contractors, and nothing in this agreement is
intended, and nothing shall be construed to create an employer/employee,
partnership, or joint venture relationship between the Parties, or to allow
either to exercise control or direction over the manner or method by which the
other performs the services that are the subject matter of this agreement;
provided always that the services to be provided hereunder shall be furnished in
a manner consistent with the standards governing such services and the
provisions of this agreement.
(S)9.3 Notices. Any notice or other communication required or
-------
desired to be given to either Party shall be in writing and shall be deemed
given when deposited in the United States mail, first-class postage prepaid,
addressed:
(a) If to Service Company
Smileage Dental Care, Inc.
9052 North Deerbrook Trail
Milwaukee, Wisconsin 53223
Attention: President
With a copies to:
American Dental Partners, Inc.
301 Edgewater Place, Suite 320
Wakefield, Massachusetts 01880-1249
Attention: Gregory A. Serrao, President
and Chief Executive Officer
and
Baker & Hostetler LLP
65 East State Street
Suite 2100
Columbus, Ohio 43215
24
<PAGE>
Attention: Gary A. Wadman, Esq.
(b) If to Provider
Wisconsin Dental Group, S.C.
9052 North Dearbrook Trail
Milwaukee, Wisconsin 53223
Attention: President
With a copy to:
Niebler & Muren, S.C.
P.O. Drawer 825
Milwaukee, Wisconsin 53008-0825
Attention: Joseph C. Niebler, Sr., Esq.
Any Party may change the address to which notices and other
communications are to be given by giving the other Parties notice of such
change.
(S)9.4 Execution of Documents. Each Party shall execute,
----------------------
acknowledge or verify, and deliver any and all documents, and take any and all
other actions, which from time to time may be reasonably requested by any other
Party to carry out the purposes and intent of this agreement.
(S)9.5 Governing Law. All questions concerning the validity,
-------------
intention, or meaning of this agreement or relating to the rights and
obligations of the Parties with respect to performance under this agreement
shall be construed and resolved under the laws of Wisconsin, without reference
to conflict of law principles.
(S)9.6 Severability. The intention of the Parties is to comply
------------
fully with all applicable laws and public policies, and this agreement shall be
construed consistently with all laws and public policies to the extent possible.
If and to the extent that any court of competent jurisdiction determines that it
is impossible to construe any provision of this agreement consistently with any
law or public policy and consequently holds that provision is invalid, such
holding shall in no way affect the validity of the other provisions of this
agreement, which shall remain in full force and effect. With respect to any
provision in this agreement finally determined by such a court to be invalid or
unenforceable, such court shall have jurisdiction to reform this agreement
(consistent with the intent of the Parties) to the extent necessary to make such
provision valid and enforceable, and, as reformed, such provision shall be
binding on the Parties.
(S)9.7 Setoff. Notwithstanding any provision of this agreement to
------
the contrary, Service Company shall have the right from time to time to setoff
any amounts owed by Service Company to Provider under this agreement against any
amounts owed by Provider to Service Company, whether pursuant to this agreement
or otherwise.
25
<PAGE>
(S)9.8 Remedies. All rights and remedies of each Party under this
--------
agreement are cumulative and in addition to all other rights and remedies which
may be available to that Party from time to time, whether under any other
agreement, at law, or in equity.
Each Party hereby acknowledges that: (a) the provisions of (S)(S)5.7
and 6.1 of this agreement are fundamental for the protection of the other
Party's legitimate business interests; (b) such provisions are reasonable and
appropriate in all respects; and (c) in the event it violates any such
provisions, the other Party would suffer irreparable harm and its remedies at
law would be inadequate. Accordingly, in the event either Party violates or
attempts to violate any such provisions, the other Party shall be entitled to a
temporary restraining order, temporary and permanent injunctions, specific
performance, and other equitable relief without any showing of irreparable harm
or damage or the posting of any bond, in addition to any other rights or
remedies which may then be available to the other Party.
(S)9.9 Non-waiver. No failure by any Party to insist upon strict
----------
compliance with any term of this agreement, to exercise any option, enforce any
right, or seek any remedy upon any default of any other Party shall affect, or
constitute a waiver of, the first Party's right to insist upon such strict
compliance, exercise that option, enforce that right, or seek that remedy with
respect to that default or any prior, contemporaneous, or subsequent default;
nor shall any custom or practice of the Parties at variance with any provision
of this agreement affect or constitute a waiver of, any Party's right to demand
strict compliance with all provisions of this agreement.
(S)9.10 Indemnification. Each Party (the "Indemnifying Party") shall
---------------
indemnify and hold harmless the other Party and its shareholders, directors,
officers, employees, agents, representatives, and affiliates (the "Indemnified
Parties") from and against any and all losses, liabilities, damages, demands,
claims, suits, actions, judgments, assessments, costs and expenses, including
without limitation interest, penalties, attorneys' fees, any and all expenses
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation (collectively, "Damages"), asserted
against, imposed upon, or incurred or suffered by the Indemnified Parties,
directly or indirectly, as a result of or arising from: (i) any failure of any
representation or warranty of the Indemnifying Party in this agreement to be
accurate and complete in all material respects when made; or (ii) any failure by
the Indemnifying Party to perform and observe fully all obligations and
conditions to be performed or observed by the Indemnifying Party under this
agreement. In addition, Provider shall indemnify Service Company and its
shareholders, directors, officers, employees, agents, representatives, and
affiliates from and against any and all Damages asserted against, imposed upon,
or incurred or suffered by any of them, directly or indirectly, as a result of
or arising from the acts or omissions of Provider or its employees, contractors,
or other agents or representatives.
(S)9.11 No Third Party Benefit. This agreement is intended for the
----------------------
exclusive benefit of the Parties and their respective successors and assigns,
and nothing contained in this agreement shall be construed as creating any
rights or benefits in or to any third party.
26
<PAGE>
(S)9.12 Captions. The captions of the various sections of this
--------
agreement are not part of the context of this agreement, are only labels to
assist in locating and reading those sections, and shall be ignored in
construing this agreement.
(S)9.13 Genders and Numbers. When permitted by the context, each
-------------------
pronoun used in this agreement includes the same pronoun in other genders or
numbers and each noun used in this agreement includes the same noun in other
numbers.
(S)9.14 Complete Agreement. This document (including its exhibits
------------------
and all other documents referred to herein, all of which are hereby incorporated
herein by reference) contains the entire agreement among the Parties with
respect to the subject matter of this agreement and, except as provided in 9.19,
below, supersedes all prior or contemporaneous discussions, negotiations,
representations, or agreements relating to the subject matter of this agreement.
No changes to this agreement shall be made or be binding upon any Party unless
made in writing and signed by each Party to this agreement.
(S)9.15 Counterparts. This agreement may be executed in multiple
------------
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
(S)9.16 Assignment. Provider may not assign this agreement without
----------
the prior written consent of Service Company, which consent may be withheld for
any reason. The sale, transfer, pledge, or assignment of any of the shares of
Provider held by any shareholder of Provider, the issuance by Provider of voting
shares to any other person, or any combination of such transactions within a
period of two years, such that the existing shareholders in Provider fail to
maintain a majority of the voting interest in Provider shall be deemed an
attempted assignment by Provider, and shall be null and void unless consented to
in writing by Service Company prior to any such transfer or issuance. Any breach
of this provision, whether or not void or voidable, shall constitute a material
breach of this agreement, and in the event of such breach, Service Company may
terminate this agreement upon 24 hours notice to Provider. Service Company shall
have the right to (i) assign its rights and obligations hereunder to any third
party and (ii) collaterally assign its interest in this agreement and its right
to collect the amounts set forth in Article VII hereunder to any financial
institution or other third party without the consent of Provider.
(S)9.17 Successors. Subject to (S)9.16, above, this agreement shall
----------
be binding upon, inure to the benefit of, and be enforceable by and against the
successors and assigns of each Party.
(S)9.18 Force Majeure. Neither Party shall be liable or deemed to be
-------------
in default for any delay or failure in performance under this agreement or other
interruption of service deemed to result, directly or indirectly, from acts of
God, civil or military authority, acts of public enemy, war, accidents, fires,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by either Party's employees, or any other similar cause
beyond the reasonable control of either Party unless such delay or failure in
performance is expressly addressed elsewhere in this agreement.
27
<PAGE>
(S)9.19 Interpretation. This agreement supersedes the Original
--------------
Service Agreement in its entirety from and after the date of this agreement;
provided that this agreement shall not modify or otherwise affect any rights or
obligations of the Parties under the Original Service Agreement which are based
upon acts or omissions occurring prior to the date of this agreement, which
rights and obligations shall survive the execution of this agreement.
WISCONSIN DENTAL GROUP, S.C.
By: /s/ Robert W. Trettin
---------------------------------
Robert W. Trettin, President
SMILEAGE DENTAL CARE, INC.
By: /s/ Don A. Deike
---------------------------------
Don A. Deike, President
28
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit A Definitions
Exhibit A-1 Financial Terms
Exhibit B [Intentionally Left Blank]
Exhibit C Five-Year Employment Agreement
Exhibit D Standard Employment Agreement
Exhibit E List of Dentists with Five-Year Employment
Agreements
29
<PAGE>
EXHIBIT A
DEFINITIONS
Actual Margin. The term "Actual Margin" shall mean, for any period: (i)
-------------
the actual Adjusted Gross Revenue for that period, less (ii) the sum of the
actual Clinic Expense and the actual Provider Expense for that period.
Adjusted Gross Revenue. The term "Adjusted Gross Revenue" shall mean
----------------------
Gross Revenue less Adjustments.
Adjustments. The term "Adjustments" shall mean all adjustments on the
-----------
accrual basis for (i) third party payor contractual allowances, adjustments,
discounts, professional courtesies, (ii) uncollectible accounts and related
expenses, and (iii) other activities that do not to result in collectible
charges.
Ancillary Revenue. The term "Ancillary Revenue" shall mean all other
-----------------
revenue actually recorded each month that is not Professional Service Revenue.
Budget. The term "Budget" shall mean an operating budget and capital
------
expenditure budget for each calendar year as prepared by Service Company, in
consultation with Provider, and approved by each of the Policy Board and Parent.
Budgeted Margin. The term "Budgeted Margin" shall mean, for any period
---------------
(i) the budgeted Adjusted Gross Revenue for that period, less (ii) the sum of
the budgeted Clinic Expense and budgeted Provider Expense for that period. The
Budgeted Margin for each calendar quarter shall be established pursuant to item
3 of Exhibit A-1 attached to this agreement.
Calculated Margin. The term "Calculated Margin" shall mean, for any
-----------------
period (i) the actual Adjusted Gross Revenue for that period, less (ii) the sum
of (A) the actual Clinic Expense for that period and (B) the actual Adjusted
Gross Revenue for that period multiplied by the budgeted Provider Expense
percentage for that period as established pursuant to item 1 of Exhibit A-1
attached to this agreement.
Capitation Revenue. The term "Capitation Revenue" shall mean all
------------------
revenue recorded under GAAP from managed care organizations or third party
payors where such revenue is recorded periodically on a per member basis for the
partial or total dental needs of an enrolled patient.
Clinic. The term "Clinic" shall mean any of the facilities, including
------
satellite facilities, that Service Company shall own, lease or otherwise procure
and provide for the use of Provider.
Clinic Expense. The term "Clinic Expense" shall mean all operating and
--------------
nonoperating expenses incurred by Service Company or Parent in the provision of
services to Provider and such expenses incurred by Provider which are expressly
identified in this agreement as Clinic Expense. Clinic Expense shall not include
any state or federal income tax, any expenses related to any Dental Assets or
the maintenance or protection of the same, or any other expense
-i-
<PAGE>
reasonably designated by Service Company as a Provider Expense. Clinic Expense
shall not include amortization of goodwill and noncompete covenants arising as a
result of the acquisition of Service Company by Parent concurrently with the
execution of this agreement, but shall include amortization of other intangible
assets obtained in that transaction. Without limiting the foregoing, Clinic
Expense shall include:
(a) The salaries, benefits, and other direct costs of all employees of
Service Company at a Clinic, but not the salaries, benefits, or other direct
costs of the dentists;
(b) The direct cost of any employee or consultant that provides
services at or in connection with a Clinic for improved clinic performance, such
as management, billing and collections, business office consultation, accounting
and legal services, but only when such services are coordinated by Service
Company;
(c) Reasonable recruitment costs and out-of-pocket expenses of Service
Company or Provider associated with the recruitment of additional dentist
employees of Provider;
(d) Dental malpractice liability insurance expenses for dentists,
Service Company employees, and non-dentist employees and comprehensive and
general liability insurance covering each Clinic and employees of Provider and
Service Company at each Clinic;
(e) The cost of laboratory services;
(f) The cost of dental supplies (including but not limited to products,
substances, items, or dental devices), and office supplies;
(g) The expense of using, leasing, purchasing or otherwise procuring
Clinics and related equipment, including utilities, depreciation, and repairs
and maintenance, provided that such expense shall not include the cost of
acquiring goodwill, noncompete covenants, or other intangible assets in
connection with such procurement;
(h) Personal property and intangible taxes assessed against Service
Company's assets which are provided or otherwise employed by Service Company for
the benefit of Provider;
(i) The reasonable travel expenses (except for the corporate staff of
Service Company and Parent) associated with attending meetings, conferences, or
seminars to benefit Provider;
(j) The cost of capital (whether as actual interest on indebtedness
incurred on behalf of Provider or as reasonable imputed interest on capital
advanced by Service Company or Parent) to finance or refinance obligations of
Provider, purchase dental and non-dental equipment, or finance new ventures of
Provider (interest expense will be charged for funds borrowed from outside
sources as well as from Parent; in the latter case, charges will be computed at
a floating rate that is equal to the current blended borrowing rate in effect
for actual and available outside borrowings of Parent; and such rate will be
computed as the sum of interest and related costs divided by the related total
of all borrowings), but specifically excluding any financing incurred by Parent
relating to the acquisition of Service Company by Parent concurrently with the
execution of this agreement;
-ii-
<PAGE>
(k) Other expenses incurred by Service Company or Parent in carrying
out its obligations under this agreement in accordance with the policies and
budgets established by the Policy Board, including without limitation the
write-off of any tangible or intangible assets on the balance sheet of Service
Company or any portion thereof other than costs incurred in connection with the
execution of this agreement and the issuance by Parent of stock options to
Provider or its dentists;
(l) Any tax assessed against Service Company in connection with the
services provided by Service Company hereunder; and
(m) Any other cost or expense designated as a Clinic Expense pursuant
to this agreement.
Confidential Information. The term "Confidential Information" shall
------------------------
mean, with respect to a Party, all trade secrets, proprietary data, and other
information (whether written or oral) of a confidential nature relating directly
or indirectly to that Party or its business, including without limitation all
business management, marketing, and economic studies and methods, patient lists,
proprietary forms, marketing data, fee schedules, customer lists, financial,
tax, accounting, and other information regarding business operations or
structure, business plans, ideas, concepts, policies, and procedures, and any
other information which that Party is obligated to treat as confidential
pursuant to any law, agreement, or course of dealing by which that Party is
bound, whether or not such Confidential Information is disclosed or otherwise
made available pursuant to this agreement. Confidential Information shall also
include the terms and provisions of this agreement and any transactions or
documents executed by the parties pursuant to this agreement. Confidential
Information shall not include any information which (i) is or becomes known or
available to the public and did not become so known through the breach of this
agreement by either Party, (ii) has been lawfully acquired from a third party
without any breach of any confidentiality restriction, or (iii) is already in
the possession of the receiving Party at the time it was disclosed to the
receiving Party by the disclosing Party.
Dental Assets. The term "Dental Assets" shall mean the following
-------------
assets of Provider:
(a) All of Provider's right, title and interest in, to or under, or
possession of, all drugs, pharmaceuticals, products, substances, items or
devices whose purchase, possession, maintenance, administration, prescription or
security requires the authorization or order of a Dental Care Professional or
requires a permit, registration, certification or any other governmental
authorization held by a Dental Care Professional as specified under any federal
or state law, or both;
(b) All of Provider's right, title and interest in and to records of
identity, diagnosis, evaluation or treatment of patients;
(c) All of Provider's right, title and interest in, to or under
insurance policies covering or relating to dental malpractice;
(d) The name of Provider;
-iii-
<PAGE>
(e) All franchises, licenses, permits, certificates, approvals and
other governmental authorizations necessary or desirable to own and operate any
of the other Dental Assets;
(f) All of Provider's right, title and interest in, to or under and
contract or agreement that requires performance by a licensed dental care
provider under federal or applicable state law.
Dental Care. The term "Dental Care" shall mean such intra-oral
-----------
diagnostic and therapeutic procedures, operations, and services as are included
under the definition of the "practice of dentistry" under the laws and
regulations of the state in which such procedures, operations, and services are
performed and which are provided by Provider to its patients through Provider's
dentists and other professional dental care personnel operating under the
supervision of Provider's dentists, including but not limited to the practice of
general dentistry, endodontics, periodontics, orthodontics, prosthodontics,
pediatric dental care, and oral surgery, and all dental care associated with any
of the foregoing.
Dental Care Professional. The term "Dental Care Professional" shall
------------------------
mean any individual holding a current, unrestricted license issued by the
appropriate dental licensing board in the state in which the Dental Care
Professional renders Dental Care, which permits such individual to provide
Dental Care, including without limitation dentists (as that term is defined in
(S)2.5) and denturists, dental assistants, and hygienists.
GAAP. The term "GAAP" shall mean generally accepted accounting
----
principles set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board and
the Securities and Exchange Commission or in such other statements by such other
entity or other practices and procedures as may be approved by a significant
segment of the accounting profession, which are applicable to the circumstances
as of the date of the determination.
Gross Revenue. The term "Gross Revenue" shall mean the sum of all
-------------
Professional Service Revenue and Ancillary Revenue before Adjustments.
Ordinary Dental Supplies. The term "Ordinary Dental Supplies" shall
------------------------
mean all products, substances, items, or devices which (i) are necessary or
appropriate for Provider's provision of Dental Care, and (ii) are not Special
Dental Supplies.
Parent. The term "Parent" shall mean American Dental Partners, Inc., a
------
Delaware corporation.
Performance Fee. The term "Performance Fee" shall mean the fee paid to
---------------
Service Company by Provider as described in (S)7.3(b).
Practice Territory. The term "Practice Territory" shall mean the
------------------
geographic area within which Provider provides Dental Care, which geographic
area shall include all of the following territories: (a) with respect to each
Clinic which offers general dentistry services only, the geographic area within
a radius of 30 miles of such Clinic, and (b) with respect to each Clinic which
offers specialty dental services, the geographic area within a radius of 50
miles of such Clinic.
-iv-
<PAGE>
Professional Service Revenue. The term "Professional Service Revenue"
----------------------------
shall mean the sum of all (i) professional fees actually recorded each month on
an accrual basis under GAAP as a result of the Dental Care rendered by the
Dental Care Professional retained by Provider, and (ii) Capitation Revenue;
including any such fees or Capitation Revenue paid or payable directly to
Provider by Service Company pursuant to the then-current Membership Agreement
(or similar agreement for providing professional services to dental plans)
between Service Company and Provider.
Provider Account. The term "Provider Account" shall mean the bank
----------------
account of Provider established by Provider promptly following the execution of
this agreement at a financial institution reasonably acceptable to Service
Company, which account shall be administered by Service Company according to
(S)(S)4.11 and 4.12 of this agreement.
Provider Consent. The term "Provider Consent" shall mean the consent
----------------
granted by Provider's chief executive officer or by another officer or
representative designated from time to time by Provider's chief executive
officer. When any provision of this agreement requires Provider Consent,
Provider Consent shall not be unreasonably withheld or delayed and shall be
binding on Provider.
Provider Expense. The term "Provider Expense" shall mean an expense
----------------
incurred by the Service Company or Provider and for which Provider, and not the
Service Company, is financially liable. Provider Expense shall include dentist
(as defined in (S)2.5) salaries, benefits (which includes workers' compensation
coverage), and other direct costs related to the dentists employed or otherwise
retained by Provider for the provision of its Dental Care (including
professional dues, subscriptions, continuing dental education expenses, and
travel costs for continuing dental education or other business travel, but
excluding business travel requested by Service Company, which shall be a Clinic
Expense), together with any expenses related to any Dental Assets or the
maintenance and protection of the same and such other costs and expenses
designated as Provider Expense in or pursuant to this agreement. In the event
Provider incurs consulting, accounting, legal or other similar fees without
Service Company's approval of such engagement through Service Company, all fees
and expenses so incurred shall be Provider Expenses.
Representatives. The term "Representatives" shall mean a Party's
---------------
officers, directors, employees, and other agents or representatives, and
attorneys, accountants, and other professional advisors.
Service Company Consent. The term "Service Company Consent" shall mean
-----------------------
the consent granted by Service Company's chief executive officer or by another
officer or representative designated from time to time by Service Company's
chief executive officer. When any provision of this agreement requires Service
Company Consent, Service Company Consent shall not be unreasonably withheld or
delayed and shall be binding on Service Company.
Service Company Expense. The term "Service Company Expense" shall mean
-----------------------
an expense or cost incurred by Service Company or Parent and for which Service
Company or Parent, and not Provider, is financially liable. Service Company
Expense shall specifically
-v-
<PAGE>
include the costs of Service Company and Parent's corporate personnel and the
travel costs of such corporate personnel and shall specifically exclude expenses
incurred by Service Company or Parent that directly benefit Provider or are
otherwise incurred by Service Company or Parent in providing services pursuant
to this agreement.
Service Fee. The term "Service Fee" shall mean the fee paid to
-----------
Service Company by Provider as described in (S)7.3(a).
Services. The term "Services" shall mean the business, administrative,
--------
and management services to be provided for Provider by Service Company as set
forth in this agreement, including without limitation the provision of
equipment, supplies, support services, non-dentist personnel, office space,
financial recordkeeping and reporting, billing and collection and other business
office services. Services shall not include the provision of Dental Care to
patients of the Provider.
Special Dental Supplies. The term "Special Dental Supplies" shall mean
-----------------------
all products, substances, items or devices, the purchase, possession,
maintenance, administration, prescription or security of which requires the
authorization or order of a Dental Care Professional or requires a permit,
registration, certification or other governmental authorization held by a Dental
Care Professional as specified under any federal and/or state law.
Term. The term "Term" shall mean the initial term and any renewal
----
periods of this agreement as described in (S)8.1, subject to termination
pursuant to (S)8.2.
-vi-
<PAGE>
EXHIBIT A-1
FINANCIAL TERMS
1. Budgeted Provider Expense [(S)4.13(a)]. For purposes of the Budget
--------------------------------------
for calendar year 1999, the following percentages of Adjusted Gross Revenue
shall be allocated to Provider Expense for the following calendar quarters,
respectively:
<TABLE>
<CAPTION>
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Full Year
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
In each succeeding annual Budget, unless the Parties otherwise mutually agree,
such percentages of Adjusted Gross Revenue shall be allocated to Provider
Expense for the respective calendar quarters of the applicable calendar year.
2. Service Fee [(S)7.3(a)]. The annual Service Fee shall be [*].
-----------------------
3. Budgeted Margin [Exhibit A]. The Budgeted Margins for the respective
---------------------------
calendar quarters in calendar year 1999 are as follows:
<TABLE>
<CAPTION>
Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4 Full Year
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
* This information has been omitted pursuant to the Securities and Exchange
Commission's grant of confidential treatment.
In the Budget for each subsequent calendar year, unless the Parties otherwise
mutually agree, such Budgeted Margins shall continue to be applicable to the
calendar quarters in such calendar year. Notwithstanding the foregoing or any
other provisions of this agreement to the contrary, if the Parties are unable to
agree on a Budget for any calendar year, then, for purposes of calculating the
Performance Fee, the Budgeted Margin for each calendar quarter of that calendar
year (the "Current Quarter") shall be the greater of (a) the Budgeted Margin for
the corresponding quarter of the prior calendar year (the "Corresponding Prior
Quarter"), or (b) an amount which is equal to the result obtained when the
Adjusted Gross Revenue for the Current Quarter is multiplied by a fraction
having as its numerator the Budgeted Margin for the Corresponding Prior Quarter
and having as its denominator the budgeted Adjusted Gross Revenue for the
Corresponding Prior Quarter.
4. Adjustments. Any or all of the percentages or amounts contained in
this exhibit my hereafter be changed from time to time by written agreement of
the Parties. Such agreement may be in the form of a new Exhibit A-1 to this
agreement, which, if signed by both Parties, shall supersede this exhibit for
all purposes thereafter.
The effective date of this Exhibit A-1 is January 1, 1999.
<PAGE>
WISCONSIN DENTAL GROUP, S.C. SMILEAGE DENTAL CARE, INC.
By: /s/ Robert W. Trettin By: /s/ Don A. Deike
-------------------------------- ---------------------------
Robert W. Trettin, President Don A. Deike, President
<PAGE>
EXHIBIT 10(T)
AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
DATED AS OF DECEMBER 4, 1998
AMONG
AMERICAN DENTAL PARTNERS, INC.,
THE LENDERS PARTY HERETO
AND
FLEET NATIONAL BANK
AS AGENT
AND
BANKBOSTON, N.A.
AS CO-AGENT
-----------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. Definitions 1
1.1 Certain Definitions 1
1.2 Accounting Terms 13
1.3 Rules of Interpretation 13
Section 2. Revolving Credit Loans; Letters of Credit 14
2.1 Amount 14
2.2 Revolving Credit Note 14
2.3 Lending Office 14
2.4 Requests For Revolving Credit Loans 14
2.5 Letters of Credit 14
2.6 Maturity of Revolving Credit Loans 16
2.7 Termination or Reduction of Commitment 16
2.8 Several Obligations 17
Section 3. [Intentionally Omitted] 17
Section 4. Interest Rates; Fees; Payments 17
4.1 Interest Rates 17
4.2 Commitment Fee 18
4.3 Letter of Credit Fees 18
4.4 Certain Notices 19
4.5 Non-Receipt of Funds by the Agent 19
4.6 Sharing of Payment; Waiver of Enforcement Without Consent,
Etc 20
4.7 Minimum and Maximum Amounts 21
4.8 Computations 21
4.9 Manner and Place of Payment 21
4.10 Pro Rata Treatment. 22
4.11 Payments Due on Days Other than Banking Days 22
4.12 Additional Costs 22
4.13 Limitation on Types of Loans 24
4.14 Illegality 24
4.15 Substitute Prime Rate Loans 24
4.16 Compensation. 24
4.18 Optional Prepayments 26
4.19 Mandatory Prepayments 26
Section 5. Security. 26
5.1 Security Interests 26
Section 6. Conditions Precedent 27
6.1 Conditions to all Loans and Letters of Credit 27
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 7. Representations and Warranties 29
7.1 Corporate Status 29
7.2 No Violation 29
7.3 Corporate Power and Authority 30
7.4 Enforceability 30
7.5 Consents or Approvals 30
7.6 Financial Statements 30
7.7 No Material Change 31
7.8 Litigation 31
7.9 Compliance with Other Instruments; Compliance with Law 31
7.10 Subsidiaries 31
7.11 Investment Company Status; Limits on Ability to Incur
Indebtedness 31
7.12 Title to Property 32
7.13 ERISA 32
7.14 Taxes 32
7.15 Environmental Matters 32
7.16 Intellectual Property 33
7.17 Level of Borrowing 33
7.18 Malpractice Insurance 33
7.19 Year 2000 Risk 33
7.20 Disclosure. 34
Section 8. Affirmative Covenants 34
8.1 Use of Proceeds. 34
8.2 Conduct of Business; Maintenance of Existence. 34
8.3 Compliance with Laws 34
8.4 Insurance 34
8.5 Financial Statements, Etc. 35
8.6 Notice of Default. 36
8.7 Environmental Matters 37
8.8 Taxes and Other Liens 38
8.9 ERISA Information 38
8.10 Inspection 38
8.11 Certain Obligations Respecting Subsidiaries 38
8.12 Further Assurances 39
Section 9. Negative Covenants 39
9.1 Transactions with Affiliates 40
9.2 Consolidation, Merger or Acquisition 40
9.3 Disposition of Assets 41
9.4 Indebtedness 41
9.5 Guarantees 42
9.6 Liens 42
9.7 Restricted Payments 43
9.8 Investments 43
9.9 ERISA 44
9.10 Fiscal Year 44
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 10. Financial Covenants 44
10.1 Debt Coverage 45
10.2 Fixed Charges Coverage 45
10.3 Minimum Net Worth. 45
Section 11. Events of Default 45
11.1 Events of Default 45
11.2 Remedies Upon an Event of Default 47
Section 12. The Agent And The Co-Agent 47
12.1 Appointment, Powers and Immunities 47
12.2 Reliance 48
12.3 Defaults 49
12.4 Rights as a Lender. 49
12.5 Events 49
12.6 Non-Reliance on Agent or the Co-Agent and Other Lenders. 50
12.7 Failure to Act 50
12.8 Removal of Agent or Co-Agent. 50
12.9 Collateral Sub-Agents 51
Section 13. General. 51
13.1 Amendments, Etc. 51
13.2 Notices, Etc. 51
13.3 No Waiver; Remedies 52
13.4 Right of Set-off 52
13.5 Expenses; Indemnification 52
13.6 Successors and Assigns. 53
13.7 Severability. 55
13.8 Governing Law 55
13.9 Waiver Of Jury Trial. 55
13.10 Venue, Consent To Service Of Process. 56
13.11 Additional Lenders. 56
13.12 Pledge. 56
13.13 Headings 57
13.14 Counterparts. 57
13.15 Confidentiality 57
13.16 Amendment and Restatement. 57
</TABLE>
EXHIBITS:
- --------
A - Revolving Credit Note
B - Security Agreement
C - Subsidiary Security Agreement
D - Stock Pledge Agreement
E - Subsidiary Guaranty
F - Compliance Certificate
G - Assignment and Joinder Agreement
<PAGE>
SCHEDULES:
- ---------
A - Disclosure Schedule
1 - Applicable Margin and Commitment Fees
2 - Commitments of the Lenders
<PAGE>
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THIS AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of December
4, 1998, by and among AMERICAN DENTAL PARTNERS, INC., a Delaware corporation
(the "Borrower"), having its principal place of business and chief executive
--------
offices at 301 Edgewater Place, Suite 320, Wakefield, Massachusetts 01880; FLEET
NATIONAL BANK, a national banking association, with its principal place of
business at Fleet Center, One Federal Street, Boston, Massachusetts 02110
(together with its successors, "Fleet"); each other lender which may from time
-----
to time become a signatory hereto (individually, together with its successors as
well as Fleet, a "Lender" and collectively, together with their respective
------
successors, the "Lenders"); Fleet, as agent for the Lenders (in such capacity,
-------
together with its successors in such capacity, the "Agent"); and BANKBOSTON,
-----
N.A. as co-agent for the Lenders (in such capacity, together with its successors
in such capacity, the "Co-Agent")
--------
WHEREAS, the Borrower and Fleet are parties to a Revolving Credit Agreement
dated as of April 24, 1997 (as amended, modified or supplemented from time to
time, the "Original Credit Agreement");
-------------------------
WHEREAS, the Borrower and Fleet desire to amend and restate the Original
Credit Agreement in its entirety in order to amend and modify certain terms and
provisions of the Original Credit Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
Definitions.
Certain Definitions. The following terms are used herein with the meanings
-------------------
assigned to them below:
"Accountants" shall mean KPMG Peat Marwick LLP, or another of the so-called
-----------
"big five" accounting firms or, subject to the prior approval of the Majority
Lenders, other certified public accountants selected by the Borrower.
"Additional Costs" shall have the meaning set forth in Section 4.12.
----------------
"Adjusted EBITDA" shall mean an amount equal to (i) EBITDA of the Borrower
---------------
for the twelve month period then ended less (ii) EBITDA for each Acquired
----
Company for such fiscal period plus (iii) EBITDA for each Acquired Company on a
----
pro forma basis for the twelve months preceding the end of such fiscal period,
provided, however, that the EBITDA for Acquired Companies may be adjusted, for
- -------- -------
certain identified one-time savings.
"Affiliate" shall mean, with respect to any specified Person (the
---------
"specified person"), any Person directly or indirectly controlling, controlled
----------------
by or under direct or indirect common control with, the specified person and,
without limiting the generality of the foregoing, includes (i) any director,
officer or, in the case of a limited liability company, manager of the specified
person or any Affiliate of the specified person, (ii) any such director's,
officer's or manager's parent, spouse, child or child's spouse (a "relative"),
(iii) any group acting in concert, of one or more such directors, officers,
managers, relatives or any combination thereof (a "group"), (iv) any
<PAGE>
Person controlled by any such director, officer, manager, relative or group in
which any such director, officer, manager, relative or group beneficially owns
or holds 10% or more of any class of voting securities or a 10% or greater
equity or profits interest and (v) any Person or group which beneficially owns
or holds 10% or more of any class of voting securities or membership interests
or a 10% or greater equity or profits interest in the specified person. For the
purposes of this definition, the term "control" when used with respect to any
specified person means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such specified
person, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" shall mean this Amended and Restated Revolving Credit
---------
Agreement.
"Applicable Lending Office" means, for each Lender and for each Type of
-------------------------
Loan, the Lending Office of such Lender (or of an affiliate of such Lender)
designated for such Type of Loan on Schedule 3 hereof or such other office of
----------
such Lender (or of an affiliate of such Lender) as such Lender may from time to
time specify to the Agent and the Borrower as the office by which its Loans of
such Type are to be made.
"Applicable Margin" shall mean, in respect of any Type of Loan, the amount
-----------------
for such Type of Loan determined pursuant to Schedule 1 attached hereto, it
----------
being agreed that any change in the Applicable Margin shall be effective three
(3) days after the date upon which the Agent has received a duly executed and
completed Compliance Certificate evidencing the applicable Total Debt/Adjusted
EBITDA Ratio.
"Banking Day" shall mean any day on which commercial banks settle payments
-----------
in New York or London with respect to any payment obligation which is a LIBOR
Loan or New York with respect to any other payment obligation, excluding
Saturday and Sunday and excluding any other day which in The Commonwealth of
Massachusetts is a legal holiday or a day on which banking institutions are
authorized by law to close.
"Borrower Group Property" shall mean any real property owned, occupied, or
-----------------------
operated by the Borrower or any of its Subsidiaries.
"Capital Expenditures" shall mean all expenditures for fixed assets made by
--------------------
the Borrower or any of its Subsidiaries which are capitalized, including
expenditures related to a Capital Lease, but excluding all expenditures incurred
in connection with any Permitted Acquisition.
"Capital Lease" shall mean, as to any Person, any lease which is
-------------
capitalized on the balance sheet of such Person in accordance with GAAP.
"Capital Lease Obligations" shall mean, as to any Person, the amount of the
-------------------------
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real and/or personal property which
obligations are classified and accounted for as a capital lease on a balance
sheet of such Person in accordance with GAAP (including Statement of Financial
Accounting Standards No. 13, as amended, of the Financial Accounting Standards
Board).
"Closing Date" shall mean the first date on which the conditions set forth
------------
in Section 6.1 have been satisfied and any Loans are to be made or any Letters
of Credit are to be issued hereunder.
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended, or any
----
successor statute.
"Collateral" shall have the meaning given that term in the Security
----------
Agreement
"Commitment" In relation to any particular Lender, the maximum dollar
----------
amount which such Lender has agreed to loan to the Borrower or make available to
the Borrower upon the terms and subject to the conditions of this Agreement,
initially as set forth on Schedule 2 attached hereto, as such Lender's
----------
Commitment may be modified pursuant hereto and in effect from time to time.
Schedule 2 shall be amended from time to time, with prior notice to the
- ----------
Borrower, to reflect any changes in the Commitments of the Lenders.
"Commitment Percentage" In relation to any particular Lender, the
---------------------
percentage which such Lender's Commitment represents of the aggregate
Commitments of all the Lenders, initially as set forth on Schedule 2 attached
----------
hereto, as such Lender's Commitment Percentage may be modified pursuant hereto
and in effect from time to time. Schedule 2 shall be amended from time to time
----------
to reflect any changes in the Commitment Percentages of the Lenders.
"Contractual Obligation" shall mean, as to any Person, any provision of any
----------------------
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Controlled Group" shall mean all members of a controlled group of
----------------
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Sections 414(b) or 414(c) of the Code.
"Default" shall mean any condition or event that constitutes an Event of
-------
Default or that with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
"Deposited Funds" shall have the meaning set forth in Section 4.6.
---------------
"EBITDA" shall mean, for any fiscal period, an amount equal to Net Income
------
for such period, plus each of the following (without duplication), to the extent
deducted in computing such Net Income: (i) Interest Expense, (ii) taxes
accrued, (iii) depreciation, and (iv) amortization of goodwill and other
intangibles.
"Environmental Laws" shall mean all federal, state, local and foreign laws,
------------------
and all regulations, notices or demand letters issued, promulgated or entered
thereunder, relating to pollution or protection of the environment and to
occupational health and safety, including, without limitation, laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or Hazardous Substances into the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals or Hazardous Substances.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor statutes.
"Event of Default" has the meaning set forth in Section 11.1.
----------------
<PAGE>
"Excluded Property" shall mean (i) any property of the Borrower or its
-----------------
Subsidiaries the purchase price of which was, or in the future may be, financed
with Indebtedness permitted by Sections 9.4(b), 9.4(c), 9.4(e), or 9.4(f) and
(ii) real property of the Borrower or its Subsidiaries the purchase price of
which was financed with Indebtedness listed on Schedule A or assumed by the
Borrower in connection with a Permitted Acquisition and (iii) leasehold
interests in any real property.
"Extension of Credit" shall mean the making of any Loan or the issuance of
-------------------
any Letter of Credit.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Banking Day next
succeeding such day, provided that (a) if such day is not a Banking Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Banking Day as so published on the next succeeding Banking Day,
and (b) if no such rate is so published on such next succeeding Banking Day, the
Federal Funds Rate for such day shall be the average rate charged to Fleet on
such day on such transactions as determined by the Agent.
"Financial Statement Date" shall mean December 31, 1997.
------------------------
"Fixed Charges" shall mean, for any fiscal period, the sum of (i) the
-------------
amount of the scheduled installments of principal payable in respect of
Indebtedness of the Borrower and its Subsidiaries during such period, plus (ii)
----
Interest Expense for such period, plus (iii) the tax provision of the Borrower
----
and its Subsidiaries paid or required to be paid in cash for such period, plus
----
(iv) Maintenance Capital Expenditures made by the Borrower and its Subsidiaries
during such period, plus (v) Rental Payments, plus (vi) distributions to
---- ----
stockholders permitted by the Agreement.
"Fleet" means Fleet National Bank and its successors.
-----
"Funding Standard Controlled Group" shall mean all members of a controlled
---------------------------------
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with the Borrower, are treated as a single
employer under Sections 414(b), 414(c), 414(m) or 414(o) of the Code.
"GAAP" shall mean accounting principles generally accepted in the United
----
States applied on a consistent basis.
"Governmental Approval" shall mean any authorization, consent, order,
---------------------
approval, license, lease, ruling, permit, tariff, rate, certification,
validation, exemption, filing or registration by or with, or notice to, any
Governmental Authority.
"Governmental Authority" shall mean any federal, state, municipal or other
----------------------
governmental department, commission, board, bureau, agency, court, tribunal or
other instrumentality, domestic or foreign, and any arbitrator.
"Guarantee" by any Person shall mean any obligation, contingent or
---------
otherwise, of such Person directly or indirectly guaranteeing any Indebtedness
or other obligation of any other Person and, without limiting the generality of
the foregoing, any obligation, direct or indirect, contingent or otherwise of
such Person (a) to purchase or pay (or advance or supply funds for the
<PAGE>
purchase or payment of) such Indebtedness or other obligation (whether arising
by virtue of partnership arrangements, by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (b) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term Guarantee shall
--------
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantors" shall mean, collectively, PDHC, Ltd., a Minnesota corporation,
----------
Texas Dental Partners, Inc., a Texas corporation, American Dental Partners of
Louisiana, Inc., a Delaware corporation, Smileage Dental Care, Inc., a Wisconsin
corporation, Soster Dental, Inc., a Pennsylvania corporation, American Dental
Partners of Wisconsin, Inc., a Delaware corporation, Apple Park Associates,
Inc., a Delaware corporation, Orthocare, Ltd., a Minnesota corporation,
Innovative Practice Concepts, Inc., an Arizona corporation, Family Care Dental
Centers, Inc., a Wisconsin corporation, American Dental Professional Services,
Inc., a Delaware corporation, American Dental Partners of Virginia, Inc., a
Delaware corporation, and American Dental Partners of Maryland, Inc., a Maryland
corporation, any other Person that becomes a party to a Subsidiary Guaranty.
"Guarantors' Documents" shall mean the Subsidiary Guaranties and the
---------------------
Subsidiary Security Agreements.
"Hazardous Substances" shall mean all hazardous and toxic substances,
--------------------
wastes or materials, hydrocarbons (including naturally occurring or man-made
petroleum and hydrocarbons), flammable explosives, urea formaldehyde insulation,
radioactive materials, biological substances, PCBs, pesticides, herbicides and
any other kind and/or type of pollutants, or contaminates and/or any other
similar substances or materials which, because of toxic, flammable, explosive,
corrosive, reactive, radioactive or other properties that may be hazardous to
human health or the environment, are included under or regulated by any
Environmental Laws.
"Indebtedness" of any Person at any date shall mean, (a) all indebtedness
------------
of such Person for borrowed money (excluding current trade liabilities which
shall include payables to affiliated dental groups incurred in the ordinary
course of business and payable in accordance with customary practices), or which
is evidenced by a note, bond, debenture or similar instrument, (b) all
obligations of such Person under leases that are treated as capitalized leases
in accordance with GAAP, (c) all obligations of such Person in respect of
bankers acceptances issued or created for the account of such Person, and all
reimbursement obligations (contingent or otherwise) of such Person in respect of
any letters of credit issued for the account of such Person to the extent not
secured by cash and without duplication of any underlying Indebtedness, (d) all
liabilities secured by any Lien on any property owned by such Person even though
such Person has not assumed or otherwise become liable for the payment thereof,
and (e) without duplication, all Guaranties.
"Intellectual Property" shall have the meaning specified in Section 7.16.
---------------------
"Interest Expense" shall mean, for any fiscal period, the sum (determined
----------------
without duplication) of the aggregate amount of interest required to be paid
during such period on Indebtedness of the Borrower and its Subsidiaries (on a
consolidated basis), including the interest portion of payments under Capital
Lease Obligations.
<PAGE>
"Interest Period" shall mean, with respect to any LIBOR Loan, the period
---------------
commencing on the date such LIBOR Loan is made or converted from a Prime Rate
Loan or the last day of the next preceding Interest Period with respect to such
LIBOR Loan and ending on the numerically corresponding day in the first, second,
third or sixth calendar month thereafter, as the Borrower may select as provided
in Section 4.4, except that each such Interest Period which commences on the
last Working 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 Working Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may end after the
Maturity Date; (ii) each Interest Period which would otherwise end on a day
which is not a Working Day shall end on the next succeeding Working Day (or, if
such next succeeding Working Day falls in the next succeeding calendar month, on
the next preceding Working Day); and (iii) no Interest Period shall have a
duration of less than one month and, if the Interest Period therefor would
otherwise be a shorter period, such LIBOR Loan shall not be available hereunder.
"Investments" shall mean, with respect to any Person (the "Investor"), any
-----------
investment by the Investor in any other Person, whether by means of share
purchase, capital contribution, purchase or other acquisition of a partnership
or joint venture interest, loan, time deposit, demand deposit or otherwise.
"Issuing Bank" shall mean Fleet.
-------------
"Letter of Credit" shall mean any standby letter of credit issued by the
----------------
Issuing Bank for the account of the Borrower as provided in this Agreement.
"Letter of Credit Usage" shall mean, at any time, the aggregate at such
----------------------
time of (a) the maximum amount then available to be drawn under all outstanding
Letters of Credit, and (b) all then unreimbursed drawings under any Letters of
Credit.
"LIBOR Lending Office" shall mean, initially, the Agent's office at One
--------------------
Federal Street, Boston, Massachusetts 02110 and, thereafter, such other office
of the Agent as shall be making or maintaining LIBOR Loans.
"LIBOR Loan" shall mean, at any time, that principal amount of the Loans,
----------
the interest on which is determined at such time on the basis of rates referred
to in the definition of "LIBOR Rate".
"LIBOR Rate" shall mean with respect to any Interest Period pertaining to a
----------
LIBOR Loan, the rate per annum (rounded upwards, if necessary, to the nearest
1/32 of one percent) as determined on the basis of the offered rates for
deposits in U.S. dollars, for a period of time comparable to the applicable
LIBOR Loan which appears on the Telerate page 3750 as of 11:00 a.m. London time
on the day that is two London Banking Days preceding the first day of such LIBOR
Loan; provided, however, if the rate described above does not appear on the
Telerate System on any applicable interest determination date, the LIBOR rate
shall be the rate (rounded upwards as described above, if necessary) for
deposits in dollars for a period substantially equal to the interest period on
the Reuters Page "LIBO" (or such other page as may replace the LIBO page on that
service for the purpose of displaying such rates), as of 11:00 a.m. (London
time), on the day that is two (2) London Banking Days prior to the beginning of
such interest period. "Banking Day" shall mean, in respect of any city, any date
on which commercial banks are open for business in that city.
<PAGE>
If both the Telerate and Reuters system are unavailable, then the rate for
that date will be determined on the basis of the offered rates for deposits in
U.S. dollars for a period of time comparable to the applicable LIBOR Loan which
are offered by four major banks in the London interbank market at approximately
11:00 a.m. London time, on the day that is two (2) London Banking Days preceding
the first day of such LIBOR Loan as selected by the Agent. The principal London
office of each of the four major London banks will be requested to provide a
quotation of its U.S. dollar deposit offered rate. If at least two such
quotations are provided, the rate for that date will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that date will be determined on the basis of the rates quoted for loans in
U.S. dollars to leading European banks for a period of time comparable to such
LIBOR Loan offered by major banks in New York City at approximately 11:00 a.m.
New York City time, on the day that its two London Banking Days preceding the
first day of such LIBOR Loan. In the event that Agent is unable to obtain any
such quotation as provided above, it will be deemed that LIBOR pursuant to a
LIBOR Loan cannot be determined.
In the event that the Board of Governors of the Federal Reserve System
shall impose a Reserve Requirement with respect to LIBOR deposits then for any
period during which such Reserve Requirement shall apply, LIBOR shall be equal
to the amount determined above divided by an amount equal to 1 minus the Reserve
Requirement.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), or preference, priority or
other security agreement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any lease
that is capitalized in accordance with GAAP, and the filing of a financing
statement under the UCC or comparable law of any jurisdiction), together with
any renewal or extension thereof.
"Liquid Investments" means (a) depositary accounts with a Lender; (b)
------------------
certificates of deposit issued by a Lender; (c) obligations issued or guaranteed
by the United States of America; (d) commercial paper; (e) repurchase
obligations entered into with a Lender; and (f) investments in money market or
bond funds sponsored or administered by an Affiliate of a Lender.
"Loans" shall mean the Revolving Credit Loans.
-----
"Loan Documents" shall mean, collectively, this Agreement, the Notes, the
--------------
Security Instruments, the Subsidiary Guaranties, the Subsidiary Security
Agreements and all other agreements and instruments that are from time to time
executed in connection with this Agreement, as each of such agreements and
instruments may be amended, modified or supplemented from time to time.
"Maintenance Capital Expenditures" shall mean any expenditures for fixed
--------------------------------
assets made by the Borrower or any of its Subsidiaries which are capitalized and
which are necessary to maintain the existing operations of the Borrower and its
Subsidiaries on an ongoing basis and incurred during the relevant period.
"Majority Lenders" shall mean, at any time while no Loans are outstanding,
----------------
the Lenders having at least fifty-one percent (51%) of the aggregate amount of
the Commitments and, at any time while Loans are outstanding, Lenders holding at
least fifty-one percent (51%) of the outstanding aggregate principal amount of
the Loans.
"Material Adverse Effect" shall mean a material adverse effect on (a) the
-----------------------
business, operations, property, condition (financial or otherwise) or prospects
of the Borrower and its
<PAGE>
Subsidiaries taken as a whole, (b) the ability of the Borrower to perform its
obligations under this Agreement, the Notes or any of the other Loan Documents
or (c) the validity or enforceability of this Agreement, the Notes or any of the
other Loan Documents or the ability of any Significant Subsidiary to perform its
obligations under the Subsidiary Guaranty or any of the other Loan Documents to
which it is a party, or the rights and remedies of the Agent and the Lenders
hereunder or thereunder.
"Maturity Date" shall mean December 4, 2001.
-------------
"Maximum Rate" shall have the meaning set forth in Section 4.1(d).
------------
"Multiemployer Plan" shall mean at any time an employee pension benefit
------------------
plan within the meaning of Section 4001(a)(3) of ERISA to which the Borrower or
any member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions, including for these purposes any Person which ceased to be a
member of the Controlled Group during such five year period.
"Net Income" or "Net Loss" for any period in respect of which the amount
---------- --------
thereof shall be determined, shall mean the aggregate of the consolidated net
income (or net loss) after taxes for such period of the Borrower and its
Subsidiaries, determined in accordance with GAAP.
"Net Worth" shall mean, at any date as of which the amount thereof is to be
---------
determined, the stockholders' equity (including preferred stock) of the Borrower
and its Subsidiaries as determined in accordance with GAAP, provided that in
--------
determining Net Worth any preferred stock shall be treated as equity.
"Notes" shall have the meaning set forth in Section 2.2.
-----
"Notice Date" shall have the meaning set forth in Section 12.8.
-----------
"Obligations" shall mean all obligations of the Borrower and its
-----------
Subsidiaries to the Agent and the Lenders of every kind and nature whether such
obligations are now existing or hereafter incurred or created, joint or several,
direct or indirect, absolute or contingent, due or to become due, matured or
unmatured, liquidated or unliquidated, arising by contract, operation of law or
otherwise, including, without limitation, (a) all principal of and interest
(including, without limitation, any interest which accrued after the
commencement of any case, proceeding or other action relating to the bankruptcy,
insolvency or reorganization of the Borrower) on any advance to the Borrower
under the Notes issued by the Borrower or pursuant to this Agreement; (b) all
other amounts (including, without limitation, any fees or expenses) payable by
Borrower or the Guarantors under the Loan Documents; (c) all amounts payable to
the Issuing Bank in connection with the issuance of any letter of credit by the
Issuing Bank for the account of any Borrower or any drawing thereunder,
including, without limitation, any reimbursement obligation and letter of credit
fees payable under any letter of credit application or reimbursement agreement
executed by the Borrower in connection with any such letter of credit; and (d)
any renewals, refinancings or extensions of any of the foregoing.
"Office of the Agent" shall mean the Banking office of the Agent located at
-------------------
One Federal Street, Boston, MA 02110 or such other location of which the Agent
shall notify the Borrower.
"Payor" shall have the meaning set forth in Section 4.5.
-----
<PAGE>
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
----
succeeding to any or all of its functions under ERISA.
"Permitted Acquisition" shall have the meaning set forth in Section 9.2.
---------------------
"Permitted Liens" shall have the meaning set forth in Section 9.6.
---------------
"Person" shall mean and include any individual, firm, corporation, trust,
------
limited liability company or other unincorporated organization or association or
other enterprise or any government or political subdivision, agency, department
or instrumentality thereof.
"Plan" means any employee pension benefit plan which is covered by Title IV
----
of ERISA or subject to the minimum funding standards under Section 412 of the
Code and is either (a) maintained by the Borrower or any member of the
Controlled Group for employees of the Borrower or any member of the Controlled
Group or (b) maintained pursuant to a collective bargaining agreement or any
other arrangement under which more than one employer makes contributions and to
which the Borrower or any member of the Controlled Group is then making or
accruing an obligation to make contributions or has within the preceding five
plan years made contributions.
"Post-Default Rate" shall mean (i) with respect to any LIBOR Loan, the rate
-----------------
of interest per annum equal to 4% above the interest rate otherwise applicable
to such LIBOR Loan at the applicable time, (ii) with respect to any Prime Rate
Loan, the rate of interest per annum equal to 4% above the interest rate
otherwise applicable to such Prime Rate Loan, and (iii) with respect to any
other amount payable by the Borrower under this Agreement which is not paid when
due, the rate of interest per annum equal to 4% above the Prime Rate at the
applicable time.
"Prime Rate" shall mean the variable per annum rate of interest so
----------
designated from time to time by Fleet as its prime rate. The Prime Rate is a
reference rate and does not necessarily represent the lowest or best rate being
charged to any customer.
"Prime Rate Loan" means at any time the principal amount of the Loans which
---------------
bears interest at the Prime Rate.
"Regulation D" means Regulation D of the Board of Governors of the Federal
------------
Reserve System as the same may be amended or supplemented from time to time.
"Regulatory Change" means any change on or after the date of this Agreement
-----------------
in United States federal, state or foreign laws or regulations, including
Regulation D, or the adoption or making on or after such date of any
interpretations, directives or requests applying to a class of lenders including
any of the Lenders of or under any United States federal or state, or any
foreign, laws or regulations (whether or not having the force of law) by any
court or governmental or monetary authority charged with the interpretation or
administration thereof (other than changes which affect taxes measured by or
imposed on the overall net income of any Lender or of its LIBOR Lending Office
by the jurisdiction in which the Lenders has its principal office or LIBOR
Lending Office).
"Reimbursement Obligation" shall mean the Obligation of the Borrower to
------------------------
reimburse the Issuing Bank and the Lenders on account of any drawing under any
Letter of Credit as provided in Section 2.5.
"Rental Payments" means rental payments in respect of operating lease
---------------
obligations for facilities of the Borrower and its Subsidiaries.
<PAGE>
"Required Payment" shall have the meaning set forth in Section 4.5.
----------------
"Reserve Requirement" shall mean, for any LIBOR Loans for any Interest
-------------------
Period therefor, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by the Lenders against
"Eurocurrency liabilities" (as such term is used in Regulation D).
"Responsible Officer" shall mean the President, the Chief Financial Officer
-------------------
or the Vice President of Financial Operations.
"Restricted Payment" shall mean, with respect to the Borrower or any
------------------
Subsidiary thereof, (a) any dividend or other distribution on any shares of
capital stock of the Borrower or such Subsidiary (except dividends payable
solely to the Borrower or any Subsidiary), and (b) any payment on account of the
purchase, redemption, retirement or acquisition of (i) any shares of the capital
stock of the Borrower or a Subsidiary thereof or (ii) any option, warrant,
convertible security or other right to acquire shares of the capital stock of
the Borrower or a Subsidiary thereof, other than, in either case, payments made
solely to the Borrower or such Subsidiary.
"Revenue" for any period in respect of which the amount thereof shall be
-------
determined, shall mean the aggregate of the consolidated revenue for such period
of the Borrower and its Subsidiaries, determined in accordance with GAAP.
"Revolving Credit Commitment" shall have the meaning specified in Section
---------------------------
2.1.
"Revolving Credit Loans" shall have the meaning set forth in Section 2.1.
----------------------
"SEC" means the Securities and Exchange Commission.
---
"Security Agreement" shall have the meaning set forth in Section 5.1.
------------------
"Security Instruments" shall mean, collectively, the Security Agreement,
--------------------
the Subsidiary Security Agreements, the Stock Pledge Agreements and each other
instrument or agreement that purports to secure the Obligations of the Borrower
to the Lenders.
"Serrao" shall mean Gregory A. Serrao.
------
"Significant Subsidiary" means a Guarantor which has annualized revenues of
----------------------
10% or more of the consolidated revenues of the Borrower and its Subsidiaries.
For purposes of this definition, annualized revenues shall be calculated based
upon the financial statements prepared for the most recent fiscal quarter of the
Person in question.
"Stated Rate" shall have the meaning set forth in Section 4.1(d).
-----------
"Stock Pledge Agreements" shall have the meaning set forth in Section 5.1.
-----------------------
"Subordinated Debt" shall mean Indebtedness of the Borrower that is
-----------------
subordinated to the Indebtedness of the Borrower owing to the Lenders either (a)
pursuant to a subordination agreement in the form (with conforming changes to
dates, parties and amounts and such other changes which, in the reasonable
judgment of the Agent, do not affect in any adverse manner the subordination of
such Indebtedness to the Indebtedness of the Borrower owing to the Lenders) of
the Subordination Agreement, dated June 1, 1998, entered into by the Borrower in
connection
<PAGE>
with the acquisition by American Dental Partners of Virginia, Inc., a subsidiary
of Borrower of substantially all of the assets of Reston Dental Group, P.C. and
previously provided to and approved by the Agent, (b) in such form and substance
as may be satisfactory to the Majority Lenders between the Borrower (or the
Agent) and the holder(s) of such Indebtedness, or (c) pursuant to the terms
thereof, where the Majority Lenders have confirmed in writing that such terms
are satisfactory to them.
"Subsidiary" shall mean, with respect to any Person, any corporation or
----------
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"Subsidiary Collateral" shall mean the collateral of each Subsidiary
---------------------
described in the Subsidiary Security Agreements.
"Subsidiary Guaranty" shall mean the amended and restated unlimited
-------------------
guaranty agreement, substantially in the form of Exhibit E hereto, entered into
---------
by each Subsidiary of the Borrower (other than a shell acquisition subsidiary
with little or no assets).
"Subsidiary Security Agreements" shall mean, collectively, security
------------------------------
agreements, each substantially in the form of Exhibit C hereto, entered into by
---------
each Subsidiary of the Borrower.
"Total Debt" shall mean the following (without duplication) with respect to
----------
the Borrower and its Subsidiaries: (i) all indebtedness for borrowed money
(other than trade liabilities, which shall include payables to affiliated dental
groups which are classified as current liabilities on the balance sheet of the
Borrower, incurred in the ordinary course of business and payable in accordance
with customary practices); (ii) all obligations evidenced by bonds, indentures,
notes and similar instruments; (iii) all Capital Lease Obligations; and (iv) all
liabilities secured by any Lien on any property owned by the Borrower,
regardless of whether such liabilities are non-recourse.
"Trailing Twelve Month Revenue" shall mean for the twelve-month period
-----------------------------
ending on the last day of the most recently ended fiscal quarter of the Borrower
and its Subsidiaries the sum of (i) Revenue of the Borrower and its Subsidiaries
for such period determined in accordance with GAAP plus (ii) revenue of Persons
acquired in Permitted Acquisitions consummated during such twelve-month period,
determined in accordance with GAAP, that is not otherwise included in clause (i)
above.
"Type" shall mean a Prime Rate Loan or a LIBOR Loan.
----
"UCC" shall mean the Uniform Commercial Code as in effect from time to time
---
in The Commonwealth of Massachusetts.
"Unfunded Liabilities" means, with respect to any Plan, at any time, the
--------------------
amount (if any) by which (a) the present value of all benefits under such Plan
exceeds (b) the fair market value of all Plan assets allocable to such benefits,
all determined as of the then most recent valuation date for such Plan, but only
to the extent that such excess represents a potential liability of the Borrower
or any member of the Controlled Group to the PBGC or such Plan under Title IV of
ERISA.
"Wholly-owned Subsidiary" shall mean, as to any Person, a Subsidiary of
-----------------------
such Person all of whose outstanding shares of capital stock are owned directly
or indirectly by such Person.
<PAGE>
"Working Day" shall mean any day on which dealings in foreign currencies
-----------
and exchange between Lenders may be carried on in the place where the LIBOR
Lending Office is located and in Boston, Massachusetts.
Accounting Terms. 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 delivered hereunder shall be
prepared, in accordance with GAAP; provided that if any change in GAAP in itself
--------
materially affects the calculation of any financial covenant in this Agreement,
the Borrower may by notice to the Agent, or the Agent may by notice to the
Borrower, require that such covenant thereafter be calculated in accordance with
GAAP as in effect, and applied by the Borrower, immediately before such change
in GAAP occurs. If such notice is given, the compliance certificates delivered
pursuant to Section 8.5(c) after such change occurs shall be accompanied by
reconciliations of the difference between the calculation set forth therein and
a calculation made in accordance with GAAP as in effect from time to time after
such change occurs.
Rules of Interpretation.
- -----------------------
A reference to any document or agreement shall include such document or
agreement as amended, modified or supplemented and in effect from time to time
in accordance with its terms and the terms of this Agreement.
The singular includes the plural and the plural includes the singular.
A reference to any Person includes its permitted successors and permitted
assigns.
The words "include", "includes" and "including" are not limiting.
The words "herein", "hereof", "hereunder" and words of like import shall
refer to this Agreement as a whole and not to any particular section or
subdivision of this Agreement.
All terms not specifically defined herein or by GAAP, which terms are
defined in the Uniform Commercial Code as in effect in The Commonwealth of
Massachusetts, shall have the meanings assigned to them in such Code.
Revolving Credit Loans; Letters of Credit.
- -----------------------------------------
Amount. Upon the terms and subject to conditions set forth herein, and in
------
reliance upon the representations, warranties and covenants of the Borrower
herein, the Lenders agree, severally and not jointly, to make loans (each a
"Revolving Credit Loan" and collectively the "Revolving Credit Loans") to the
--------------------- ----------------------
Borrower and the Issuing Bank hereby agrees to issue Letters of Credit for the
account of the Borrower at the Borrower's request from time to time from and
after the Closing Date and prior to the Maturity Date in an aggregate principal
amount not to exceed at any one time outstanding the sum of $50,000,000 (the
"Revolving Credit Commitment"), as the same may be reduced or terminated
---------------------------
pursuant to the provisions hereof, provided that the sum of all outstanding
--------
Revolving Credit Loans and Letter of Credit Usage shall not at any time exceed
the Revolving Credit Commitment. Within the foregoing limits and subject to the
terms and conditions hereof, the Borrower may request Letters of Credit and may
borrow, repay and reborrow Revolving Credit Loans at any time or from time to
time until the Maturity Date or the earlier termination of the Revolving Credit
Commitment.
<PAGE>
Revolving Credit Note. The Revolving Credit Loans shall be evidenced by
---------------------
separate promissory notes for each Lender, each such note to be in substantially
the form attached hereto as Exhibit A, dated as of the Closing Date and
---------
completed with appropriate insertions (each such note being referred to herein
as a "Note" and collectively as the "Notes") and shall be payable with interest
---- -----
in accordance with Section 4 below.
Lending Office. The Loans of each Type made by each Lender shall be made
--------------
and maintained at such Lender's Applicable Lending Office for Loans of such
Type.
Requests For Revolving Credit Loans. Whenever the Borrower desires to
-----------------------------------
obtain a Revolving Credit Loan or to convert an outstanding Revolving Credit
Loan from one Type to another, it shall notify the Agent in accordance with the
provisions of Section 4.4 below. Not later than 1:00 p.m. Boston time on the
-----------
date specified for each such borrowing hereunder, each Lender shall, subject to
the terms and conditions of this Agreement, make available the amount of the
Revolving Credit Loan to be made by it on such date to the Agent at the Office
of the Agent, for the account of the Borrower. Subject to the terms and
conditions of this Agreement, the amount so received by the Agent shall be made
available to the Borrower by wiring the funds to such account as the Borrower
shall specify.
Letters of Credit.
- -----------------
The Borrower may use the Revolving Credit Commitment for Letters of Credit
to be issued by the Issuing Bank, provided that in each case (a) the Borrower
--------
executes and delivers a letter of credit application and reimbursement agreement
reasonably satisfactory to the Issuing Bank and complies with any conditions to
the issuance of such Letter of Credit (including payment of any applicable
fees); (b) the Issuing Bank has approved the form of such Letter of Credit; (c)
the requested Letter of Credit is for a purpose permitted by Section 8.1 hereof;
(d) such Letter of Credit bears an expiration date not later than one year from
its date of issuance and not later than the Maturity Date; (e) the conditions
set forth in Section 6.1 shall have been satisfied as of the date of the
issuance of the Letter of Credit; and (f) both before the issuance of the
requested Letter of Credit and after giving effect to the issuance thereof the
sum of (i) all outstanding Revolving Credit Loans and Letter of Credit Usage
shall not exceed the Revolving Credit Commitment; and (ii) the Letter of Credit
Usage shall not exceed $3,000,000.
Effective upon the issuance of each Letter of Credit and without any
further action on the part of the Issuing Bank or the Lenders in respect
thereof, the Issuing Bank hereby grants to each Lender, and each Lender hereby
acquires from the Issuing Bank, a participating interest in such Letter of
Credit to the extent of such Lender's Commitment Percentage thereof and each
Lender severally agrees that it shall be absolutely liable, without regard to
the occurrence of any Default or Event of Default, to the extent of such
Lender's Commitment Percentage thereof, to reimburse the Issuing Bank on demand
for the amount of each draft paid by the Issuing Bank under each Letter of
Credit to the extent that such amount is not reimbursed by the Borrower. Each
Lender's obligation to make further Loans to the Borrower shall be reduced by
such Lender's Percentage of Letter of Credit Usage.
In order to induce the Issuing Bank to issue, extend and renew each Letter
of Credit, the Borrower hereby agrees to reimburse or pay to the Issuing Bank,
for the account of the Issuing Bank or (as the case may be) the Lenders, with
respect to each Letter of Credit issued, extended or renewed by the Issuing Bank
hereunder, on each date that any draft presented under any Letter of Credit is
honored by the Issuing Bank or the Issuing Bank otherwise makes payment with
respect thereto, (i) the amount paid by the Issuing Bank under or with respect
to such Letter of
<PAGE>
Credit, and (ii) the amount of any reasonable and customary fees, charges or
other costs and expenses whatsoever incurred by the Issuing Bank or any Lender
in connection with any payment made by the Issuing Bank under, or with respect
to, such Letter of Credit.
If any draft shall be presented or other demand for payment shall be made
under any Letter of Credit, the Issuing Bank shall notify the Borrower of the
date and amount of the draft presented or demand for payment and of the date and
time when it expects to pay such draft or honor such demand for payment. On the
date that such draft is paid or other payment is made by the Issuing Bank, the
Issuing Bank shall promptly notify the Lenders of the amount of any unpaid
Reimbursement Obligation. All such unpaid Reimbursement Obligations with
respect to Letters of Credit shall be deemed to be Prime Rate Loans. No later
than 12:00 noon (Boston time) on the Banking Day next following the receipt of
such notice, each Lender shall make available to the Agent, at the Agent's head
office, in immediately available funds, such Lender's Commitment Percentage of
such unpaid Reimbursement Obligation, together with an amount equal to the
product of (i) the average, computed for the period referred to in clause (iii)
below, of the weighted average interest rate paid by the Agent for federal funds
acquired by the Agent during each day included in such period, times (ii) the
-----
amount equal to such Lender's Commitment Percentage of such unpaid Reimbursement
Obligation, times (iii) a fraction, the numerator of which is the number of days
-----
that have elapsed from and including the date the Issuing Bank paid the draft
presented for honor or otherwise made payment until the date on which such
Lender's Commitment Percentage of such unpaid Reimbursement Obligation shall
become immediately available to the Agent, and the denominator of which is 365.
The responsibility of the Issuing Bank to the Borrower shall be only to
determine that the documents (including each draft) delivered under each Letter
of Credit in connection with such presentment shall be in conformity in all
material respects with such Letter of Credit.
The Borrower's Reimbursement Obligations shall be absolute and
unconditional under any and all circumstances and irrespective of the occurrence
of any Default or Event of Default or any condition precedent whatsoever or any
set off, counterclaim or defense to payment which the Borrower may have or have
had against the Issuing Bank, the Agent, the Lenders or any beneficiary of a
Letter of Credit. The Borrower further agrees that the Issuing Bank, the Agent
and the Lenders shall not be responsible for, and the Borrower's Reimbursement
Obligations shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, even if such documents
should in fact prove to be in any or all respects invalid, fraudulent or forged,
or any dispute between or among the Borrower, the beneficiary of any Letter of
Credit or any financing institution or other party to which any Letter of Credit
may be transferred or any claims or defenses whatsoever of the Borrower, against
the beneficiary of any Letter of Credit or any such transferee.
The Issuing Bank, the Agent and the Lenders shall not be liable for any
error, omission, interruption or delay in transmission, dispatch or delivery of
any message or advice, however transmitted, in connection with any Letter of
Credit. The Borrower agrees that any action taken or omitted by the Issuing
Bank, the Agent or the Lenders under or in connection with each Letter of Credit
and the related drafts and documents, if done in good faith, shall be binding
upon the Borrower and shall not result in any liability on the part of the
Issuing Bank, the Agent or the Lenders to the Borrower except, in the case of
any such party, any such liability resulted from the gross negligence or willful
misconduct of such party.
Maturity of Revolving Credit Loans. All Revolving Credit Loans shall
----------------------------------
mature and the total unpaid principal amount thereunder shall be due and payable
on the Maturity Date, or such earlier date on which the Revolving Credit Loans
and all other sums owing under this Agreement
<PAGE>
and the other Loan Documents shall be due as a result of acceleration, at which
time all amounts advanced under this Section 2 shall be immediately due and
payable.
Termination or Reduction of Commitment.
- --------------------------------------
The Revolving Credit Commitment shall automatically terminate at 5:00 p.m.
Boston time on the Maturity Date. The Borrower, upon notice to the Agent and
each Lender in accordance with Section 4.4 and the repayment in full of the
outstanding principal balance of the Revolving Credit Loans (and accrued
interest thereon) and the payment in full of any expenses or other fees owed by
the Borrower to the Agent or any Lender under or pursuant to this Agreement, may
elect to terminate the Revolving Credit Commitment permanently, whereupon the
Commitments of the Lenders shall be terminated entirely. If any Letters of
Credit would remain outstanding after the effective date of any such
termination, in addition to the satisfaction of all other applicable terms and
conditions of this Agreement, the Borrower shall either deposit with and pledge
to the Agent cash in an amount equal to 100% of the Letter of Credit Usage at
the effective date of such termination, or (ii) arrange for the termination of
such Letters of Credit and the return thereof to the Issuing Bank. No such
termination may be reinstated.
The Borrower may also, upon notice to the Agent and each Lender in
accordance with Section 4.4, reduce the Revolving Credit Commitment in integral
multiples of $500,000, whereupon the Commitments of the Lenders shall be reduced
pro rata in accordance with their respective Commitment Percentages by the
aggregate amount specified in such notice. If, as a result of any such
reduction, the aggregate outstanding balance of Revolving Credit Loans plus the
Letter of Credit Usage would exceed the Revolving Credit Commitment, the
Borrower shall, as a condition precedent to any such reduction, deposit with and
pledge to the Agent cash in an amount equal to 100% of such excess or to make
repayments of outstanding Revolving Credit Loans in an aggregate amount equal to
such excess. No such reduction may be reinstated.
Several Obligations. The failure of any Lender to make any Loan to be made
-------------------
by it on the date specified therefor shall not relieve any other Lender of its
obligation to make its Loan on such date, but neither the Agent nor any Lender
shall be responsible for the failure of any other Lender to make a Loan to be
made by such other Lender.
[Intentionally Omitted]
Interest Rates; Fees; Payments.
- ------------------------------
Interest Rates.
- --------------
The Borrower agrees to pay to the Agent for the account of each Lender
interest on the unpaid principal amount of each Loan for each day from and
including the date such Loan is made to but excluding the date the principal of
such Loan is paid in full at the following rates per annum:
1.1.1.1. for Loans which are Prime Rate Loans, at a rate per annum
equal to the Prime Rate plus the Applicable Margin; and
1.1.1.2. for Loans which are LIBOR Loans, at a rate per annum equal to
the LIBOR Rate plus the Applicable Margin.
Notwithstanding the foregoing, if an Event of Default shall
occur, then at the option of the Agent or the Majority
Lenders, the unpaid balance of
<PAGE>
Loans and any other amount payable hereunder which is not paid in
full when due shall bear interest at a rate per annum equal to
the Post-Default Rate, until such Event of Default is cured or
waived.
Accrued interest on each Prime Rate Loan shall be payable monthly
in arrears on the first day of each month, accrued interest on
LIBOR Loans shall be payable on the last day of each Interest
Period and, if any such Interest Period is longer than three
months, at intervals of three months after the first day thereof,
and interest on all Loans shall be payable in any event upon the
payment, prepayment or conversion thereof, but only on the
principal so paid or prepaid or converted; provided that interest
--------
payable pursuant to Section 4.1(b) during the pendency of an
Event of Default shall be payable from time to time on demand of
the Agent. Promptly after the determination of any interest rate
provided for herein or any change therein, the Agent shall notify
the Borrower and each of the Lenders thereof.
Notwithstanding the foregoing provisions of this Section 4.1, if
at any time the rate of interest set forth in subparagraph (a)
above (the "Stated Rate") exceeds the maximum non-usurious
-----------
interest rate permissible for any Lender to charge a commercial
borrower under applicable law (the "Maximum Rate"), the rate of
------------
interest charged on the Loans by such Lender hereunder shall be
limited to the Maximum Rate. In the event the Stated Rate that
has theretofore been subject to the preceding sentence at any
time is less than the Maximum Rate in respect of the Loans
hereunder by any Lender, the principal amount of the Loans shall
bear interest at the Maximum Rate until the total amount of
interest paid to such Lender or accrued on such Loans by such
Lender hereunder equals the amount of interest which would have
been paid to the Lenders or accrued on the Loans by the Lenders
hereunder if the Stated Rate had at all times been in effect. In
the event that upon payment in full of all amounts payable
hereunder, the total amount of interest paid to any Lender or
accrued on such Lender's Loans under the terms of this Agreement
is less than the total amount of interest which would have been
paid to such Lender or accrued on such Lender's Loans if the
Stated Rate had at all times been in effect, then the Borrower
shall, to the extent permitted by applicable law, pay to such
Lender an amount equal to the difference between (a) the lesser
of (i) the amount of interest which would have accrued on the
Loans if the Maximum Rate had at all times been in effect or (ii)
the amount of interest which would have accrued on the Loans if
the Stated Rate had at all times been in effect and (b) the
amount of interest actually paid to the Lenders or accrued on the
Loans under this Agreement. In the event any Lender ever
receives, collects or applies as interest any sum in excess of
the Maximum Rate, such excess amount shall be applied to the
reduction of the principal balance of such Lender's Loans or to
other amounts (other than interest) payable hereunder, and if no
such principal is then outstanding, such excess or part thereof
remaining shall be paid to the Borrower.
Commitment Fee. The Borrower shall pay to the Agent for the
--------------
ratable account of each Lender quarterly in arrears on the first
day of each quarter a commitment fee on the actual daily balance
of the unutilized portion of
<PAGE>
the Commitment for the preceding quarter at a rate per annum as
set forth on Schedule 1 attached hereto based on the actual
number of days elapsed in the period based on a year of 360 days.
Letter of Credit Fees. In connection with each Letter of Credit,
---------------------
the Borrower shall pay to the Issuing Bank any applicable
issuance, amendment, transfer and similar fees in accordance with
the Issuing Bank's customary charges and in connection with the
issuance or extension of any Standby Letter of Credit shall also
pay an annual standby commission equal to the then effective
Applicable Margin for LIBOR Loans minus 0.125% of the total face
amount of such Standby Letter of Credit.
Certain Notices. Notices to the Agent of borrowings, conversions
---------------
and prepayments of Loans, of the duration of Interest Periods and
of termination or reduction of Commitments shall be irrevocable
and shall be effective only if received by the Lenders not later
than the time specified below on the number of Banking Days prior
to the date of the borrowing, conversion, prepayment, termination
or reduction specified below:
Number of Banking Time of Day
Days Prior Notice (Boston Time)
----------------- -------------
Borrowings or prepayment
of Prime Rate Loans 0 11:00 a.m.
Borrowings of, prepayment
of, conversion into, or
duration of Interest Periods
for LIBOR Loans 2 10:30 a.m.
Termination or reduction
of Commitments 3 12:00 noon
Each notice of borrowing, conversion or prepayment shall specify
the amount, the Type of the Loan to be borrowed, converted or
prepaid, the date of borrowing, conversion or prepayment (which
shall be a Banking Day in the case of the prepayment of a Prime
Rate Loan, or a Working Day in the case of the conversion or
prepayment of a LIBOR Loan) and, in the case of LIBOR Loans, the
duration of the Interest Period therefor (subject to the
definition of Interest Period). Each such notice of duration of
an Interest Period shall specify the Loans to which such Interest
Period is to relate, provided, however, as long as an Event of
Default has occurred and is continuing, the Borrower's right to
request new LIBOR Loans shall cease. In the event that the
Borrower fails to select the duration of any Interest Period for
any LIBOR Loan within the time period and otherwise as provided
in this Section 4.4, such LIBOR Loan will be automatically
converted into a Prime Rate Loan on the last day of the then
current Interest Period for such LIBOR Loan or (if outstanding as
Prime Rate Loans) will remain as, or (if not then outstanding)
will be made as Prime Rate Loans.
<PAGE>
Non-Receipt of Funds by the Agent. Unless the Agent shall have
---------------------------------
been notified by a Lender or the Borrower (the "Payor") prior to
-----
the date on which such Lender is to make payment to the Agent of
the proceeds of a Loan to be made by it hereunder or the Borrower
is to make a payment to the Agent for the account of one or more
of the Lenders, as the case may be (such payment being herein
called the "Required Payment"), which notice shall be effective
----------------
upon receipt, that the Payor does not intend to make the Required
Payment to the Agent, the Agent may assume that the Required
Payment has been made and may, in reliance upon such assumption
(but shall not be required to), make the amount thereof available
to the intended recipient on such date and, if the Payor has not
in fact made the Required Payment to the Agent, the recipient of
such payment shall, on demand, pay to the Agent the amount made
available to it together with interest thereon in respect of the
period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount at a
rate per annum equal to the Federal Funds Rate for such period.
Sharing of Payment; Waiver of Enforcement Without Consent, Etc.
--------------------------------------------------------------
The Borrower agrees that, in addition to (and without limitation
of) any right of set-off, banker's lien or counterclaim any
Lender may otherwise have, each Lender shall be entitled, at its
option and without regard to the adequacy of any other Collateral
or Subsidiary Collateral held by or for the benefit of such
Lender, to offset balances (whether based on provisional or final
credits or on collected or uncollected funds), credits,
securities or other property of the Borrower or any Subsidiary
held by such Lender, for the account of the Borrower at any of
its offices, in Dollars or in any other currency (collectively,
the "Deposited Funds"), against any principal of or interest on
---------------
any Loans to the Borrower by any Lender hereunder, or any other
Obligation of the Borrower hereunder, which is not paid when due,
taking into account any applicable grace period, (regardless of
whether such balances are then due to the Borrower), in which
case it shall promptly notify the Borrower, the Agent and the
other Lenders thereof, provided that such Lender's failure to
give such notice shall not affect the validity thereof. The
Borrower further grants to the Agent for the benefit of the Agent
and each Lender a lien, security interest and right of set-off in
all such Deposited Funds, it being agreed that the possession of
any such Deposited Funds by any Lender shall be for the benefit
of the Agent and the Lenders, provided, however, that nothing
-------- -------
herein shall restrict the Borrower from using such Deposited
Funds unless and until a Default or Event of Default shall have
occurred and be continuing. The Borrower agrees, to the fullest
extent it may effectively do so under applicable law, that any
Person purchasing a participation in the Loans made, or other
obligations held, by another Person, whether or not acquired
pursuant to the foregoing arrangements, may exercise all rights
of set-off, banker's lien, counterclaim or similar rights with
respect to such participation as fully as if such Lender were a
direct holder of Loans or other obligations in the amount of such
participation. ANY AND ALL RIGHTS TO REQUIRE THE AGENT OR A
LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY
OTHER COLLATERAL WHICH SECURES THE
<PAGE>
LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO
SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE BORROWER OR ANY
GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.
The Lenders agree among themselves that no Lender shall, except
with the written consent of the Majority Lenders, exercise any
right pursuant to Section 4.6(a) or exercise, with respect to any
--------------
Loans or other obligations hereunder, any other right of set-off,
banker's Lien, counterclaim or similar right, so long as any
Lender has any Commitment hereunder or any amounts due hereunder
remain unpaid.
If a Lender shall obtain payment of any principal of or interest
on any Loan made by it under this Agreement, or on any other
obligation then due to such Lender hereunder, through the
exercise of any right of set-off, banker's lien, counterclaim or
similar right, or otherwise, it shall promptly notify the Agent
and purchase from the other Lenders participations in the Loans
made, or other obligations held, by the other Lenders in such
amounts, and make such other adjustments from time to time as
shall be equitable to the end that all the Lenders shall share
the benefit of such payment (net of any expenses which may be
incurred by such Lender in obtaining or preserving such benefit)
pro rata in accordance with the unpaid principal and interest on
the Loans or other obligations then due to each of them. To such
end, all the Lenders shall make appropriate adjustments among
themselves (by the resale of participations sold or otherwise) if
such payment is rescinded or must otherwise be restored
(including the payment of interest to the extent that the Lender
obligated to return such funds is obligated to return interest).
Each Lender waives all rights to enforce, and shall not attempt
to enforce, any rights hereunder, under the Notes or under any
other Loan Document without the prior written consent of the
Majority Lenders. Each Lender further agrees that all rights
under the Security Instruments shall be exercised only through
the Agent under the Security Instruments.
Nothing contained herein shall require any Lender to exercise any
right of set-off, banker's Lien, counterclaim or similar right or
shall affect the right of any Lender to exercise, and retain the
benefits of exercising, any such right with respect to any other
indebtedness or obligation of any Borrower.
This Section 4.6 is for the benefit of the Lenders only and does
-----------
not constitute a waiver of any rights against the Borrower or any
of its Subsidiaries or against any property held as security for
any obligations hereunder or under any Loan Document.
Minimum and Maximum Amounts. Each borrowing, conversion and
---------------------------
prepayment of principal of Revolving Credit Loans shall be in an
aggregate principal amount equal to (a) in the case of LIBOR
Loans, $500,000 or a larger multiple of $100,000, and (b) in the
case of Prime Rate Loans, $250,000 or a larger multiple of
$50,000 (conversions or prepayments of Revolving Credit Loans of
different Types or, in the case of LIBOR Loans, having different
Interest Periods, at the same time
<PAGE>
hereunder shall be deemed separate conversions and prepayments
for purposes of the foregoing, one for each Type or Interest
Period); provided that any payment or prepayment in full of the
--------
Loans may be in the aggregate outstanding principal amount
thereof.
Computations. All interest on LIBOR Loans shall be computed on
------------
the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in
the period for which payable and all interest on Prime Rate Loans
shall be computed on the basis of a year of 365 days (or 366 days
in the case of a leap year) and actual days elapsed (including
the first but excluding the last day) occurring in the period for
which payable.
Manner and Place of Payment. All payments under this Agreement
---------------------------
shall be made not later than 1:00 p.m. (Boston Time) on the date
when due and shall be made in lawful money of the United States
in immediately available funds at the Office of the Agent for the
account of each Lender or by the Borrower's check drawn on the
depositary account(s) maintained by the Borrower with the Agent
payable to the Agent for the account of each Lender or its order.
All payments shall be made without setoff, counterclaim,
withholding or reduction of any kind whatsoever. The Agent (or
any Lenders for whose account any such payment is made) may (but
shall not be obligated to) debit the amount of any such payment
on the date when due, taking into account any applicable grace
period, to any ordinary deposit account of the Borrower with the
Agent, or such Lender, as the case may be, without notice to the
Borrower. The Borrower shall, at the time of making each payment
hereunder or under any Note, specify to the Agent the Loans or
other amounts payable by the Borrower hereunder to which such
payment is to be applied (and in the event that they fail to so
specify, or if an Event of Default has occurred and is
continuing, the Agent may apply such payment for the benefit of
the Lenders as it may elect in its sole discretion, but subject
to the other terms and conditions of this Agreement, including
without limitation, Section 4.10 hereof). Each payment received
------------
by the Agent hereunder or under any Note for the account of a
Lender shall be paid promptly to such Lender, in immediately
available funds, for the account of such Lender's Applicable
Lending Office.
Pro Rata Treatment. Except to the extent otherwise provided
-------------------
herein: (a) each borrowing from the Lenders under Section 2.1
-----------
hereof shall be made from the Lenders and the payment of the
commitment fee under Section 4.2 hereof shall be made for the
-----------
account of the Lenders pro rata according to the Lenders'
Commitment Percentage, (b) each payment by the Borrower of
principal of or interest on Loans of a particular Type shall be
made to the Agent for the account of the Lenders pro rata in
accordance with the respective unpaid principal amounts of such
Loans held by the Lenders and (c) each conversion of Loans of a
particular Type shall be made pro rata among the Lenders in
accordance with the respective principal amounts of such Loans
held by the Lenders.
Payments Due on Days Other than Banking Days. Subject to the
--------------------------------------------
definition of "Interest Period" with respect to LIBOR Loans as
set forth in
<PAGE>
Section 1.1, whenever any payment to be made hereunder or under
the Notes shall be due on a day which is not a Banking Day, such
payment may be made on the next succeeding Banking Day, and such
extension of time shall be included in computing any interest or
fees due.
Additional Costs.
----------------
The Borrower shall pay to the Agent for the account of each
Lender from time to time such amounts as such Lender may
determine to be necessary to compensate it for any costs incurred
by such Lender which such Lender determines are attributable to
its making or maintaining of any LIBOR Loans hereunder or its
obligation to make any of such Loans hereunder, or any reduction
in any amount receivable by such Lender hereunder in respect of
any LIBOR Loan or such obligation (such increases in costs and
reductions in amounts receivable being herein called "Additional
----------
Costs"), in each case resulting from any Regulatory Change which:
-----
1.1.1.3. changes the basis of taxation of any amounts payable to such
Lender under this Agreement or the Notes in respect of any LIBOR
Loan; or
1.1.1.4. imposes or modifies any reserve, special deposit or similar
requirements (other than the Reserve Requirement, to the extent
it is taken into consideration in determining the LIBOR Rate)
relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of, such Lender (including any
LIBOR Loan or any deposits referred to in the definition of
"LIBOR Rate" below).
Each Lender will provide the Borrower notice of any event
occurring after the date of this Agreement which will entitle
such Lender to compensation pursuant to this Section as promptly
as practicable after it obtains knowledge thereof and determines
to request such compensation. Each Lender will furnish the
Borrower with a statement, in reasonable detail, setting forth
the basis and amount of each request by such Lender for
compensation under this Section. Within 30 days of the notice by
such Lender, the Borrower shall pay the Agent for the benefit of
the affected Lender that portion of such increased costs incurred
or reduction in an amount received which is attributable to
making, funding and maintaining such affected Lender's Loans
hereunder. If such sum is not paid within such 30 day period, it
shall bear interest at the Post-Default Rate until paid in full.
The Borrower shall not be required to make any such payment for
such increased costs arising prior to the date which is one
hundred twenty (120) days before the date of such notice (unless
and only to the extent such law, rule, regulation, policy,
guideline, directive or interpretation applies retroactively to a
period prior to the date which is one hundred twenty (120) days
before the date of such notice, in which case, the Borrower shall
not be required to make any payment for increased costs resulting
from such retroactive application unless such Lender provides
such notice within one hundred twenty (120) days after such rule,
regulation, policy, guideline, directive or interpretation is
published in final form and the Lender reasonably should have
been aware thereof. If any affected Lender shall subsequently
recoup costs for which such Lender has heretofore been
compensated by the Borrower under this
<PAGE>
Section 4.12, such Lender shall remit to the Borrower the amount
of such recoupment.
Without limiting the effect of the foregoing provisions of this
Section, in the event that, by reason of any Regulatory Change,
any Lender either (i) incurs Additional Costs based on or
measured by the excess above a specified level of the amount of a
category of deposits or other liabilities of such Lender which
includes deposits by reference to which the interest rate on
LIBOR Loans is determined as provided in this Agreement or a
category of extensions of credit or other assets of such Lender
which includes LIBOR Loans or (ii) becomes subject to
restrictions on the amount of such a category of liabilities or
assets which it may hold, then, if such Lender so elects by
notice to the Borrower, the obligation of such Lender to make
LIBOR Loans hereunder shall be suspended until the date such
Regulatory Change ceases to be in effect.
1.1.1.5. Determinations and allocations by any Lender for purposes of this
Section of the effect of any Regulatory Change on its costs of
maintaining its obligations to make LIBOR Loans or of making or
maintaining LIBOR Loans or on amounts receivable by it in respect
of LIBOR Loans, and of the additional amounts required to
compensate such Lender in respect of any Additional Costs, shall
be conclusive absent manifest error, provided that such
determinations and allocations are made on a reasonable basis.
Limitation on Types of Loans. Anything herein to the contrary
----------------------------
notwithstanding, if, with respect to any LIBOR Loans, the
Majority Lenders determine in good faith (which determination
shall be conclusive) that the relevant rates of interest referred
to in the definition of "LIBOR Rate" upon the basis of which the
rates of interest for any LIBOR Loan are to be determined do not
accurately reflect the cost to such Lenders of making or
maintaining such LIBOR Loans for the Interest Period therefor,
then the Agent shall promptly notify the Borrower, and so long as
such condition remains in effect, the Lenders shall be under no
obligation to make LIBOR Loans or to convert Prime Rate Loans
into LIBOR Loans and the Borrower shall, on the last day(s) of
the then current Interest Period(s) for the outstanding LIBOR
Loans, either prepay such LIBOR Loans or convert such LIBOR Loans
into Prime Rate Loans.
Illegality. Notwithstanding any other provision of this
----------
Agreement to the contrary, in the event that it becomes unlawful
for any Lender or its LIBOR Lending Office to (a) honor its
obligation to make LIBOR Loans hereunder, or (b) maintain LIBOR
Loans hereunder, then such Lender shall promptly notify the
Borrower thereof (identifying the illegality in question in
reasonable detail) and such Lenders's obligation to make LIBOR
Loans hereunder shall be suspended until such time as such Lender
may again make and maintain LIBOR Loans.
Substitute Prime Rate Loans. If the obligation of any Lender to
---------------------------
make LIBOR Loans shall be suspended pursuant to Sections 4.12,
4.13 or 4.14 hereof, all Loans which would otherwise be made by
such Lender as LIBOR Loans shall be made instead as Prime Rate
Loans (and, if an event referred to in Section 4.12(b) or Section
4.14 has occurred and such
<PAGE>
Lender so requests, by notice to the Borrower, each LIBOR Loan of
such Lender then outstanding shall be automatically converted
into a Prime Rate Loan on the date specified by such Lender in
such notice) and, to the extent that LIBOR Loans are so made as
(or converted into) Prime Rate Loans, all payments of principal
which would otherwise be applied to such LIBOR Loans shall be
applied instead to such Prime Rate Loans.
Compensation. If any payment, prepayment or conversion of a
------------
LIBOR Loan occurs on a date other than the last day of an
Interest Period for such Loan, the Borrower shall pay to the
Agent for the account of each Lender, upon the request of the
Lender through the Agent, as compensation for any loss, cost or
expense incurred by such Lender as the result of such payment,
prepayment or conversion, an amount (if a positive number) equal
to:
A x (B-C) X D
--------------------
360
where:
"A" equals the principal amount of the LIBOR Loan so paid, prepaid or
converted (the "Affected LIBOR Loan");
-------------------
"B" equals the LIBOR Rate (expressed as a decimal) applicable to the
Affected LIBOR Loan;
"C" equals the applicable LIBOR Rate (expressed as a decimal) in effect on
or about the date of such payment, prepayment or conversion, for deposits
in an amount equal approximately to the principal amount of the Affected
LIBOR Loan with an Interest Period (the "Remaining Interest Period")
-------------------------
beginning on the date of such payment, prepayment or conversion to but
excluding the last day of the existing Interest Period; and
"D" equals the number of days in the Remaining Interest Period;
and any other out-of-pocket loss or expense (including any
internal processing charge customarily charged by such Lender)
suffered by such Lender in liquidating deposits prior to maturity
in amounts which correspond to the principal amount of the
Affected LIBOR Loan; provided that such Lender shall have
--------
delivered to the Borrower a certificate, in reasonable detail, as
to the amount of such loss and expense along with the basis for
calculation thereof. Determination of amounts payable to a Lender
in connection with a LIBOR Loan shall be calculated as though a
Lender funded its LIBOR Loan through the purchase of a deposit of
the type and maturity corresponding to the deposit used as a
reference in determining the LIBOR Rate applicable to such Loan,
whether in fact that is the case or not.
Capital Adequacy. If any Lender shall determine that the
----------------
applicability of any law, rule, regulation or guideline adopted
pursuant to or arising out of the July 1988 report of the Basle
Committee on Banking Regulations and Supervisory Practices
entitled "International Convergence of Capital
<PAGE>
Measurement and Capital Standards", or the adoption after the
date hereof of any other applicable law, rule, regulation or
guideline regarding capital adequacy, or any change in the
foregoing or in the enforcement, interpretation or administration
thereof by any Governmental Authority charged with the
enforcement, interpretation or administration thereof, or
compliance by such Lender or any Person controlling such Lender
(a "Parent") with any request or directive regarding capital
------
adequacy (whether or not having the force of law) of any such
Governmental Authority, has or would have the effect of reducing
the rate of return on capital of such Lender or its Parent as a
consequence of such Lender's obligations hereunder to a level
below that which such Lender (or its Parent) could have achieved
but for such applicability, adoption, change or compliance
(taking into consideration the policies of such Lender (or its
Parent) with respect to capital adequacy) by an amount reasonably
deemed by such Lender to be material, then such Lender shall
provide the Borrower notice thereof. A statement of such Lender,
in reasonable detail, claiming compensation under this Section
and setting forth the additional amount or amounts to be paid to
it hereunder shall be conclusive absent manifest error; provided
--------
that the determination thereof is made on a reasonable basis. In
determining such amount, such Lender may use any reasonable
averaging and attribution methods. Within 30 days of the
notification by such Lender, the Borrower shall pay the Agent for
the benefit of the affected Lender that portion of such increased
costs incurred (including any reduction in the rate of return on
capital to an amount below that which such Lender could have
achieved but for such change in regulation after taking into
account the Lenders' policies as to capital adequacy) or
reduction in an amount received which is attributable to making,
funding and maintaining such affected Lender's Loans hereunder.
If such sum is not paid within such 30 day period, it shall bear
interest at the Post-Default Rate until paid in full. The
Borrower shall not be required to make any such payment for such
increased costs arising prior to the date which is one hundred
twenty (120) days before the date of such notice (unless and only
to the extent such law, rule, regulation, policy, guideline,
directive or interpretation applies retroactively to a period
prior to the date which is one hundred twenty (120) days before
the date of such notice, in which case, the Borrower shall not be
required to make any payment for increased costs resulting from
such retroactive application unless such Lender provides such
notice within one hundred twenty (120) days after such rule,
regulation, policy, guideline, directive or interpretation is
published in final form and the Lender reasonably should have
been aware thereof). If any affected Lender shall subsequently
recoup costs for which such Lender has heretofore been
compensated under this Section 4.17 by the Borrower, such Lender
shall remit to the Borrower the amount of such recoupment.
Optional Prepayments. The Borrower shall have the right to
--------------------
prepay the Loans in whole or in part and to convert Loans of one
Type into another Type, without premium or penalty, at any time
and from time to time, provided that (i) at the time of the
--------
prepayment in full of all Extensions of Credit, the Borrower
shall pay all interest accrued on the amount prepaid; (ii) the
Borrower shall give the Agent notice of such prepayment as
provided in Section 4.4; (iii) LIBOR Loans may be converted into
Prime
<PAGE>
Rate Loans only on the last day of an Interest Period thereof;
and (iv) the Agent for the account of each Lender shall be paid,
at the time of any prepayment of a LIBOR Loan that is being
prepaid on other than the last day of an Interest Period
therefor, the amount provided for in Section 4.16.
Mandatory Prepayments. In the event the Borrower closes any
---------------------
public offering of its capital stock after the date hereof, the
Borrower shall be required to prepay the Loans in an amount equal
to the net proceeds (after costs and expenses associated with
such offering) received by the Borrower in such offering.
Security.
--------
Security Interests.
------------------
The Borrower agrees to grant to the Agent for the benefit of the
Lenders on the Closing Date a security interest in, and a lien
on, all right, title and interest of the Borrower in and to
substantially all the assets of the Borrower (excluding Excluded
Property) and to enter into a security agreement in favor of the
Agent for the benefit of the Lenders in the form of Exhibit B
---------
hereto (the "Security Agreement") in order to secure payment and
------------------
performance of the Borrower's Obligations to the Agent and the
Lenders under this Agreement, the Notes and the other Loan
Documents to which it is a party.
The Borrower shall cause each of its Subsidiaries to grant to the
Agent for the benefit of the Lenders on the Closing Date a
security interest in, and a lien on, all right, title and
interest of each such Subsidiary in and to substantially all the
assets of each such Subsidiary and to enter into a security
agreement in favor of the Agent for the benefit of the Lenders in
substantially the form of Exhibit C hereto (collectively, the
---------
"Subsidiary Security Agreements") in order to secure payment and
------------------------------
performance of the Borrower's Obligations to the Agent and the
Lenders under this Agreement, the Notes and the other Loan
Documents.
The Borrower agrees to enter into stock pledge agreements in
favor of the Agent for the benefit of the Lenders in the form of
Exhibit D attached hereto (the "Stock Pledge Agreements")
--------- -----------------------
providing for the pledge to the Agent for the benefit of the
Lenders of all outstanding capital stock of all present and
future Subsidiaries of the Borrower and to deliver to the Agent
for the benefit of the Lenders certificates representing all such
shares accompanied by undated stock powers or other appropriate
instruments of transfer duly executed in blank.
Conditions Precedent.
--------------------
Conditions to all Loans and Letters of Credit. The Lenders shall
---------------------------------------------
not be obligated to make any of the Loans to the Borrower and the
Issuing Bank shall not be obligated to issue any Letter of Credit
hereunder until the following conditions have been satisfied to
the satisfaction of the Agent:
<PAGE>
This Agreement the Notes and the Security Instruments. This
-----------------------------------------------------
Agreement, the borrowings hereunder, the Notes, the Security
Instruments and all transactions contemplated by this Agreement
and the Security Instruments shall have been duly authorized by
the Borrower. The Subsidiary Guaranty and Security Instrument to
which a Guarantor is a party and all transactions contemplated
thereby shall have been duly authorized by such Guarantor. The
Borrower shall have duly executed and delivered to the Agent this
Agreement, the Notes and the Security Instruments in form and
substance satisfactory to the Agent and its counsel. Each of the
Guarantors shall have duly executed and delivered to the Agent a
Subsidiary Guaranty substantially in the form of Exhibit E hereto
---------
and a Subsidiary Security Agreement substantially in the form of
Exhibit C hereto.
---------
No Default or Event of Default. On the date hereof and on the
------------------------------
date of making each Extension of Credit, no Default or Event of
Default shall have occurred and be continuing.
Correctness of Representations. On the Closing Date and on the
------------------------------
date of each Extension of Credit, all representations and
warranties made by the Borrower in Section 7 below or otherwise
in writing in connection herewith shall be true and correct with
the same effect as though such representations and warranties had
been made on and as of today's date, except that representations
and warranties expressly limited to a certain date shall be true
and correct as of that date.
Opinion of Counsel for the Borrower. The Agent shall have
-----------------------------------
received the favorable opinion of counsel to the Borrower and the
Guarantors addressed to the Agent and the Lenders, in form and
substance reasonably satisfactory to the Agent and its counsel.
Approvals. On the Closing Date and on the date of each Extension
---------
of Credit, all necessary consents, approvals, licenses,
permissions, registrations or validations of any Governmental
Authority or any other Person required for the execution,
delivery, performance or carrying out of the provisions of this
Agreement, the Notes, the Subsidiary Guaranties and the Security
Instruments, or for the validity or enforceability of the
obligations incurred thereunder (other than the filing of
financing statements as required under subparagraph (f) below),
shall have been obtained and shall be in full force and effect
and copies thereof certified by a duly authorized officer of the
Borrower to such effect shall have been delivered to the Agent.
Filing of Financing Statements, etc. On or before the Closing
-----------------------------------
Date, financing statements or other appropriate documentation
relating to the security interests and rights granted pursuant to
the Security Instruments, executed and delivered by the Borrower
to the Agent, shall have been duly recorded or filed in such
manner and in such places as is required by law (including,
pursuant to the UCC) to establish, preserve, protect, and perfect
such security interests and rights; and all taxes, fees and other
charges in connection with the execution, delivery and filing of
this
<PAGE>
Agreement and such financing statements and other appropriate
documentation shall have been duly paid.
Supporting Documents. On or before the date hereof, there shall
--------------------
have been delivered to the Agent the following supporting
documents:
1.1.1.6. a long-form legal existence and corporate good standing
certificates with respect to the Borrower and each of the
Guarantors dated as of a recent date issued by the appropriate
Secretary of State or other official;
1.1.1.7. certificates dated as of a recent date with respect to the due
qualification of the Borrower and each of the Guarantors to do
business in each jurisdiction where the failure to be so
qualified would have a Material Adverse Effect, issued by the
Secretary of State of each such jurisdiction;
1.1.1.8. copies of the corporate charters of the Borrower and each of the
Guarantors, certified by the appropriate Secretary of State or
other officials, as in effect on the date hereof;
1.1.1.9. a certificate of the Secretary or Assistant Secretary of the
Borrower certifying as to (a) the By-Laws of the Borrower, as in
effect on the date hereof; (b) the incumbency and signatures of
the officers of the Borrower who have executed any documents in
connection with the transactions contemplated by this Agreement;
and (c) the resolutions of the Board of Directors of the Borrower
authorizing the execution, delivery and performance of this
Agreement and the making of the Loans hereunder, and the
execution and delivery of the Notes and the other Loan Documents;
1.1.1.10. a certificate of the Secretary or Assistant Secretary of
each Guarantor certifying as to (a) the By-Laws of the such
Guarantor, as in effect on the date hereof; (b) the incumbency
and signatures of the officers of such Guarantor who have
executed any documents in connection with the transactions
contemplated by this Agreement; and (c) the resolutions of the
Boards of Directors of such Guarantor authorizing the execution,
delivery and performance of the Subsidiary Guaranty and
Subsidiary Security Agreement to which it is a party.
1.1.1.11. all other information and documents which the Agent or its
counsel may reasonably request in connection with the
transactions contemplated by this Agreement.
Compliance Certificate. The Borrower shall have furnished to the
----------------------
Agent a Compliance Certificate in the form of attached Exhibit F
---------
appropriately completed and signed by a Responsible Officer of
the Borrower, which certificate shall reflect compliance by the
Borrower with the requirements of this Agreement as of the date
thereof.
Litigation. No litigation, arbitration, proceeding or
----------
investigation shall be pending or, to the knowledge of the
Borrower, threatened against any
<PAGE>
Borrower or any Subsidiary of a Borrower which, in the sole
judgement of the Agent, might have a Material Adverse Effect.
Fees and Expenses. On or before the Closing Date, the Borrower
-----------------
shall have (i) paid to the Agent for the account of the Lenders
all amounts payable under Section 13.5 hereof identified by the
------------
Agent on or before the Closing Date; and (ii) paid to the Agent
all fees due under a certain letter between the Agent and the
Borrower, dated the date hereof.
Legal Matters. All documents and legal matters incident to the
-------------
transactions contemplated by this Agreement shall be reasonably
satisfactory to Sullivan & Worcester LLP, special counsel for the
Agent.
Representations and Warranties.
------------------------------
In order to induce the Agent and the Lenders to enter into this
Agreement and to make the contemplated Extensions of Credit, the
Borrower hereby represents and warrants as follows to the Agent
and the Lenders (except to the extent qualified by supplemental
disclosure set forth on Schedule A hereto) and the following
----------
representations and warranties (to the extent so qualified, if
any) shall survive the execution and delivery of this Agreement
and the Notes:
Corporate Status. The Borrower and each Guarantor is a duly
----------------
organized and validly existing corporation in good standing under
the laws of the state of its organization and is duly qualified
or licensed as a foreign corporation in good standing in each
jurisdiction in which the failure to do so would have a Material
Adverse Effect.
No Violation. Neither the execution, delivery or performance of
------------
this Agreement or any other Loan Document, nor consummation of
the transactions contemplated therein or thereby will (i)
contravene any law, statute, rule or regulation to which the
Borrower or any Guarantor is subject or any judgment, decree,
franchise, order or permit applicable to the Borrower or any
Guarantor where such contravention has or could reasonably be
anticipated to have a Material Adverse Effect, or (ii) conflict
or be inconsistent with or will result in any breach of, or
constitute a default under, or result in or require the creation
or imposition of any Lien (other than the liens created by the
Security Instruments) upon any of the property or assets of the
Borrower or any Guarantor pursuant to, any Contractual Obligation
of the Borrower or any Guarantor, or (iii) violate any provision
of the corporate charters or by-laws of the Borrower or any
Guarantor.
Corporate Power and Authority. The execution, delivery and
-----------------------------
performance of this Agreement and the other Loan Documents to
which it is a party are within the corporate powers of the
Borrower and each Guarantor and have been duly authorized by all
necessary corporate action.
Enforceability. This Agreement and each other Loan Document to
--------------
which it is a party constitutes valid and binding obligations of
the Borrower and each Guarantor enforceable against the Borrower
and each Guarantor in
<PAGE>
accordance with its terms, except as be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally and
subject to general principles of equity, whether applied in a
court of equity or at law.
Consents or Approvals. No order, permission, consent, approval,
---------------------
license, authorization, registration or validation of, or filing
with, or exemption by, any Governmental Authority or any other
Person is required to authorize, or is required in connection
with, the execution, delivery and performance of this Agreement
or any other Loan Document by the Borrower or any Guarantor, or
the taking of any action contemplated hereby or thereby, except
where the failure to obtain such authorization could reasonably
be anticipated to have a Material Adverse Effect and except for
the filing of UCC-1 financing statements in the appropriate UCC
filing offices listed on the Perfection Certificate (as defined
in the Security Agreement) and for routine filings under federal
securities laws.
Financial Statements.
--------------------
The Borrower has furnished the Agent with the consolidated
balance sheet of the Borrower and its Subsidiaries as of the
Financial Statement Date, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year
then ended, which have been audited by the Accountants. Such
financial statements, including the related schedules and notes,
fairly present the consolidated financial position of the
Borrower and its Subsidiaries as of the Financial Statement Date,
and the results of their operations and their cash flows for the
year then ended in conformity with GAAP.
During the period from the Financial Statement Date to the
Closing Date: (i) except as permitted pursuant to Section 9.3 or
identified in Schedule A or in the Borrower's Form 10-Qs filed
with the SEC for the first three quarters of 1998 or the
Borrower's Form S-4 Registration Statement dated November 18,
1998 as filed with the SEC, copies of which have previously been
delivered to Agent, there has been no sale, transfer or other
disposition by the Borrower or any of its Subsidiaries of any
material part of their business or property and, except as set
forth in Schedule A, no purchase or other acquisition of any
----------
business or property (including any capital stock of any Person)
material in relation to the consolidated financial condition of
the Borrower and its Subsidiaries at the Financial Statement
Date; and (ii) neither the Borrower nor any of its Subsidiaries
have made a Restricted Payment, or agreed or committed to make a
Restricted Payment, except as permitted pursuant to Section 9.7.
The Borrower has and, after giving effect to the Loans to be made
on the Closing Date, will have, assets (both tangible and
intangible), having a value in excess of the amount required to
pay the probable liability on its then-existing debts (whether
matured or unmatured, liquidated or unliquidated, fixed or
contingent); the Borrower has and will have access to adequate
capital for the conduct of its business and the discharge of its
debts incurred in connection therewith as such debts mature; the
Borrower was not insolvent immediately prior to the making of the
Loans on the
<PAGE>
Closing Date and immediately after giving effect thereto, the
Borrower will not be insolvent.
All the above-referenced financial statements (including the
related schedules and notes) have been prepared in accordance
with GAAP applied consistently throughout the periods involved
(except as approved by the Accountants and disclosed therein and,
in the case of interim financial statements, subject to normal
year-end adjustments and the absence of footnotes and schedules).
No Material Change. Since the Financial Statement Date there has
------------------
been no development or event, or to the best knowledge of the
Borrower, any prospective development or event, which has had or
could reasonably be anticipated to have a Material Adverse
Effect.
Litigation. There are no actions, suits or proceedings pending or
----------
threatened against or affecting the Borrower or any of its
Subsidiaries which in any one case or in the aggregate, if
determined adversely to the interests of such party, could
reasonably be anticipated to have a Material Adverse Effect.
Compliance with Other Instruments; Compliance with Law. Neither
------------------------------------------------------
the Borrower nor any of its Subsidiaries are (after taking into
account applicable cure periods) in default under any Contractual
Obligation (including any Contractual Obligation relating to any
Indebtedness of the Borrower) where such default could reasonably
be anticipated to have a Material Adverse Effect. Neither the
Borrower nor any of its Subsidiaries are in default and/or in
violation of any applicable statute, rule, writ, injunction,
decree, order or regulation of any Governmental Authority having
jurisdiction over the Borrower or its Subsidiaries which default
or violation could reasonably be anticipated to have a Material
Adverse Effect.
Subsidiaries. On the Closing Date, the Borrower does not have
------------
any Subsidiaries except as set forth on attached Schedule A.
----------
Investment Company Status; Limits on Ability to Incur
-----------------------------------------------------
Indebtedness. The Borrower is not an "investment company" or a
------------
company "controlled by" an investment company within the meaning
of the Investment Company Act of 1940, as amended. The Borrower
is not subject to regulation under any Federal or State statute
or regulation which limits its ability to incur Indebtedness.
Title to Property. The Borrower and each of its Subsidiaries has
-----------------
good and marketable title to all of its properties and assets,
including the properties and assets reflected in the consolidated
balance sheet of the Borrower as of the Financial Statement Date,
except such as have been disposed of since that date in the
ordinary course of business, and none of such properties or
assets is subject to any Lien except for (a) Permitted Liens, or
(b) a defect in title or other claim other than defects and
claims that, in the aggregate, would have no Material Adverse
Effect. The Borrower and each of its Subsidiaries enjoys
peaceful and undisturbed possession under all leases
<PAGE>
necessary in any material respect for the operation of their
properties and assets and no material default exists under such
leases (after taking into account applicable cure periods under
said leases). All such leases are valid and subsisting and are in
full force and effect.
ERISA. The Borrower and each member of the Funding Standard
-----
Controlled Group have fulfilled their obligations under the
minimum funding standards of ERISA and the Code with respect to
pension plans maintained by the Borrower or any member of the
Funding Standard Controlled Group or to which the Borrower or any
member of the Funding Standard Controlled Group is obligated to
contribute, except where the failure to fulfill such obligations
would not result in the aggregate of an "accumulated funding
deficiency", within the meaning of Section 302 of ERISA, in
excess of $250,000. The Borrower and each member of the
Controlled Group are in compliance in all material respects with
the presently applicable provisions of ERISA and the Code, and
have not incurred any liability to the PBGC or a Plan under Title
IV of ERISA (other than to make contributions or premium payments
in the ordinary course).
Taxes. All tax returns of the Borrower and its Subsidiaries
-----
required to be filed have been timely filed (after giving effect
to any permitted extensions) except for any tax returns which if
not filed on a timely basis would not have a Material Adverse
Effect, all material taxes, fees and other governmental charges
(other than those being contested in good faith by appropriate
proceedings diligently conducted and with respect to which
adequate accruals have been established and, in the case of ad
--
valorem taxes or betterment assessments, no proceedings to
-------
foreclose any lien with respect thereto have been commenced and,
in all other cases, no notice of lien has been filed or other
action taken to perfect or enforce such lien) shown thereon which
are payable have been paid. The charges and reserves on the
books of the Borrower and its Subsidiaries for all income and
other taxes are adequate, and the Borrower knows of no additional
assessment or any basis therefor. The Federal income tax returns
of the Borrower and its Subsidiaries have not been audited within
the last three years, all prior audits have been closed, and
there are no unpaid assessments, penalties or other charges
arising from such prior audits.
Environmental Matters.
---------------------
The Borrower and each of its Subsidiaries have obtained all
Governmental Approvals that are required for the operation of
their business under any Environmental Law, except where the
failure to so obtain a Governmental Approval would not have a
Material Adverse Effect.
The Borrower and each of its Subsidiaries are in compliance with
all terms and conditions of all required Governmental Approvals
and are also in compliance with all terms and conditions of all
applicable Environmental Laws, noncompliance with which would
have a Material Adverse Effect.
<PAGE>
There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, investigation,
proceeding, notice or demand letter pending or, to the best
knowledge of the Borrower threatened against the Borrower or any
of its Subsidiaries relating in any way to the Environmental Laws
which could have a Material Adverse Effect, and there is no Lien
of any private entity or Governmental Authority against any
Borrower Group Property, which Lien could have a Material Adverse
Effect.
There has been no claim, complaint, notice, or request for
information received by the Borrower or any Subsidiary with
respect to any site listed on the National Priority List
promulgated pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") 42 USC (S) 9601 et
------ --
seq. or any state list of sites requiring investigation or
----
cleanup with respect to contamination by Hazardous Substances,
which claim, complaint, notice, or request for information could
have a Material Adverse Effect.
To the best of the Borrower's knowledge, there has been no
release or threat of release of any Hazardous Substance at any
Borrower Group Property which would likely result in liability
being imposed upon the Borrower or any Subsidiary thereof, which
liability would have a Material Adverse Effect.
Intellectual Property. The Borrower and each of its Subsidiaries
---------------------
owns or licenses such copyrights, patents, trademarks and similar
rights ("Intellectual Property") as are necessary for the conduct
---------------------
of its respective businesses as now conducted, without any known
conflict with the rights of others which would have a Material
Adverse Effect.
Level of Borrowing. After giving effect to any Extensions of
------------------
Credit to be made as of the date hereof under this Agreement, the
sum of all outstanding Revolving Credit Loans and Letter of
Credit Usage do not exceed the Revolving Credit Commitment.
Malpractice Insurance. The senior management of the Borrower,
---------------------
and each of its Subsidiaries, has concluded, after the exercise
of reasonable business judgment, that such entities are not
engaged in the practice of dentistry and are not required to
maintain malpractice insurance and that if such senior management
concludes after the Closing Date that such entities are required
to maintain malpractice insurance, the Borrower covenants and
agrees to, and will require each of its Subsidiaries to, obtain
and maintain comprehensive malpractice insurance against bodily
injury and death with financially sound and reputable insurance
companies in such amounts and against such risks as are usually
carried by owners of similar businesses and properties in the
same general areas in which the Borrower and its Subsidiaries
operate..
Year 2000 Risk. The Borrower and each Guarantor has reviewed the
--------------
"Year 2000 Risk" (that is the risk that computer applications
used by Borrower and each Guarantor and/or that suppliers,
vendors and customers may be unable to recognize and perform
without error date-sensitive
<PAGE>
functions involving certain dates prior to and any date after
December 31, 1999) and the Borrower and each Guarantor is
exercising commercially reasonable efforts to ensure that the
Year 2000 Risk will not adversely affect their business
operations and/or financial condition.
Disclosure. None of the representations or warranties made by
----------
the Borrower in this Agreement, or in any other document
furnished to the Agent or the Lenders by or on behalf of the
Borrower in connection herewith contains (or will contain on the
Closing Date) any untrue statement of a material fact or omits
(or will omit on the Closing Date) to state any material fact
necessary to make the statements herein or therein, in light of
the circumstances under which they are made, not misleading.
There is no fact known to the Borrower on the date of this
Agreement which has any reasonable likelihood of having a
Material Adverse Effect which has not been set forth in or
referred to in this Agreement.
Affirmative Covenants.
---------------------
The Borrower covenants and agrees that for so long as this
Agreement is in effect and until the Notes, together with all
interest thereon and all other Obligations of the Borrower and
the Guarantors to the Lenders are paid or satisfied in full,
unless the Majority Lenders shall otherwise consent in writing:
Use of Proceeds. The Borrower shall use the proceeds of
---------------
Revolving Credit Loans for the working capital purposes of the
Borrower and its Subsidiaries and for Permitted Acquisitions,
including for payments under Letters of Credit and for the costs
and expenses of the transactions contemplated hereby. Without
limiting the foregoing, no part of such proceeds will be used for
the purpose of purchasing or carrying any "margin security" as
such term is defined in Regulation U of the Board of Governors of
the Federal Reserve System.
Conduct of Business; Maintenance of Existence. The Borrower
---------------------------------------------
will, and will cause of each of its Subsidiaries to, continue to
engage in the business in which they are engaged and maintain its
existence and comply with all applicable statutes, rules and
regulations and remain duly qualified as a foreign corporation,
licensed and in good standing in each jurisdiction where such
qualification or licensing is required by the nature of its
business, the character and location of its property, business,
or the ownership or leasing of its property, except where such
noncompliance or failure to so qualify would not have a Material
Adverse Effect, and the Borrower will maintain its properties in
good operating condition, and continue to conduct its business as
presently conducted.
Compliance with Laws. The Borrower will, and will cause each of
--------------------
its Subsidiaries to, comply in all material respects with all
applicable laws, ordinances, rules, regulations and requirements
of Governmental Authorities.
Insurance.
---------
<PAGE>
The Borrower will, and will cause each of its Subsidiaries to,
maintain insurance with financially sound and reputable insurance
companies in such amounts and with such deductibles and against
such risks as is usually carried by owners of similar businesses
and properties in the same general areas in which the Borrower
and its Subsidiaries operate, provided that in any event the
Borrower and its Subsidiaries shall maintain or cause to be
maintained (i) insurance against casualty, loss or damage
covering all property and improvements of the Borrower and its
Subsidiaries in amounts and in respect of perils usually carried
by owners of similar businesses and properties in the same
general areas in which Borrower and its Subsidiaries operate;
(ii) comprehensive general liability insurance against claims for
bodily injury, death or property damage; and (iii) workers'
compensation insurance to the extent required by applicable law.
Such policies may be blanket policies covering the Borrower and
all its Subsidiaries. In the case of policies referenced in
clauses (i) and (ii) above, all such insurance shall (x) name the
Borrower and the Agent, for the benefit of the Lenders, as loss
payees for losses exceeding $500,000 and additional insureds as
their interests may appear; (y) provide that no termination,
cancellation or material reduction in the amount or material
modification to the extent of coverage shall be effective until
at least 30 days after receipt by the Agent of notice thereof;
and (z) be reasonably satisfactory in all other respects to the
Agent. Notwithstanding the foregoing, the Borrower may upon a
determination to such effect by its Board of Directors and notice
to the Agent, self insure, in whole or in part, for risks and
claims of the type described in clauses (i) and (ii) of the first
sentence of this Section 8.4 to the extent that self insurance is
normal and customary for similarly situated businesses.
The Borrower will not enter into any management service agreement
or similar agreement with an affiliated dentist or professional
corporation unless such dentist or professional corporation
agrees to maintain comprehensive malpractice insurance against
claims for bodily injury and death with financially sound and
reputable insurance companies in such amounts and against such
risks as is usually carried by dentists in the same general areas
in which such dentists operate.
As long as no Default or Event of Default shall have occurred and
be continuing, the Agent shall return to the Borrower any
insurance proceeds it receives in payment of a claim filed by the
Borrower or any of its Subsidiaries.
Financial Statements, Etc. The Borrower will furnish to each of
-------------------------
the Lenders:
within forty-five (45) days after the end of each quarter of the
Borrower (other than the fourth quarter), the unaudited
consolidated balance sheet as of the end of such period and the
related consolidated statements of operations and cash flows of
the Borrower and its Subsidiaries as of and for the three-month
period and the year-to-date period ended on the last day of such
quarter, accompanied by a certificate of a Responsible Officer of
the Borrower to the effect that such financial statements fairly
present
<PAGE>
the consolidated financial condition of the Borrower and its
Subsidiaries as of the end of such quarter, and the consolidated
results of their operations for such quarter, in each case in
accordance with GAAP (except for the absence of footnotes)
consistently applied (subject to normal year-end audit
adjustments);
within forty-five (45) days after the end of the second financial
quarter of the Borrower, the unaudited consolidating balance
sheet (which may be grouped by geographic region) as of the end
of such period and the related unaudited consolidating statement
of operations (which may be grouped by geographic region) for the
six-month period ended on the last day of such quarter,
accompanied by a certificate of a Responsible Officer of the
Borrower to the effect that such financial statements fairly
present the consolidated financial condition of the Borrower and
its Subsidiaries as of the end of such period, and the
consolidated results of their operations for such period, in each
case in accordance with GAAP (except for the absence of
footnotes) consistently applied (subject to normal year-end audit
adjustments);
within one hundred twenty (120) days after the last day of each
year of the Borrower, the audited consolidated balance sheet and
income statement and statement of cash flows of the Borrower and
its Subsidiaries as of and for the year then ended, audited by
the Accountants without any material qualifications together with
the unaudited consolidating balance sheet and statement of
operations of the Borrower and its Subsidiaries as of and for the
year then ended, together with a certificate (which may be
included as part of a Compliance Certificate) of a Responsible
Officer of the Borrower to the effect that such financial
statements fairly present the consolidated financial condition of
the Borrower and its Subsidiaries as of the end of such year and
the consolidated results of their operations for such year, in
each case in accordance with GAAP.
at the time of the delivery of the quarterly, six-month and
yearly financial statements required by Sections 8.5(a), (b) and
(c) above, a Compliance Certificate signed by a Responsible
Officer of the Borrower in the form attached to this Agreement as
Exhibit F, appropriately completed;
---------
copies of any management letter provided by the Accountants and
addressed to the Board of Directors of the Borrower or to the
Audit Committee of the Board of Directors of the Borrower;
promptly upon becoming aware of any litigation or other
proceeding against the Borrower or any of its Subsidiaries that
could reasonably be expected to have a Material Adverse Effect,
notice thereof;
promptly following the request of the Majority Lenders, such
further information concerning the business, affairs and
financial condition or operations of the Borrower and its
Subsidiaries as the Agent may reasonably request;
<PAGE>
promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports,
proxy statements and other materials; and
promptly upon the filing thereof by the Borrower with the SEC
(and in any event within ten (10) days of such filing), copies of
any registration statements (on SEC Form S-1, S-3 or any other
form) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents if such forms no longer exist).
Notice of Default. As soon as practicable, and in any event,
-----------------
within three (3) Banking Days of becoming aware of the existence
of any condition or event which constitutes a Default, the
Borrower will provide the Agent and each Lender with written
notice specifying the nature and period of existence thereof and
what action the Borrower is taking or proposes to take with
respect thereto.
Environmental Matters.
---------------------
The Borrower and each of its Subsidiaries shall comply with all
terms and conditions of all applicable Governmental Approvals and
all applicable Environmental Laws, except where failure to comply
would not have a Material Adverse Effect.
The Borrower shall promptly notify the Agent (and the Agent shall
promptly thereafter notify the Lenders) should the Borrower
become aware of:
1.1.1.12. any spill, release, or threat of release of any Hazardous
Substance at or from any Borrower Group Property or by any Person
for whose conduct the Borrower or any Subsidiary thereof are
responsible, to the extent the Borrower is required by
Environmental Laws to report such to any Governmental Authority;
1.1.1.13. any action or notice with respect to a civil, criminal or
administrative action, suit, demand, claim, hearing, notice of
violation, investigation, proceeding, notice or demand letter
pending or threatened against the Borrower or any Subsidiary
thereof relating in any way to the Environmental Laws, or any
Lien of any Governmental Authority or any other Person against
any Borrower Group Property relating in any way to the
Environmental Laws;
1.1.1.14. any claim made or threatened by any Person against the
Borrower or any of its Subsidiaries or any property of the
Borrower or any of its Subsidiaries thereof relating to damage,
contribution, cost recovery compensation, loss or injury
resulting from any Hazardous Substance pertaining to such
property or the business or operations of the Borrower or such
Subsidiary; and
1.1.1.15. any occurrence or condition on any real property adjoining
any Borrower Group Property known to the officers or supervisory
personnel of the Borrower or any of its Subsidiaries or other
employees having
<PAGE>
responsibility for the compliance by the Borrower or any
Subsidiary thereof with Environmental Laws, without any
independent investigation, which does cause, or could cause, such
Borrower Group Property, or any part thereof, to contain
Hazardous Substances in violation of any Environmental Laws, or
which does cause, or could cause, such Borrower Group Property to
be subject to any restrictions on the ownership, occupancy,
transferability or use thereof by the Borrower or any of its
Subsidiaries.
The Borrower will, and will cause each of its Subsidiaries to, at
their own cost and expense, and within such period as may be
required by applicable law or regulation, initiate all remedial
actions and thereafter diligently prosecute such action as shall
be required by law for the cleanup of such Borrower Group
Property, including all removal, containment and remedial actions
in accordance with all applicable Environmental Laws (and in all
events in a manner reasonably satisfactory to the Majority
Lenders) and shall further pay or cause to be paid, at no expense
to the Agent or the Lenders, all cleanup, administrative, and
enforcement costs of applicable Government Authorities which may
be asserted against such Borrower Group Property.
Taxes and Other Liens. The Borrower will, and will cause each of
---------------------
its Subsidiaries to, pay when due all taxes, assessments,
governmental charges or levies, or claims for labor, supplies,
rent and other obligations made against it which, if unpaid,
might become a Lien against the Borrower or such Subsidiary or on
its property, except liabilities being contested in good faith
and by proper proceedings, as to which adequate accruals are
maintained on the books of the Borrower or its Subsidiaries, in
accordance with GAAP.
ERISA Information. If and when the Borrower or any member of the
-----------------
Controlled Group (a) gives or is required to give notice to the
PBGC of any "reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows
that the plan administrator of any Plan has given or is required
to give notice of any such reportable event, (b) receives notice
of complete or partial withdrawal liability under Title IV of
ERISA or (c) receives notice from the PBGC under Title IV of
ERISA of an intent to terminate or appoint a trustee to
administer the Plan, the Borrower shall in each such instance
promptly furnish to the Lenders a copy of any such notice.
Inspection. The Borrower will permit a representative of the
----------
Agent (including any field examiner or auditor retained by the
Agent) to inspect and make copies of the Borrower's books and
records, and to discuss their affairs, finances and accounts with
their officers and accountants, at such reasonable times and
places and as often as the Agent may reasonably request.
Certain Obligations Respecting Subsidiaries.
-------------------------------------------
<PAGE>
The Borrower will, and will cause each of its Subsidiaries to,
take such action from time to time as shall be necessary to
ensure that the Borrower at all times owns (subject only to the
Lien of the Security Instruments) all of the issued and
outstanding shares of each class of stock of each of its
Subsidiaries. Without limiting the generality of the foregoing,
the Borrower shall not, and shall not permit any of its
Subsidiaries to, sell, transfer or otherwise dispose of any
shares of stock in any Subsidiary owned by it, or permit any of
its Subsidiaries to issue any shares of stock of any class
whatsoever to any Person other than the Borrower. In the event
that any such additional shares of stock shall be issued by any
Subsidiary of the Borrower, the Borrower agrees forthwith to
deliver to the Agent pursuant to the Security Instruments the
certificates evidencing such shares of stock, accompanied by
undated stock powers executed in blank and shall take such other
action as the Agent shall request to perfect the security
interest created therein pursuant to the Security Instruments.
Promptly (but in any event within thirty (30) days) following the
creation of any Subsidiary (other than a shell acquisition
subsidiary with little or no assets) of the Borrower following
the Closing Date, or the acquisition of any Person by a Borrower
or any Subsidiary thereof pursuant to which such Person becomes a
direct or indirect Subsidiary of the Borrower, the Borrower (i)
shall notify the Agent in writing of the creation or acquisition
of such Subsidiary (and the Agent shall promptly thereafter
notify the Lenders) and (ii) shall cause such Subsidiary to
become a guarantor of the performance of the Obligations and to
execute and deliver a Subsidiary Guaranty and a Subsidiary
Security Agreement and such other documents, in form and
substance satisfactory to the Agent, as the Agent shall
reasonably require in order to confirm the authorization and
enforceability of such guaranty.
Promptly (but in any event within thirty (30) days) following the
creation of any Subsidiary (other than a shell acquisition
subsidiary with little or no assets) of the Borrower following
the Closing Date, or the acquisition of any Person by a Borrower
or any Subsidiary thereof pursuant to which such Person becomes a
direct or indirect Subsidiary of the Borrower, the Borrower shall
(i) cause such Subsidiary to grant to the Agent for the benefit
of the Lenders a security interest in, and a lien on, all right,
title and interest of such Subsidiary in and to substantially all
the assets of such Subsidiary (except for Excluded Property) and
to enter into a Subsidiary Security Agreement in favor of the
Agent for the benefit of the Lenders and such other documents, in
form and substance satisfactory to the Agent, as the Agent shall
reasonably require in order to confirm and perfect the
authorization and enforceability of such security interest, and
(ii) forthwith deliver to the Lenders pursuant to the Security
Instruments the certificates evidencing all of the issued and
outstanding shares of stock of such Subsidiary, accompanied by
undated stock powers executed in blank and take such other action
as the Agent shall request to perfect the security interest
created therein pursuant to the Security Instruments. The
Borrower shall, and shall cause the appropriate Subsidiaries of
the Borrower to, promptly (x) execute and deliver to the Agent
such number of copies as the Agent may specify of documents
creating such Liens, (y) do all other things which may be
necessary or which the Agent may
<PAGE>
reasonably request in order to confer upon and confirm to the
Agent the benefits of such security, and (z) deliver such
certificates, evidences of corporate action or other documents as
the Agent may reasonably request, all in form and substance
reasonably satisfactory to the Lenders, relating to the
satisfaction of the Borrower's obligations under this Section.
Further Assurances. The Borrower will, and will cause each of
------------------
its Subsidiaries to, execute and deliver to the Agent or any
Lender any writings and do all things necessary, effectual or
reasonably requested by the Agent to carry into effect the
provisions and intent of this Agreement or any other Loan
Document.
Negative Covenants.
------------------
The Borrower covenants and agrees that for so long as this
Agreement is in effect and until the Notes, together with all
interest thereon and all other Obligations of the Borrower and
the Guarantors to the Lenders are paid or satisfied in full,
without the prior written consent of the Majority Lenders:
Transactions with Affiliates. Except as permitted by Section 9.8
----------------------------
hereof or as set forth on Schedule A, the Borrower will not, and
----------
will not permit any of its Subsidiaries to, directly or
indirectly, pay any funds to or for the account of, make any
Investment in, lease, sell, transfer or otherwise dispose of any
assets, tangible or intangible, or engage in any transaction in
connection with any joint enterprise or other joint arrangement
with, any Affiliate of the Borrower, unless such transaction is
not prohibited by this Agreement, is for reasonable business or
tax purposes, is in the ordinary course of the Borrower's or such
Subsidiary's business, and is upon fair and reasonable terms no
less favorable to the Borrower or such Subsidiary as those that
could be obtained in a comparable arm's length transaction with a
Person that is not an Affiliate.
Consolidation, Merger or Acquisition.
------------------------------------
Neither the Borrower nor any of its Subsidiaries shall merge or
consolidate with or into any other Person, or make any
acquisition of the business or assets of any other Person except:
(i) any Subsidiary of the Borrower may merge into a Borrower or
any wholly-owned Subsidiary of a Borrower; (ii) Investments to
the extent permitted by Section 9.8 hereof; and (iii) Permitted
Acquisitions. For purposes hereof a "Permitted Acquisition" is
---------------------
an acquisition which satisfies the following requirements: (A) if
it involves an asset purchase, stock purchase or a merger or
consolidation, upon the consummation of which the surviving or
acquired party shall be the Borrower or a Subsidiary of the
Borrower; (B) at the time of such acquisition and after giving
effect thereto no Event of Default shall have occurred and be
continuing; and (C) the conditions set forth in Section 9.2(b)
hereof shall have been satisfied with respect to the proposed
acquisition.
In addition to the requirements set forth in Section 9.2(a), the
following additional conditions must be satisfied with respect to
each Permitted Acquisition:
<PAGE>
1.1.1.16. Each company, business or Person to be acquired shall be engaged
in the same or a related line of business to the then current
businesses conducted by the Borrower and its Subsidiaries and
shall have EBITDA with adjustments for certain one-time saving
reasonably acceptable to the Agent for the twelve months
immediately preceding the proposed acquisition date greater than
$1.00;
1.1.1.17. With respect to any individual proposed acquisition involving
aggregate consideration in excess of $1,000,000, the Borrower
will submit a pro forma Compliance Certificate to the Agent
(which the Agent shall promptly thereafter forward to the
Lenders) which shall demonstrate that on a pro forma basis and
after giving effect to the proposed acquisition the Borrower will
be in compliance with the financial covenants set forth in
Section 10. hereof;
1.1.1.18. All necessary consents, approvals, licenses, permissions,
registrations or validations of any Governmental Authority or any
other Person required for the consummation of the proposed
acquisition shall have been obtained and shall be in full force
and effect;
1.1.1.19. With respect to any individual proposed acquisition involving an
aggregate acquisition price in excess of $10,000,000 (including
assumption of Indebtedness)/1/, such acquisition shall be subject
to the review (but not the approval) of the Majority Lenders
which review shall be completed within five (5) Banking Days
after the Agent and each of the Lenders shall have received
copies of the draft acquisition agreement for such proposed
acquisition and the financial statements of the entity to be
acquired (audited or reviewed to the extent available) provided,
however, that the Borrower shall deliver to the Agent and each of
the Lenders such additional information or documents as the Agent
shall reasonably request, provided that any such additional
request shall not extend or delay the running of the
aforementioned five (5) Banking Day period; and
1.1.1.20. Each new Subsidiary of the Borrower formed to make such
acquisition and each Person to be acquired which becomes a
Subsidiary of the Borrower shall agree to become a guarantor of
the Obligations and shall have executed such instruments in
connection therewith as the Agent and its counsel shall
reasonably request, including without limitation a Subsidiary
Guaranty and a Subsidiary Security Agreement.
Disposition of Assets. The Borrower shall not convey, sell,
---------------------
lease, transfer or otherwise dispose of any of their property,
business or assets (including, without limitation, accounts
receivable and leasehold assets), whether now owned or hereafter
acquired, except for (i) equipment or other assets sold, leased,
assigned or otherwise disposed of in the ordinary course of
business; (ii) the sale of inventory in the ordinary course of
business and (iii) other assets (excluding accounts receivable
which may not be disposed of), provided that the aggregate book
--------
value of all assets disposed of pursuant to this clause (iii) in
any year shall not exceed five percent
_________________________
/1/ Trade liabilities already excluded from definition of
Indebtedness.
<PAGE>
(5%) of the consolidated total assets, determined on a pro forma
basis for completed Permitted Acquisitions, of the Borrower as of
the end of any such year.
Indebtedness. Neither the Borrower nor any of its Subsidiaries
------------
shall create, incur, assume or suffer to exist any Indebtedness,
except:
the Obligations;
existing Indebtedness, including Subordinated Debt, if any,
listed on Schedule A hereto;
----------
Capital Lease Obligations in an aggregate amount not to exceed
$250,000 at any one time outstanding; provided that after giving
--------
effect to the incurrence of any such Capital Lease Obligations,
no Default or Event of Default shall have occurred and be
continuing;
Subordinated Debt incurred by the Borrower after the date hereof;
provided that, after giving effect to the incurrence of such
--------
Subordinated Debt, no Default or Event of Default shall have
occurred and be continuing;
purchase money Indebtedness for the purchase price of equipment
and capital assets incurred in the ordinary course of business,
provided that such Indebtedness does not exceed $250,000 in
--------
principal amount in the aggregate at any time outstanding;
other Indebtedness that does not exceed an amount equal to 1.5%
of Trailing Twelve Month Revenue (not including any other
Indebtedness permitted by this Section 9.4); and
-----------
Indebtedness owing by the Borrower to one of its Subsidiaries or
to the Borrower from one of its Subsidiaries.
Guarantees. Neither the Borrower or any of its Subsidiaries
----------
shall create, incur or suffer to exist any obligations in respect
of Guarantees except for:
the Subsidiary Guaranties;
existing Guarantees, if any, listed on Schedule A hereto;
----------
Guarantees entered into after the date hereof in connection with
Capital Lease Obligations and Indebtedness permitted under
Section 9.4.
Guarantees entered into by Borrower whereby it guarantees the
performance of any of its Subsidiaries under leases of office
space or dental practice space.
Liens. Neither the Borrower nor any of its Subsidiaries shall
-----
create, incur, assume or suffer to exist any Lien on any of its
properties or assets, except the following (collectively,
"Permitted Liens"):
---------------
<PAGE>
Liens for taxes, fees, assessments and other governmental charges
not delinquent or being contested in good faith and by proper
proceedings, as to which adequate accruals are maintained on the
books of the Borrower in accordance with GAAP;
carriers', warehousemen's, mechanics', materialmen's, landlord's
or similar liens imposed by law incurred in the ordinary course
of business in respect of obligations not overdue, or being
contested in good faith and by proper proceedings and as to which
adequate accruals with respect thereto are maintained on the
books of the Borrower in accordance with GAAP;
pledges or deposits in connection with workers' compensation,
unemployment insurance and other types of social security
legislation;
security deposits made to secure the performance of leases,
licenses and statutory obligations incurred in the ordinary
course of business;
Liens in favor of the Agent for the benefit of the Lenders;
existing Liens, if any, listed on Schedule A hereto; provided
---------- --------
that no such Lien is spread to cover any additional property
after the date hereof, and that the principal amount of the
Indebtedness secured thereby is not increased; and
Liens securing (i) Indebtedness for the purchase price of
property or the refinancing thereof (provided such refinancing
does not increase the amount of such Indebtedness) to the extent
permitted by Section 9.4(e) or (ii) Indebtedness permitted by
Sections 9.4(c) or 9.4(f), provided that in each such case (x)
--------
each such Lien is given solely to secure the purchase price of
such property (or the refinancing thereof), does not extend to
any other property and is given at the time of acquisition of
such property, and (y) the Indebtedness secured thereby does not
exceed the lesser of the cost of such property or its fair market
value at the time of acquisition.
Restricted Payments. Neither the Borrower nor any of its
-------------------
Subsidiaries shall declare or make any Restricted Payment, except
that (i) the Subsidiaries may declare and make cash dividends to
the Borrower and (ii) the Borrower may make payments to Gregory
A. Serrao for the repurchase of stock of the Borrower held by him
pursuant to Section 12 of his Employment and Non-Competition
Agreement with the Company dated as of January 8, 1996, provided,
however, that the Borrower shall not use proceeds of Revolving
Credit Loans to finance any such repurchase and any such
repurchase shall have been approved by the Board of Directors of
the Borrower.
Investments. Subject to the provisions of Section 9.2, neither
-----------
the Borrower nor any of its Subsidiaries shall make, maintain or
acquire any Investment in any Person other than:
marketable obligations issued or guaranteed by the United States
of America having a maturity of one year or less from the date of
purchase;
<PAGE>
certificates of deposit, eurodollar time deposits, commercial
paper or any other obligations of any Lender or of any other bank
or savings and loan with a minimum capital surplus of
$100,000,000, with a maturity of less than one year from the date
of such Investment;
commercial paper with maturities of not more than 90 days having
the highest rating then given by Moody's Investors Services, Inc.
or Standard & Poor's Corporation;
repurchase obligations with a term of not more than seven days
for underlying securities of the types described in subparagraph
(a) above entered into with any bank with a minimum capital
surplus of $100,000,000;
shares in money market mutual funds substantially all the assets
of which are comprised of securities and other obligations of the
types described in subparagraphs (a) through (d) above;
depository accounts at any Lender;
stock or obligations issued to the Borrower or any Subsidiary
thereof in settlement of claims against others by reason of an
event of bankruptcy or a composition or the readjustment of debt
or a reorganization of any debtor of the Borrower or such
Subsidiary;
currently existing Investments set forth on Schedule A;
----------
Investments by the Borrower in its Subsidiaries; and
Investments in stock of publicly traded companies provided that
the initial aggregate amount of cash so invested shall not exceed
$50,000 in the aggregate.
ERISA. The Borrower will not permit any Plan maintained by the
-----
Borrower or by any member of the Controlled Group to: (a) engage
in any "prohibited transaction" (ERISA (S)2003(c)); (b) fail to
report to the Agent a "reportable event" (ERISA (S)4043) within
30 days after its occurrence or as to any reportable event as to
which the 30-day notice period requirement of Section 4043(b) of
Title IV of ERISA has been waived by the PBGC, within 30 days of
such time as the Borrower is requested to notify the PBGC of such
reportable event; (c) incur any "accumulated funding deficiency"
(ERISA (S)302); (d) terminate its existence at any time in a
manner which could result in the imposition of a Lien on the
property of the Borrower or any Subsidiary thereof; or (e) fail
to report to the Agent any "complete withdrawal" or "partial
withdrawal" by the Borrower or an affiliate from a "multiemployer
plan" (ERISA (S)(S)4203, 4205, and 4001, respectively). The
quoted terms are defined in the respective sections of ERISA
cited above.
Fiscal Year. The Borrower and its Subsidiaries shall not change
-----------
their fiscal year without giving the Agent notice in writing at
least forty-five (45) days prior to the effective date of such
change and negotiating and
<PAGE>
reaching agreement with the Majority Lenders as to any changes to
the financial covenants set forth in Section 10 as may be
occasioned thereby in the reasonable judgment of the Majority
Lenders.
Financial Covenants.
-------------------
The Borrower covenants and agrees that so long as this Agreement
is in effect and until the Notes, together with all interest
thereon and all other Obligations of the Borrower to the Lenders
are paid or satisfied in full:
Debt Coverage. The Borrower will not permit the ratio of Total
-------------
Debt to Adjusted EBITDA to exceed 3.0 to 1.0 in each case, as
determined at the end of each fiscal quarter for the four
quarters then ended.
Fixed Charges Coverage. The Borrower will not permit the ratio
----------------------
of Adjusted EBITDA plus Rental Payments to Fixed Charges to be
----
less than 1.25 to 1:00 as determined at the end of each fiscal
quarter for the four quarters then ended.
Minimum Net Worth. The Borrower shall at all times maintain Net
-----------------
Worth at the end of any fiscal quarter in an amount of not less
than (i) the Net Worth of the Borrower at September 30, 1998
minus (ii) $2,000,000, plus (iii) fifty percent (50%) of
----- ----
cumulative consolidated Net Income for the period (taken as a
single period) from September 30, 1998 through the end of such
quarter, provided, that for purposes of this clause (iii) only
--------
positive consolidated Net Income shall be included and any net
losses shall be disregarded, plus (iv) one hundred percent (100%)
----
of the net proceeds of any public offering by the Borrower of
shares of its capital stock.
Events of Default.
-----------------
Events of Default. The occurrence of any of the following events
-----------------
shall be an "Event of Default" hereunder:
----------------
The Borrower shall default (i) in the due and punctual payment of
principal of any Loan; or (ii) in the payment of interest on any
Loan or in the payment of any other amount due under any Loan
Document and such default shall continue for more than five (5)
Business Days after such payment was due; or
Any representation, warranty or statement made herein or any
other Loan Document, or in any certificate or statement furnished
pursuant to or in connection herewith or therewith, shall prove
to be incorrect, misleading or incomplete in any material respect
on the date as of which made or deemed made; or
The Borrower shall default in the performance or observance of
any term, covenant or agreement on its part to be performed or
observed pursuant to Sections 8.1 (but only to the extent such
default relates to Regulation U) 8.2, 8.6, 8.10, 9.2, 9.7, 9.9,
9.10, and 10 hereof; or
<PAGE>
The Borrower shall default in the performance or observance of
any term, covenant or agreement on its part to be performed or
observed pursuant to any of the provisions of this Agreement or
any other Loan Document (other than those referred to in
paragraphs (a) through (c) above) and such default shall continue
unremedied for a period of thirty (30) days after the occurrence
of such Default; or
Any obligation of the Borrower or any of its Subsidiaries in
respect of any Indebtedness (other than the Notes) or any
Guarantee, including, without limitation, any Indebtedness owing
to the Agent or any Lender, which involves an aggregate amount in
excess of $500,000 shall be declared to be or shall become due
and payable prior to the stated maturity thereof and shall not be
paid, or such Indebtedness or Guarantee shall not be paid as and
when the same becomes due and payable, or there shall occur and
be continuing any default under any instrument, agreement or
evidence of indebtedness relating to any such Indebtedness the
effect of which is to permit the holder or holders of such
instrument, agreement or evidence of indebtedness, or a trustee,
agent or other representative on behalf of such holder or
holders, to cause such Indebtedness to become due prior to its
stated maturity and shall not be paid; or
The Borrower or any of its Subsidiaries thereof 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 Bankruptcy Code, (iv) file a petition
seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, winding-up, 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
Bankruptcy Code, or (vi) take any corporate action for the
purpose of effecting any of the foregoing; or
A proceeding or case shall be commenced, without the application
or consent of the Borrower or any of its Subsidiaries in any
court of competent jurisdiction, seeking (i) its liquidation,
reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like of the Borrower or
any of its Subsidiaries or of all or any substantial part of its
assets, or (iii) similar relief in respect of the Borrower or any
of its Subsidiaries 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 an order for
relief against the Borrower or any of its Subsidiaries shall be
entered in an involuntary case under the Bankruptcy Code; or
A judgment or judgments for the payment of money in excess of
$500,000 (net of insurance proceeds) in the aggregate shall be
rendered against the Borrower or any of its Subsidiaries and any
such judgment or judgments
<PAGE>
shall not have been vacated, discharged, stayed or bonded pending
appeal within thirty (30) days from the entry thereof; or
The Borrower or any member of the Controlled Group shall fail to
pay when due an amount or amounts aggregating in excess of
$500,000 which it is obligated to pay to the PBGC or to a Plan
under Title IV of ERISA; or a notice of intent to terminate a
Plan or Plans having aggregate Unfunded Liabilities in excess of
$500,000 shall be filed under Title IV of ERISA by the Borrower
or any member of the Controlled Group, any plan administrator or
any combination of the foregoing; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate or to cause a
trustee to be appointed to administer any such Plan or Plans or a
proceeding shall be instituted by a fiduciary of any such Plan or
Plans against the Borrower or any member of the Controlled Group
to enforce Sections 515 or 4219(c)(5) of ERISA; or a condition
shall exist by reason of which the PBGC would be entitled to
obtain a decree adjudicating that any such Plan or Plans must be
terminated; or there shall occur a complete or partial withdrawal
form, or a default, within the meaning of Section 4219(c)(5) of
ERISA, with respect to, one or more Multiemployer Plans which
could cause the Borrower or one or more members of the Controlled
Group to incur a current payment obligation in excess of
$500,000; or
Pension plans maintained by the Borrower or any member of the
Funding Standard Controlled Group or to which the Borrower or any
member of the Funding Standard Controlled Group is obligated to
contribute shall incur in the aggregate an "accumulated funding
deficiency", within the meaning of Section 302 of ERISA, in
excess of $500,000, or
Any Security Instrument shall cease for any reason to be in full
force and effect or shall cease to be effective to grant a
perfected security interest in a material portion of the
Collateral described in such Security Instrument with the
priority stated to be granted thereby;
Any Significant Subsidiary shall revoke its Subsidiary Guaranty
or any Subsidiary Guaranty or Subsidiary Security Document to
which a Significant Subsidiary is a party shall cease for any
reason to be in full force and effect; or
The individuals serving as Chief Executive Officer and Chief
Financial Officer of the Borrower on the Closing Date shall both
cease, for any reason (including, without limitation,
resignation, removal or death), to be executive officers of the
Borrower within any six month period, unless successors
reasonably acceptable to the Majority Lenders replace such
individuals within a reasonable period of time after they shall
have ceased to serve.
Remedies Upon an Event of Default. If any Event of Default shall
---------------------------------
have occurred and be continuing, the Agent may (and, if directed
by Majority Lenders, shall) by notice (a) declare the Commitments
terminated (whereupon the Commitments shall be terminated) and/or
(b) declare the principal amount then outstanding of, and the
accrued interest on, the
<PAGE>
Loans and commitment fees and all other amounts payable hereunder
and under the Notes to be forthwith due and payable, whereupon
such amounts shall be and become immediately due and payable,
without further notice (including, without limitation, notice of
intent to accelerate), presentment, demand, protest or other
formalities of any kind, all of which are hereby expressly waived
by the Borrower; provided that in the case of the occurrence of
--------
an Event of Default with respect to the Borrower referred to in
clauses (f) and (g) of Section 11.1, the Commitments shall be
automatically terminated and the principal amount then
outstanding of, and the accrued interest on, the Loans and
commitment fees and all other amounts payable hereunder and under
the Notes shall be and become automatically and immediately due
and payable, without notice (including, without limitation,
notice of intent to accelerate), presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly
waived by the Borrower.
The Agent And The Co-Agent.
--------------------------
Appointment, Powers and Immunities.
----------------------------------
Each Lender and the Issuing Bank hereby irrevocably appoints and
authorizes the Agent to act as its agent hereunder and under the
other Loan Documents with such powers as are specifically
delegated to the Agent by the terms hereof and thereof, together
with such other powers as are reasonably incidental thereto.
Each Lender and the Issuing Bank hereby irrevocably appoints and
authorizes the Co-Agent to act as its co-agent hereunder and
under the other Loan Documents. Each Lender and the Issuing Bank
irrevocably authorizes the Co-Agent to take such action on behalf
of each of the Lenders and the Issuing Bank and to exercise all
such powers as are expressly delegated to such Co-Agent hereunder
and in the other Loan Documents and all related documents or by
the Agent, together with such other powers as are reasonably
incidental thereto. The Co-Agent shall not have any duties or
responsibilities or any fiduciary relationship with the Agent,
any Lender or Issuing Bank except as expressly set forth in this
Agreement. All references hereunder to the rights and
obligations of the Agent shall also be deemed to apply to the Co-
Agent to the extent that the duties or actions of the Agent to
which such rights or obligations relate have been delegated by
the Agent to the Co-Agent.
The Agent and the Co-Agent (which terms as used in this Section
12 shall include reference to their Affiliates and their own and
their Affiliates' officers, directors, employees and agents):
(a) shall have no duties or responsibilities except those
expressly set forth in this Agreement and the other Loan
Documents, and shall not by reason of this Agreement or any other
Loan Document be a trustee for any Lender; (b) shall not be
responsible to the Lenders for any recitals, statements,
representations or warranties contained in this Agreement or any
other Loan Document, or in any certificate or other document
referred to or provided for in, or received by any of them under,
this Agreement or any other Loan Document, or for the value,
validity, effectiveness, genuineness,
<PAGE>
enforceability or sufficiency of this Agreement or any other Loan
Document or any other document referred to or provided for herein
or therein or for any failure by the Borrower or any other Person
to perform any of its obligations hereunder or thereunder; (c)
shall not be required to initiate or conduct any litigation or
collection proceedings hereunder or under any other Loan Document
except to the extent requested by the Majority Lenders, and (d)
shall not be responsible for any action taken or omitted to be
taken by them hereunder or under any other Loan Document or any
other document or instrument referred to or provided for herein
or therein or in connection herewith or therewith, except for
their own gross negligence or willful misconduct. The Agent and
the Co-Agent may employ agents and attorneys-in-fact and shall
not be responsible for the negligence or misconduct of any such
agents or attorneys-in-fact selected by it with reasonable care.
Reliance. The Agent and the Co-Agent shall be entitled to rely
--------
upon any certification, notice or other communication (including
any thereof by telephone, telex, telegram or cable) believed by
them to be genuine and correct and to have been signed or sent by
or on behalf of the proper Person or Persons, and upon advice and
statements of legal counsel, independent accountants and other
experts selected by the Agent or the Co-Agent. As to any matters
not expressly provided for by this Agreement or any other Loan
Document, the Agent and the Co-Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder and
thereunder in accordance with instructions signed by the Majority
Lenders (or if required by Section 13.1 hereof, by all of the
------------
Lenders), and such instructions of the Majority Lenders and any
action taken or failure to act pursuant thereto shall be binding
on all of the Lenders.
Defaults. The Agent and the Co-Agent shall not be deemed to have
--------
knowledge of the occurrence of a Default (other than the non-
payment of principal of or interest on Loans) unless the Agent or
the Co-Agent has received notice from a Lender or the Borrower
specifying such Default and stating that such notice is a "Notice
of Default". In the event the Co-Agent receives such a notice of
the occurrence of a Default, it shall give prompt notice thereof
to the Agent. In the event that the Agent receives such a notice
of the occurrence of a Default, the Agent shall give prompt
notice thereof to the Lenders (and shall give each Lender prompt
notice of each such non-payment). The Agent shall (subject to
Section 12.7 hereof) take such action with respect to such
------------
Default as shall be directed by the Majority Lenders (or if
required by Section 13.1 hereof, by all of the Lenders), provided
------------ --------
that, unless and until the Agent shall have received such
directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to
such Default as it shall deem advisable in the best interests of
the Lenders.
Rights as a Lender. Subject to the provisions of Section 4.6(b),
------------------
with respect to their Commitments and the Loans made by them,
Fleet and BankBoston, N.A. in their capacities as Lenders
hereunder shall have the same rights and powers hereunder as any
other Lender and may exercise the same as though they were not
acting as the Agent or the Co-Agent, and
<PAGE>
the term "Lender" or "Lenders" shall, unless the context
otherwise indicates, include Fleet and BankBoston, N.A. in their
individual capacities. The Agent or the Co-Agent may (without
having to account therefor to any Lender) accept deposits from,
lend money to and the Co-Agent generally engage in any kind of
banking, trust or other business with the Borrower (and any of
their Affiliates) as if they were not acting as the Agent and the
Co-Agent, and the Agent and the Co-Agent may accept fees and
other consideration from the Borrower (in addition to the agency
fees and arrangement fees heretofore agreed to between the
Borrower and the Agent and Co-Agent) for services in connection
with this Agreement or otherwise without having to account for
the same to the Lenders.
Events. The Lenders agree to indemnify the Agent and the Co-
------
Agent (to the extent not reimbursed under Section 13.5 hereof),
------------
but without limiting the obligations of the Borrower under said
Section 13.5, ratably in accordance with their respective
------------
Commitments, for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be
imposed on, incurred by or asserted against the Agent and the Co-
Agent in any way relating to or arising out of this Agreement or
any other Loan Document or any other documents contemplated by or
referred to herein or therein or the transactions contemplated
hereby or thereby (including, without limitation, the costs and
expenses which the Borrower is obligated to pay under Section
-------
13.5 hereof but excluding, unless a Default has occurred and is
----
continuing, normal administrative costs and expenses incident to
the performance of its agency duties hereunder) or the
enforcement of any of the terms hereof or thereof or of any such
other documents, provided that no Lender shall be liable for any
--------
of the foregoing to the extent they arise from the gross
negligence or willful misconduct of the party to be indemnified
and provided further that nothing in this Section 12.5 shall
-------- ------- ------------
require any Lender to reimburse the Agent and the Co-Agent for
internal overhead.
Non-Reliance on Agent or the Co-Agent and Other Lenders. Each
-------------------------------------------------------
Lender agrees that it has, independently and without reliance on
the Agent and the Co-Agent or any other Lender, and based on such
documents and information as it has deemed appropriate, made its
own credit analysis of the Borrower and decision to enter into
this Agreement and that it will, independently and without
reliance upon the Agent or the Co-Agent or any other Lender, and
based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and
decisions in taking or not taking action under this Agreement or
any of the other Loan Documents. The Agent and the Co-Agent
shall not be under any obligation to any Lender to ascertain or
to inquire as to the performance or observance by the Borrower of
this Agreement or any of the other Loan Documents or any other
document referred to or provided for herein or therein or to
inspect the properties or books of the Borrower. Except for
notices, reports and other documents and information expressly
required to be furnished to the Lenders by the Agent and the Co-
Agent hereunder or the other Loan Documents, the Agent and the
Co-Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the
affairs, financial condition or business
<PAGE>
of the Borrower (or any of its Affiliates) which may come into
the possession of the Agent and the Co-Agent.
Failure to Act. Except for action expressly required of the
--------------
Agent or the Co-Agent hereunder and under the other Loan
Documents, the Agent and the Co-Agent shall in all cases be fully
justified in failing or refusing to act hereunder and thereunder
unless it shall receive further assurances to its satisfaction by
the Lenders of their indemnification obligations under Section
-------
12.5 hereof against any and all liability and expense which may
----
be incurred by it by reason of taking or continuing to take any
such action.
Removal of Agent or Co-Agent. Subject to the appointment and
----------------------------
acceptance of a successor Agent or Co-Agent as provided below,
the Agent or Co-Agent may be removed at any time with or without
cause by the Majority Lenders. Upon any such removal the
Majority Lenders shall have the right to appoint a successor
Agent or Co-Agent reasonably acceptable to the Borrower (and, in
the case of a successor Co-Agent, reasonably acceptable to the
Agent). If no successor Agent or Co-Agent shall have been so
appointed by the Majority Lenders and shall have accepted such
appointment within 30 days after the Majority Lenders' removal of
the retiring Agent or Co-Agent (the "Notice Date"), then the
-----------
retiring Agent or Co- Agent may, on behalf of the Lenders,
appoint a successor Agent or Co-Agent reasonably acceptable to
the Borrower (and, in the case of successor Co-Agent, reasonably
acceptable to the Agent). Any successor Agent or Co-Agent shall
be (i) a Lender or (ii) if no Lender has accepted such
appointment within 30 days after the Notice Date, a bank which
has an office in Boston, Massachusetts with a combined capital
and surplus of at least $200,000,000. Upon the acceptance of any
appointment as Agent or Co-Agent hereunder by a successor Agent
or Co-Agent, such successor Agent or Co-Agent shall thereupon
succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent or Co-Agent, and the
retiring Agent or Co-Agent shall be discharged from its duties
and obligations hereunder. After any retiring Agent or Co-
Agent's removal hereunder as Agent or Co-Agent, the provisions of
this Section 12 shall continue in effect for its benefit in
----------
respect of any actions taken or omitted to be taken by it while
it was acting as the Agent or Co-Agent. The Agent or Co-Agent
may upon notice thereof to the Borrower and the Lenders, but
subject to the prior written consent of the Borrower, resign, in
which case the procedures for appointing a successor Agent or Co-
Agent set forth in this Section 12.8 shall be followed as though
the Agent or Co-Agent had been removed by the Majority Lenders.
Collateral Sub-Agents. Each Lender by its execution and delivery
---------------------
of this Agreement agrees, as contemplated by the Security
Instruments, that, in the event it shall hold any Liquid
Investments referred to therein, such Liquid Investments shall be
held in the name and under the control of such Lender and such
Lender shall hold such Liquid Investments as a collateral sub-
agent for the Agent thereunder.
General.
-------
<PAGE>
Amendments, Etc. No amendment or waiver of any provision of this
---------------
Agreement, the Notes, or any other Loan Document nor consent to
any departure by the Borrower therefrom, shall in any event be
effective unless the same shall be in writing and signed by the
Majority Lenders and the Borrower, and then such waiver or
consent shall be effective only in the specific instance and for
the specific purpose for which given; provided that no amendment,
--------
waiver or consent shall, unless in writing and signed by all the
Lenders, do any of the following: (i) increase any Commitment
of any of the Lenders or subject the Lenders to any additional
obligations; (ii) reduce the principal of, or interest on, any
Loan or fees hereunder; (iii) postpone any date fixed for any
payment of principal of, or interest on, any Loan, or fee
hereunder; (iv) change the percentage of any of the Commitments
or of the aggregate unpaid principal amount of any of the Loans,
or the number of Lenders, which shall be required for the Lenders
or any of them to take any action under this Agreement; (v)
change any provision contained in Sections 2.1, 4.12, through
-------- --- ----
4.19, 13.5 or this Section 13.1 hereof; (vi) release any
---- ---- ------------
substantial portion of the security for the Obligations of the
Borrower under this Agreement or any Note, except for
dispositions permitted under Sections 5.2 or 9.3 or release any
Guarantor of any of its respective obligations under the
Guarantors' Documents; (vii) modify the definition of "Majority
Lenders" as set forth in Section 1.1; or (viii) in those
-----------
provisions where consent or approval by the Majority Lenders is
required, eliminate the requirement of such consent or approval.
Notwithstanding anything in this Section 13.1 to the contrary, no
------------
amendment, waiver or consent shall be made with respect to
Section 12 without the consent of the Agent. Upon receipt of an
----------
affidavit of an officer of Agent as to the loss, theft,
destruction or mutilation of any Note or any other security
document which is not of public record and in the case of any
such loss, theft, destruction or mutilation, upon surrender and
cancellation of any such Note or other Loan Document, Borrower
will issue, in lieu thereof, a replacement Note or other Loan
Document in the same principal amount thereof (to the extent
applicable) and otherwise of like tenor.
Notices, Etc. Unless otherwise specified herein, all notices
------------
hereunder to any party hereto shall be in writing and shall be
deemed to have been given when delivered by hand, or when sent by
electronic facsimile transmission or by telex, answer back
received, or on the first Banking Day after delivery to any
overnight delivery service, freight pre-paid, or three days after
being sent by certified or registered mail, return receipt
requested, postage pre-paid, and addressed to such party at its
address indicated on Schedule 2 hereto; or at any other address
-----------
specified by such party in writing except that notices to the
Agent pursuant to Section 4 shall not be effective until received
by the Agent.
No Waiver; Remedies. No failure on the part of the Agent or the
-------------------
Lenders to exercise, and no delay in exercising, any right
hereunder, under the Notes or under any of the other Loan
Documents shall operate as a waiver thereof; nor shall any single
or partial exercise of any right hereunder, under the Notes or
under any of the other Loan Documents preclude any other or
further exercise thereof or the exercise of any other right. The
<PAGE>
remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
Right of Set-off.
----------------
Upon the occurrence and during the continuance of any Event of
Default, each Lender is hereby authorized at any time and from
time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other
indebtedness at any time owing by such Lender to or for the
credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this
Agreement and the Notes, irrespective of whether or not such
Lender shall have made any demand hereunder.
Each Lender agrees promptly to notify the Borrower, the Agent and
the other Lenders after any such set-off and application,
provided that the failure to give such notice shall not affect
--------
the validity of such set-off and application. The rights of the
Lenders under this Section 13.4 are in addition to other rights
------------
and remedies (including, without limitation, other rights of set-
off) which the Lenders may have.
Expenses; Indemnification.
-------------------------
The Borrower shall pay on demand (i) any and all reasonable
expenses incurred by the Agent in connection with the syndication
of the Revolving Credit Loans; (ii) all out-of-pocket costs and
expenses of the Agent in connection with the administration of
this Agreement and the other Loan Documents, and any waiver or
amendment of any provision hereof or thereof, including without
limitation, the reasonable fees and disbursements of counsel for
the Agent; and (iii) if any Default or Event of Default occurs,
all reasonable costs and expenses incurred by the Agent and the
Lenders, including the reasonable fees and disbursements of
counsel to the Agent and the Lenders, and of any field examiners,
auditors, appraisers, environmental engineers or consultants, or
investment banking firms retained by the Agent and the Lenders in
connection with such Event of Default or collection, bankruptcy,
insolvency and other enforcement proceedings related thereto.
The Borrower agrees to pay, indemnify and hold the Agent and the
Lenders harmless from, any and all recording and filing fees, and
any and all liabilities with respect to, or resulting from any
delay in paying, stamp, excise or other taxes, if any, which may
be payable or determined to be payable in connection with the
execution and delivery of or the consummation or administration
of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or
in respect of, this Agreement or the other Loan Documents, or any
documents delivered pursuant hereto or thereto.
The Borrower agree to indemnify the Agent and the Lenders and
their respective officers and directors and hold the Agent and
the Lenders and their respective officers and directors harmless
from and against any and all liabilities, losses, damages,
reasonable costs and expenses of any kind
<PAGE>
(including, without limitation, the reasonable fees and
disbursements of counsel for the Agent and each Lender in
connection with any investigative, administrative or judicial
proceeding initiated by a third party, whether or not the Agent
or any Lender shall be designated a party thereto) which may be
incurred by the Agent or any Lender, relating to or arising out
of this Agreement or any other Loan Document, or the existence of
any Hazardous Substance on, in, or under any Borrower Group
Property, or any violation of any applicable Environmental Laws
for which the Borrower or any Subsidiary thereof has any
liability or which occurs upon any Borrower Group Property, or
the imposition of any Lien under any Environmental Laws, provided
--------
that neither the Agent nor any Lender shall not have the right to
be indemnified hereunder for its own bad faith, gross negligence
or willful misconduct as finally determined by a court of
competent jurisdiction.
The agreements in this Section 13.5 shall survive the repayment
------------
of the Notes, and all other amounts payable under this Agreement
and the other Loan Documents.
Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns
except that the Borrower may not assign its rights or obligations
hereunder or under the Notes without the prior written consent of
all of the Lenders.
Each Lender shall have the right with the consent of the Agent
and the Borrower (which consent in each case shall not be
unreasonably withheld or delayed) to assign at any time any
portion of its Commitment hereunder and its interests in the risk
relating to any Revolving Credit Loans and Letter of Credit
participations in an amount equal to or greater than $5,000,000
to other Lenders or to banks or financial institutions acceptable
to the Agent (each an "Assignee"), provided that any Lender which
-------- --------
proposes to assign less than its total Commitment must retain a
Commitment of at least $5,000,000. Each Assignee shall execute
and deliver to the Agent and the Borrower a counterpart joinder
in the form of Exhibit G hereto and shall pay to the Agent,
---------
solely for the account of the Agent, an assignment fee of $3,500.
Upon the execution and delivery of such counterpart joinder, (a)
such Assignee shall, on the date and to the extent provided in
such counterpart joinder, become a "Lender" party to this
Agreement and the other Loan Documents for all purposes of this
Agreement and the other Loan Documents and shall have all rights
and obligations of a "Lender" with a Commitment as set forth in
such counterpart joinder, and the transferor Lender shall, on the
date and to the extent provided in such counterpart joinder, be
released prospectively from its obligations hereunder and under
the other Loan Documents to a corresponding extent (and, in the
case of an assignment covering all of the remaining portion of an
assigning Lender's rights and obligations under this Agreement,
such transferor shall cease to be a party hereto but shall
continue to be entitled to the benefits of Section 13.5 and to
any interest or fees accrued for its account hereunder and not
yet paid); (b) the assigning Lender shall promptly surrender its
Notes to the Agent for cancellation
<PAGE>
and delivery to the Borrower, provided that if the assigning
Lender has retained any Commitment, the Borrower shall execute
and deliver to the Agent for delivery to such assigning Lender
new Notes in the aggregate amount of the assigning Lender's
retained Commitment; (c) the Borrower shall issue to the Assignee
such Notes in the aggregate amount of such Assignee's Commitment
dated the Closing Date or such other date as may be specified by
such Assignee; (d) this Agreement shall be deemed appropriately
amended to reflect (i) the status of such Assignee as a party
hereto and (ii) the status and rights of the Lenders hereunder;
and (e) the Borrower shall take such action as the Agent may
reasonably request to perfect or maintain the perfection of any
security interests contemplated by this Agreement or any other
Loan Document in favor of the Agent or Lenders, including any
Assignee which becomes a party to this Agreement.
If the Assignee, or any Participant pursuant to Section 13.6(d)
hereof, is organized under the laws of a jurisdiction other than
the United States or any state thereof, such Assignee shall
execute and deliver to the Borrower, simultaneously with or prior
to such Assignee's execution and delivery of the counterpart
joinder described above in Section 13.6(b) and such Participant
shall execute and deliver to the Lender granting the
participation, a United States Internal Revenue Service Form 4224
or Form 1001 (or any successor form), appropriately completed,
wherein such Assignee or Participant claims entitlement to
complete exemption from United States Federal Withholding Tax on
all interest payments hereunder and all fees payable pursuant to
any of the Loan Documents. The Borrower shall not be required to
pay any increased amount to any Assignee or other Lender on
account of taxes to the extent such taxes would not have been
payable if the Assignee or Participant had furnished the Forms
referenced in this Section 13.6(b) unless the failure to furnish
such a Form results from (i) any act of or failure to act by any
of the Borrower or (ii) the adoption of or change in any law,
rule, regulation or guideline affecting such Assignee or
Participant occurring (y) after the date on which any such
Assignee executes and delivers the counterpart joinder and
complies with all other applicable provisions of Section 13.6(b)
or (z) after the date a Participant is granted its participation.
Each Lender shall have the right, with the consent of the Agent
(which consent shall not be unreasonably withheld or delayed), to
grant participations, each in an amount equal to or greater than
$5,000,000 to one or more banks or other financial institutions
(each a "Participant") in all or any part of any Loans and Letter
-----------
of Credit participations owing to such Lender and the Notes held
by such Lender. Notwithstanding the foregoing, any participation
granted by a Lender to an Affiliate of the granting Lender shall
not be subject to either the consent of the Agent or the minimum
participation amount. Each Lender shall retain the sole right to
approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents,
provided that the documents evidencing any such participation may
--------
provide that, except with the consent of such Participant, such
Lender will not consent to (a) the reduction in or forgiveness of
the stated principal of or rate of interest on or commitment fee
with respect to the portion of any Revolving Credit Loan subject
to such participation, (b) the extension or postponement of any
stated date fixed for payment of principal or interest or
commitment fee with respect to the portion of any Revolving
<PAGE>
Credit Loan subject to such participation, or (c) the waiver or
reduction of any right to indemnification of such Lender
hereunder. Notwithstanding the foregoing, no participation shall
operate to increase the total Commitments hereunder or otherwise
alter the substantive terms of this Agreement. In the event of
any such sale by a Lender of participating interests to a
Participant, such Lender's obligations under this Agreement shall
remain unchanged, such Lender shall remain solely responsible for
the performance thereof, such Lender shall remain the holder of
such Notes for all purposes under this Agreement and the Borrower
and Agent shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations
under this Agreement. Notwithstanding anything to the contrary
contained herein, the Borrower agrees that provisions of Sections
4.10 and 4.12 through 4.19 shall inure to the benefit of each
Participant, and each Lender may enforce such provisions on
behalf of any of its Participants; provided, however, in no event
--------
shall the Borrower be required to pay to the Participants of a
Lender and such Lender, in the aggregate, any amounts in excess
of the total amount they would otherwise be obligated to pay to
such Lender under the applicable section referred above had such
Lender not granted participations pursuant to this Section
13.6(d).
Each Lender may furnish any information concerning the Borrower,
its Subsidiaries and any other Loan Party in the possession of
such Lender from time to time to assignees and participants
(including prospective assignees and participants), provided,
that such Lender shall require any such prospective or actual
assignee or participant to maintain the confidentiality
requirements of Section 13.15. Notwithstanding any other
provision of this Section 13.6, Fleet agrees for the benefit of
------------
the Borrower to retain for its own account a principal amount of
the Loans and a portion of the Revolving Credit Commitment equal
in the aggregate to at least 50% of the principal amount from
time to time outstanding of the Loans and of the Revolving Credit
Commitment.
Severability. Any provision of this Agreement which is
------------
prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of
such prohibition, unenforceability or non-authorization without
invalidating the remaining provisions hereof or affecting the
validity, enforceability or legality of such provision in any
other jurisdiction.
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REGARD TO CONFLICTS OF LAWS RULES).
WAIVER OF JURY TRIAL. THE AGENT, THE LENDERS AND THE BORROWER
--------------------
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY AGREE THAT NONE OF THEM
NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN
<PAGE>
ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED
UPON, OR ARISING OUT OF, OR IN CONNECTION WITH THIS AGREEMENT,
THE NOTES, ANY RELATED DOCUMENTS OR INSTRUMENTS, ANY COLLATERAL
OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS OR STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY OF THEM, OR (B)
SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN
WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE
PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE
AGENT, THE LENDERS AND THE BORROWER, AND THESE PROVISIONS SHALL
BE SUBJECT TO NO EXCEPTIONS. NEITHER THE AGENT, THE LENDERS NOR
THE BORROWER HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE
PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL
INSTANCES. THE BORROWER'S AGREEMENT TO THE FOREGOING CONSTITUTES
A MATERIAL INDUCEMENT FOR THE AGENT, AND THE LENDERS TO ENTER
INTO THIS AGREEMENT, FOR THE LENDERS TO MAKE THE LOANS AND FOR
THE ISSUING BANK TO ISSUE LETTERS OF CREDIT.
VENUE, CONSENT TO SERVICE OF PROCESS. THE BORROWER ACCEPT FOR
------------------------------------
THEMSELVES AND IN CONNECTION WITH THEIR PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF
MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND
AGAINST THEM WHICH ARISES OUT OF OR BY REASON OF THIS AGREEMENT,
THE NOTES, ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, IRREVOCABLY AGREE TO BE BOUND BY
ANY FINAL JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN WHICH THEY SHALL HAVE BEEN SERVED WITH
PROCESS IN THE MANNER HEREINAFTER PROVIDED, SUBJECT TO EXERCISE
AND EXHAUSTION OF ALL RIGHTS OF APPEAL AND TO THE EXTENT THAT
THEY MAY LAWFULLY DO SO, WAIVE AND AGREE NOT TO ASSERT, BY WAY OF
MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR
PROCEEDING ANY CLAIMS THAT THEY ARE NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF SUCH COURT, THAT THEIR PROPERTY IS EXEMPT OR
IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE
THEREOF IS IMPROPER, AND AGREE THAT PROCESS MAY BE SERVED UPON
THEM IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER
PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS,
RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
<PAGE>
Additional Lenders. The Borrower, each of the Lenders and the
------------------
Agent may at any time agree to add one or more lenders to this
agreement pursuant to an instrument in writing specifying such
new lender's "commitments" (and the reduction in commitments of
the existing Lenders as a result thereof) in such manner as the
Borrower, each of the Lenders and the Agent shall agree. Upon
the execution of such instrument (and the satisfaction of such
conditions and other terms as shall therein be specified) such
additional lender or lenders shall be deemed a "lender" or
"lenders" for the purposes of this agreement and shall enjoy all
rights and assume all obligations on the part of the Lenders set
forth in this agreement, and the Lenders whose commitments are
then being reduced shall be released from their commitments to
the extent of such reduction.
Pledge. Any Lender may at any time pledge all or any portion of
------
its rights under the Agreement including any portion of any of
the Notes to any of the twelve (12) Federal Reserve Banks
organized under Section 4 of the Federal Reserve Act, 12 U.S.C.
Section 341. No such pledge or enforcement thereof shall release
Fleet from its obligations under any of the Loan Documents.
Headings. Section headings in this Agreement are included herein
--------
for convenience of reference only and shall not constitute a part
of this Agreement for any other purpose.
Counterparts. This Agreement may be signed in one or more
------------
counterparts each of which shall constitute an original and all
of which taken together shall constitute one and the same
instrument.
Confidentiality. The Agent and each Lender and participant will
---------------
keep confidential all Confidential Information (as defined below)
and will not, without the Borrower's consent, disclose the same
to any person other than to directors, officers, employees,
agents or other representatives (including attorneys, accountants
and financial advisers) of the Agent or any Lender or prospective
Lender or any of their respective Affiliate and other than to any
governmental agency or authority in accordance with applicable
laws, rules or regulations or to any other third party as such
Lender may deem reasonably necessary in connection with or in
response to a subpoena, order, decree, notice of discovery or
ruling which has been or on its face purports to have been
issued, filed or served under authority of any court, tribunal,
arbitration board, commission or similar entity in connection
with any case or pending matter. As used herein, the term
"Confidential Information" shall mean only information prepared
by the Borrower and furnished to the Lenders or obtained by the
Lenders hereunder which consists of financial statements and
projections of the Borrower, the Borrower's form of management
agreement, business plan, and documents with respect to
acquisitions by the Borrower or which is identified as
confidential and which (i) is not ascertainable or obtained from
public or published information or (ii) is not known or does not
become known to the public (other than through a breach by the
Lenders of this Section).
<PAGE>
Amendment and Restatement. This Agreement amends and restates in
-------------------------
its entirety the Original Credit Agreement. This Agreement and
the other Loan Documents express the entire understanding of the
parties with respect to the transactions contemplated hereby,
except for the letter agreement dated August 5, 1998 between the
Borrower and the Agent with respect to fees payable to the Agent,
which letter agreement shall continue in full force and effect
and shall not be superseded by any of the Loan Documents.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed under seal and delivered by their respective
officers thereunto duly authorized as of the date first above
written.
AMERICAN DENTAL PARTNERS, INC.
By: /s/ Ronald M. Levenson
-------------------------
Name: Ronald M. Levenson
Title: Chief Financial Officer
FLEET NATIONAL BANK, Individually and as Agent
By: /s/ Ginger Stolzenthaler
--------------------------
Ginger C. Stolzenthaler
Senior Vice President.
BANKBOSTON, N.A., Individually and as Co-Agent
By: /s/ Timothy G. Clifford
--------------------------
Name: Timothy G. Clifford
Title: Director
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Brian C. O'Neill
--------------------------
Name: Brian C. O'Neill
Title: Vice President
<PAGE>
EXHIBIT 10(FF)
EMPLOYMENT AND NONCOMPETITION AGREEMENT
---------------------------------------
This agreement is made effective January 1, 1999 (the "Commencement Date"),
between American Dental Partners, Inc., a Delaware corporation (the "Company"),
and Joseph V. Errante, D.D.S. (the "Employee").
Background Information
----------------------
The Employee has been employed by Innovative Practice Concepts, Inc., an
Arizona corporation and wholly-owned subsidiary of the Company ("IPC"), pursuant
to an Employment and Noncompetition Agreement dated January 1, 1998 between the
Employee and IPC (the "Original Agreement"). Concurrently with the execution of
this agreement, the Employee and IPC are executing a termination of the Original
Agreement, effective as of 11:59 p.m., December 31, 1998, and the Employee and
the Company desire to provide for the employment of the Employee by the Company
on the terms and conditions set forth below.
Statement of Agreement
----------------------
The Company and the Employee (the "Parties") hereby acknowledge the
accuracy of the foregoing Background Information and agree as follows:
(S)1. Employment. Upon the terms and subject to the conditions described
----------
in this agreement, the Company hereby employs the Employee and the Employee
hereby accepts employment by the Company.
(S)2. Term. Employee's employment with the Company pursuant to this
----
agreement shall be for the period beginning on the Commencement Date and ending
on the fourth anniversary of the Commencement Date (the "Initial Term"), unless
or until sooner terminated pursuant to (S)7 of this agreement. This agreement
may be extended or renewed after the expiration of the Initial Term, but only by
mutual written agreement of the Parties. When permitted by the context, any
reference in this agreement to the "term of this agreement" shall include the
Initial Term and the period of any such extensions or renewals.
(S)3. Services. The Employee shall serve as Vice President, Regional
--------
Operations of the Company, shall report directly to the Chief Executive Officer
of the Company (the "CEO"), and shall devote his full business and professional
time, attention, energy, loyalty, and skill to the Company's business,
performing such executive or administrative tasks and having such
responsibilities as may be assigned to him from time to time by the CEO or the
Board of Directors of the Company (the "Board").
(S)4. Compensation. As compensation for his services under this agreement,
------------
the Company shall pay the Employee a base salary at the annual rate of $140,000
(the "Base Salary"), payable in bi-weekly installments, in arrears, and in
accordance with the Company's
<PAGE>
general policies and procedures for payment of salaries to its executive
personnel. The Employee's performance shall be reviewed not less often than
annually for the purpose, among others, of considering potential increases in
the Base Salary, but the Company shall not be obligated to make any such
increases.
In addition, the Employee may earn an annual bonus for each calendar year
during the term of this agreement in an amount up to 35% of the Base Salary (as
in effect from time to time), which bonus shall be based upon and tied to the
achievement of various objectives to be prepared annually by the CEO.
(S)5. Fringe Benefits and Perquisites. During the term of this agreement,
-------------------------------
the Employee shall also be entitled to the following fringe benefits and
perquisites:
(a) Group health and welfare benefits comparable to those offered
generally to the Company's executive personnel from time to time;
(b) Four weeks paid vacation during each year of this agreement;
(c) Participation in such stock option plans of the Company as may
be designated from time to time by the Board (or a duly authorized
committee of such Board), in its discretion, subject to all terms and
conditions of such plans; and
(d) Such other benefits and perquisites as may be offered generally
to the Company's executive personnel from time to time pursuant to such
terms, conditions, and policies as may be approved by the Board.
(S)6. Confidentiality; Noncompetition. The Employee shall not, directly or
-------------------------------
indirectly, at any time (whether during the term of this agreement or
thereafter), disclose any Confidential Information (defined below) to any
person, association, or other entity (other than the Affiliated Companies, as
defined below), or use, or permit or assist any person, association, or other
entity (other than the Affiliated Companies) to use, any Confidential
Information, excepting only: (i) Confidential Information which (A) is then
generally available to or obtainable by the public and which did not become so
available or obtainable through the breach of any provision of this agreement by
the Employee, or (B) is obtained by the Employee on a non-confidential basis
from a source other than an Affiliated Company or any agent or other
representative of an Affiliated Company and such source had the right to
disclose such Confidential Information to the Employee without violating any
legal, contractual, fiduciary, or other obligation; and (ii) disclosures
required by applicable law.
Upon termination of his employment by the Company (for any reason), the
Employee shall immediately deliver to the Company all documents and other
materials containing any Confidential Information which are in his possession or
under his control.
During the Restricted Period (defined below), the Employee shall not,
directly or indirectly (whether individually or as a shareholder or other owner,
partner, member, director, officer, employee, consultant, creditor or agent of
any person, association, or other entity):
-2-
<PAGE>
(a) Enter into, engage in, or promote or assist (financially or
otherwise), directly or indirectly, any business which (i) provides dental
services anywhere in the Restricted Territory, or (ii) competes with the
business of any Affiliated Company (the "Business") anywhere in the
Restricted Territory, provided that the foregoing shall not preclude the
Employee from owning less than 1% of the outstanding capital stock of any
corporation whose shares are publicly traded on a national securities
exchange or system;
(b) Solicit or attempt to solicit business in competition with the
Business from any insurance company, any dental plan provider, any person
or entity which provides professional dental care services to the public,
or any other third party to which any Affiliated Company provides
management, consulting, or other services (in any such case, a "Restricted
Company"), or interfere or attempt to interfere with any relationship of
any Affiliated Company with any Restricted Company;
(c) Induce or encourage any employee, officer, director, agent,
supplier, or independent contractor of any Affiliated Company to terminate
its relationship with any such Affiliated Company, or otherwise interfere
or attempt to interfere in any way with any Affiliated Company's
relationships with its employees, officers, directors, agents, suppliers,
independent contractors, or others;
(d) Employ or engage any person who, at any time within the one-year
period immediately preceding such employment or engagement, was an
employee, officer, director, or agent of any Affiliated Company; or
(e) Make any statement (oral or written) or take any other action
which would tend to disparage or diminish the reputation of any Affiliated
Company.
For purposes of this agreement:
(i) "Affiliated Companies" shall include the Company and all
subsidiaries or affiliates of the Company other than Summit Ventures IV,
L.P. and any of its affiliates which are not engaged in a business similar
to that of the Company or any of its subsidiaries;
(ii) "Confidential Information" shall mean all trade secrets,
proprietary data, and other confidential information of any Affiliated
Company, including without limitation financial information, information
relating to business operations, services, promotional practices, and
relationships with Restricted Companies, suppliers, employees, independent
contractors, or other parties, and any information which any Affiliated
Company is obligated to treat as confidential pursuant to any course of
dealing or any agreement to which it is a party or otherwise bound;
-3-
<PAGE>
(iii) the "Restricted Period" shall mean the period beginning on the
Commencement Date and ending on the later of (A) the fourth anniversary of
the Commencement Date or (B) the second anniversary of the date (the
"Termination Date") of termination (for any reason) of Employee's
employment with the Company (whether pursuant to this agreement or
otherwise); and
(iv) "Restricted Territory" shall mean (A) at any time prior to the
Termination Date, all metropolitan statistical areas ("MSAs") and all
cities, towns, villages, townships, and other similar political
subdivisions, whether incorporated or unincorporated (collectively,
"Cities"), in which any Affiliated Company then owns, leases, manages, or
operates an office or other facility, and (B) on or after the Termination
Date, all MSAs and Cities in which any Affiliated Company owns, leases,
manages, or operates an office or other facility on the Termination Date.
Notwithstanding the foregoing, with respect to (S)6(a)(i), above, and, if,
but only if, either or both of the Employee and Margaret R. Errante,
D.D.S., along with such dental hygienists, dental assistants, and other
non-dentist personnel as either of them deems necessary (subject to
(S)(S)6(c) and (d), above), personally provide clinical care to all
patients who result from the activities described in (S)6(b), above, then
also with respect to (S)6(b), "Restricted Territory" shall mean (1) at any
time prior to the Termination Date, the geographic area within a radius of
seven miles from any offices or facilities operated or otherwise utilized
by Associated Dental Care Providers, P.C., an Arizona professional
corporation ("ADCP"), at which any dentist employed or otherwise retained
by ADCP is then scheduled to see patients, and (2) on or after the
Termination Date, the geographic area within a radius of seven miles of any
offices or facilities operated or otherwise utilized by ADCP at which any
dentist employed or otherwise retained by ADCP has been scheduled to see
patients on a regular basis or has seen patients on a regular basis at any
time during the two-year period immediately preceding the Termination Date.
The Employee acknowledges that (1) the provisions of this section are
fundamental and essential for the protection of the Company's legitimate
business and proprietary interests, (2) such provisions are reasonable and
appropriate in all respects, and (3) in the event of any violation by the
Employee of any of such provisions, the Company would suffer irreparable harm
and its remedies at law would be inadequate. In the event of any violation or
attempted violation of such provisions by the Employee, the Company shall be
entitled to a temporary restraining order, temporary and permanent injunctions,
specific performance, and other equitable relief, without any showing of
irreparable harm or damage or the posting of any bond, in addition to any other
rights or remedies which may then be available to the Company.
(S)7. Termination. The Employee's employment with the Company shall
-----------
terminate automatically upon the death of the Employee and may be terminated by
the Company, without any further obligation on the part of the Company (except
as provided in clause (c), below), immediately upon notice to the Employee under
any of the following circumstances:
(a) At any time for Cause (defined below);
-4-
<PAGE>
(b) At any time when the Employee is under a Long-Term Disability
(defined below); or
(c) At any time without Cause; provided that if the Company
terminates the Employee's employment pursuant to this clause (c) and no
other basis for termination exists under this agreement, then the Employee
shall be entitled to severance payments in an aggregate amount equal to the
Base Salary for a period equal to the lesser of one year or the period
remaining in the Initial Term at the time of such termination. Any such
severance payments shall be payable periodically in the same manner as the
Base Salary is payable under (S)4 of this agreement, and, notwithstanding
any other provisions of this agreement to the contrary, such severance
payments shall be payable only so long as the Employee is in full
compliance with the provisions of (S)6 of this agreement.
For purposes of this agreement:
(i) "Cause" shall mean:
(A) any act constituting (1) a felony under the federal laws of the
United States, the laws of any state, or any other applicable law, (2)
fraud, embezzlement, misappropriation of assets, willful misfeasance, or
dishonesty, or (3) other criminal conduct which in any way materially and
adversely affects the reputation, goodwill, or business position of the
Company;
(B) the failure of the Employee to perform and observe all material
obligations and conditions to be performed and observed by the Employee
under this agreement, or to perform his duties in accordance with the
policies, programs, budgets, procedures, and directions established from
time to time by the CEO or the Board (any such failure, a "Performance
Failure"), and to correct such Performance Failure promptly following
notice from the Company to do so; or
(C) having corrected (or the Company having waived the correction of)
a Performance Failure, the occurrence of any subsequent Performance
Failure; and
(ii) "Long-Term Disability" shall mean that, because of physical or mental
incapacity, it is more likely than not that the Employee will be unable,
within 180 days after such incapacity commenced, to perform the essential
functions of his position with the Company, with or without reasonable
accommodation. In the event of any disagreement about whether or when the
Employee is under a Long-Term Disability, the question shall be determined:
(A) by a physician selected by agreement between the Employee and the
Company if such a physician is selected within 10 days after either of them
requests the other so to agree; or, if not, (B) by two physicians, the
first of whom shall be selected by the Employee and the second of whom
shall be selected by the Company or, if the Employee fails to make a
selection within 10 days after being requested to do so by the Company, the
second physician shall be selected by the first physician; or, if the two
physicians fail to agree, (C) by a third physician selected by the first
two physicians. The Employee shall submit to all reasonable examinations
requested by any such physicians.
-5-
<PAGE>
(S)8. Capacity. The Employee represents and warrants to the Company that
--------
he has the capacity and right to enter into this agreement and perform all of
his obligations under this agreement without any restriction.
(S)9. Remedies. All rights and remedies of either Party under this
--------
agreement are cumulative and in addition to all other rights and remedies which
may be available to that Party from time to time, whether under any other
agreement, at law, or in equity.
(S)10. Survival. The termination of the Employee's employment with the
--------
Company (for any reason) shall not relieve either Party of any of that Party's
obligations under this agreement existing at, arising as a result of, or
relating to acts or omissions occurring prior to, such termination. Without
limiting the generality of the preceding sentence, in no event shall the
termination of such employment modify or affect any obligations of the Employee
or rights of the Company under (S)6 of this agreement, all of which shall
survive the termination of such employment.
(S)11. Notices. All notices and other communications under this agreement
-------
to any Party shall be in writing and shall be deemed given when delivered
personally, telecopied (which is confirmed) to that Party at the telecopy number
for that Party set forth below, mailed by certified mail (return receipt
requested) to that Party at the address for that Party (or at such other address
for such Party as such Party shall have specified in notice to the other Party)
or delivered to Federal Express, UPS, or any similar express delivery service
for delivery to that Party at that address:
(a) If to the Company:
American Dental Partners, Inc.
301 Edgewater Place
Suite 320
Wakefield, Massachusetts 01880-1249
Attention: Gregory A. Serrao, Chief Executive Officer
Telecopy No.: (617) 224-4216
with a copy to
Baker & Hostetler
65 East State Street
Columbus, Ohio 43215
Attention: Gary A. Wadman, Esq.
Telecopy No.: (614) 462-2616
-6-
<PAGE>
(b) If to the Employee:
Joseph V. Errante, D.D.S.
2100 North Kolb Road, Suite 105
Tucson, Arizona 85715
Telecopy No.: (520) 290-9317
with a copy to:
DeConcini McDonald Yetwin & Lacy, P.C.
2525 East Broadway Boulevard
Suite 200
Tucson, Arizona 85716-5300
Attention: James A. Jutry, Esq.
Telecopy No.: (520) 322-5585
(S)12. Severability. The intention of the Parties is to comply fully with
------------
all rules, laws, and public policies to the extent possible. If and to the
extent that any court of competent jurisdiction is unable so to construe any
provision of this agreement and holds that provision to be invalid, such
invalidity shall not affect the remaining provisions of this agreement, which
shall remain in full force and effect. With respect to any provision in this
agreement finally determined by such a court to be invalid or unenforceable,
such court shall have jurisdiction to reform this agreement to the extent
necessary to make such provision valid and enforceable, and, as reformed, such
provision shall be binding on the Parties.
(S)13. Non-Waiver. No failure by either Party to insist upon strict
----------
compliance with any term of this agreement, to exercise any option, to enforce
any right, or to seek any remedy upon any default of the other Party shall
affect, or constitute a waiver of, the other Party's right to insist upon such
strict compliance, exercise that option, enforce that right, or seek that remedy
with respect to that default or any prior, contemporaneous, or subsequent
default. No custom or practice of the Parties at variance with any provision of
this agreement shall affect, or constitute a waiver of, either Party's right to
demand strict compliance with all provisions of this agreement.
(S)14. Complete Agreement. This agreement and all documents referred to in
------------------
this agreement, all of which are hereby incorporated herein by reference,
contain the entire agreement between the Parties and supersede all other
agreements and understandings between the Parties with respect to the subject
matter of this agreement. No alterations, additions, or other changes to this
agreement shall be made or be binding unless made in writing and signed by both
Parties.
(S)15. Governing Law. This agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Arizona without regard to principles of
conflicts of law.
-7-
<PAGE>
(S)16. Captions. The captions of the various sections of this agreement
--------
are not part of the context of this agreement, are only guides to assist in
locating those sections, and shall be ignored in construing this agreement.
(S)17. Genders and Numbers. Where permitted by the context, each pronoun
-------------------
used in this agreement includes the same pronoun in other genders and numbers,
and each noun used in this agreement includes the same noun in other numbers.
(S)18. Successors. This agreement shall be personal to the Employee and no
----------
rights or obligations of the Employee under this agreement may be assigned by
the Employee to any third party. Any assignment or attempted assignment by the
Employee in violation of the preceding sentence shall be null and void. Subject
to the foregoing, this agreement shall be binding upon, inure to the benefit of,
and be enforceable by and against the successors and assigns of each Party.
AMERICAN DENTAL PARTNERS, INC.
By /s/ Gregory A. Serrao /s/ Joseph V.Errante, D.D.S.
---------------------------- ----------------------------
Gregory A. Serrao, President JOSEPH V. ERRANTE, D.D.S.
-8-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF AMERICAN DENTAL PARTNERS, INC.
PDHC, Ltd., a Minnesota corporation
Texas Dental Partners, Inc., a Texas corporation
Smileage Dental Care, Inc., a Wisconsin corporation
American Dental Partners of Louisiana, Inc., a Delaware corporation
Soster Dental, Inc., a Pennsylvania corporation
American Dental Partners of Wisconsin, Inc., a Delaware corporation
Apple Park Associates, Inc., a Delaware corporation
Orthocare, Ltd., a Minnesota corporation
Oral Healthcare Corporation, a Delaware corporation
Innovative Practice Concepts, Inc., an Arizona corporation
Family Care Dental Centers, Inc., a Wisconsin corporation
American Dental Professional Services, Inc., a Delaware corporation
American Dental Partners of Virginia, Inc., a Delaware corporation
American Dental Partners of Maryland, Inc., a Delaware corporation
American Dental Partners of Alabama, Inc., an Alabama corporation
<PAGE>
EXHIBIT 23
The Board of Directors
American Dental Partners, Inc.:
We consent to incorporation by reference in the registration statements (Nos.:
333-50605, 333-59075, 333-59077 and 333-59079) on Form S-8 of our report dated
February 12, 1999, relating to the consolidated balance sheets of American
Dental Partners, Inc., as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 Annual Report on Form 10-K of American Dental
Partners, Inc.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
March 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheets and Consolidated Statements of Operations
and is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,091
<SECURITIES> 0
<RECEIVABLES> 4,765
<ALLOWANCES> 0
<INVENTORY> 585
<CURRENT-ASSETS> 8,972
<PP&E> 12,943
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,535
<CURRENT-LIABILITIES> 11,697
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 48,231
<TOTAL-LIABILITY-AND-EQUITY> 70,535
<SALES> 84,090
<TOTAL-REVENUES> 84,090
<CGS> 0
<TOTAL-COSTS> 76,639
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,085
<INCOME-PRETAX> 6,366
<INCOME-TAX> 2,480
<INCOME-CONTINUING> 3,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,886
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.54
</TABLE>
