<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-26688
UNITED DENTAL CARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2309712
(State of incorporation) (I.R.S. Employer Identification No.)
13601 Preston Road, Suite 500 East
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 458-7474
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class:
COMMON STOCK, $.10 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX 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 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. [ ]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, based on the closing price of the Common
Stock on The Nasdaq Stock Market on March 12, 1997, was approximately $155.2
million. (For the purposes of this computation, all directors, officers and
10% beneficial stockholders of the registrant are deemed to be affiliates.)
As of March 12, 1997, 8,925,416 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report is incorporated by
reference from registrant's definitive proxy statement for its Annual Meeting
of Stockholders (to be filed with the Commission pursuant to Regulation 14A).
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART III
The information required by Part III of this Report is incorporated by reference from the registrant's
definitive proxy statement for its Annual Meeting of Stockholders (to be filed with the Commission
pursuant to Regulation 14A).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
<PAGE> 3
ITEM 1. BUSINESS
GENERAL
United Dental Care, Inc. ("UDC" or "the Company") is a managed dental
benefits company that is licensed to operate prepaid dental plans in 28 states
and, as of December 31, 1996, provided dental coverage to approximately
1,700,000 members. The Company offers a comprehensive range of dental plans
capable of meeting the needs of employer groups of all sizes as well as
individuals. UDC's dentist networks, as of December 31, 1996, consisted of
approximately 4,000 general dentists as well as specialty dentists providing a
broad range of dental services. The Company markets its services through
multiple distribution channels, including independent brokers, third-party
arrangements with HMOs and a direct sales force of over 120 persons. In 1996,
the Company entered into agreements to acquire five managed dental benefits
companies and one dental referral plan company, all six companies having
approximately 500,000 members in the aggregate. As of December 31, 1996, all
but two of the acquisitions had been closed, and one of those two was completed
effective January 1, 1997.
Managed dental benefits plans are usually offered as an alternative to
traditional dental indemnity insurance, although the Company has the capability
of offering dual choice plans that provide both prepaid and indemnity plans.
Industry sources report that prepaid dental plans are typically priced 20% or
more below comparable indemnity plans. Prepaid dental plans are offered by
employers to employees, frequently on a voluntary participation basis with all
or part of the premium being paid by the employee. At the time of enrollment,
participating employees and dependents become members of the prepaid dental
plan and, under most of the Company's plans, each member is entitled to select
his or her own dentist from the dentist network. The Company pays the network
dentist a fixed monthly amount, or capitation payment, for each member who
selected that dentist, regardless of the services rendered in any particular
month. In addition, the dentist is paid a separate fee, or copayment, by the
member at the time of service for many of the dental services covered under the
plan. Under the prepaid dental plans of the Company, virtually all covered
dental services are provided through these capitation arrangements, in which
the Company bears little financial risk for either utilization levels or cost
of services.
THE MANAGED DENTAL BENEFITS INDUSTRY
Background
According to the U.S. Office of National Health Statistics, total
expenditures for dental care in the United States grew from approximately $14.4
billion in 1980 to approximately $43.2 billion in 1993. According to the
American Dental Association, there were approximately 138,000 active licensed
dentists engaged in private practice in the United States in 1991. The
American Dental Association estimated that in 1993 approximately 68% of the
nation's private dentists were in solo practice and approximately 20% were in
two-person practices.
Historically, payment for dental services has been on a
fee-for-service basis. Under this system, the individual, or a dental
indemnity insurance company, pays fees established by the dentist for the
dental services provided by the dentist and the dentist has little incentive to
control costs or minimize expenses. The charges for services generally vary
widely among dentists. Since the individual pays all or a portion of the
established fees, the individual is reluctant to incur the costs of preventive
dental care. In addition, the individual has limited access to information
regarding cost and quality for use as a basis for selecting a dentist.
Dental Indemnity Insurance
The number of individuals in the United States with dental benefits
was estimated by the National Association of Dental Plans to be approximately
117 million in 1995, representing approximately 46% of the total United States
population. Historically, dental coverage was not an employee benefit
customarily provided by employers. The Company believes that dental benefits
are a frequently requested employee benefit. In response to employee demand,
employers have increasingly offered dental coverage to employees usually in the
form of indemnity insurance. According to a 1993 survey performed by Foster
Higgins, an employee benefits consulting firm, approximately 87% of employers
with more than 200 employees, approximately 63% of employers with 50-199
employees and approximately
3
<PAGE> 4
39% of employers with 10-49 employees offer dental coverage as an available
employee benefit. Dental coverage is typically offered as a separate benefit
from medical coverage with the employer frequently paying none, or only a
portion, of the premium for the dental coverage.
Dental indemnity insurance is similar to medical indemnity insurance
in that the individual or the employer pays a premium for the dental insurance
coverage and the insurance company pays or reimburses the dentist in whole or
in part for the charges for dental services. While dental indemnity insurance
companies have utilized mechanisms to control costs such as limiting charges to
reasonable and customary charges for the community in which the services are
rendered and utilizing preferred providers with whom discounted fee schedules
are negotiated, such mechanisms do not transfer significant risk to the dentist
or provide significant incentives to the dentist to control costs or reduce
fees or to the individual to utilize preventative dental services.
Managed Dental Benefits
Increasing concern with the costs of health care, including dental
care, has resulted in a greater willingness by employers and consumers to
consider managed health care delivery systems. The Company believes that these
alternate delivery systems are able to provide for services, or benefits, at a
lower cost, or premium, than fee-for-service alternatives.
Companies having the management expertise and industry knowledge
required to establish and maintain a network of specialized providers such as
dentists have developed specialized managed delivery systems to provide such
health care services. HMOs, PPOs and other forms of managed health care plans
for general medical services have not customarily devoted the resources to
develop specialty managed delivery systems and frequently subcontract with
companies providing single specialty managed delivery systems such as the
Company's prepaid dental plans.
According to the National Association of Dental Plans, prepaid dental
plans have grown from approximately 10.4 million covered members in 1991 to an
estimated 23.9 million in 1996, an annual compounded growth rate of
approximately 18.1%. The Company believes the relatively high growth rate for
prepaid dental plans is attributable to: (i) the greater acceptance and
utilization of managed care alternatives by employers and employees to reduce
costs; (ii) the significant price advantage relative to indemnity plans; (iii)
the cost effectiveness to employers of prepaid plans as an employee benefit;
and (iv) the growing acceptance of capitated dental plans by dentists,
resulting in improved accessibility and convenience for members. The number of
people with dental benefits was estimated by the National Association of Dental
Plans to be approximately 117 million in 1995, of which approximately 16% were
covered under prepaid dental plans representing approximately 9% of the total
United States population. The Company believes there is significant growth
opportunity for the managed dental benefits industry.
A prepaid dental plan pays a fixed monthly capitation payment to the
network dentist who provides dental services as needed at either no cost to the
member or at reduced fees (copayments) paid by the member. Consequently, the
risk of high utilization is shifted to the dentist, although, generally, the
dentist receives copayments for many covered services that are often greater
than the direct costs of the dentist, reducing financial risk. The capitation
method rewards efficient providers who stress routine, preventive care and
control their fixed expenses. In comparison, under the traditional
fee-for-service payment system, the risk of utilization is borne by the insurer
or the consumer, with little incentive to the dentist to be an efficient
provider. The Company believes that the ability of a managed dental benefits
plan to volume purchase, shift risk to providers and manage both the costs and
utilization of dental care typically results in premiums 20% or more below
premiums for a traditional indemnity plan.
In addition, some prepaid dental plans provide for specialty care at
fixed copayments by the member. Unlike medical care, the majority of dental
care is provided by general dentists with some specialty care provided by
endodontists (specialists in root canal therapy), orthodontists (specialists in
tooth movement), oral surgeons (specialists in extractions), pedodontists
(specialists in dentistry for children) and periodontists (specialists in
gum-related treatment). Companies such as UDC that arrange for specialty care
at fixed copayments are further able to manage the costs and utilization of
dental services through specialty referral authorization programs and
discounted fee arrangements with specialty dentists. Medium to large
employers increasingly expect comprehensive dental care, including specialty
care, from prepaid dental plans, at stipulated copayments comparable to the
type of coverage provided by a general medical plan.
4
<PAGE> 5
According to the National Association of Dental Plans, the number of
dentists affiliated with prepaid dental plans was approximately 27,500 in 1995,
or approximately 19% of all active dentists. The Company believes that
significant growth of prepaid dental plans will continue as a result of: (i)
growing acceptance and participation in such plans by dentists; (ii) greater
acceptance of such plans by consumers who are becoming increasingly aware of
the price advantages, improved service and convenience offered by such plans;
and (iii) recognition by employers that such plans can be used to provide
important employee benefits at little or no cost to the employer.
Consequently, the Company believes prepaid dental plans will be increasingly
used to replace more expensive forms of dental coverage and provide dental
coverage to greater portions of the population that presently have no dental
coverage.
The Company believes that the managed dental benefits industry has the
potential for significant growth and is highly fragmented. The National
Association of Dental Plans estimated that, at the beginning of 1994,
approximately 40% of its members operating prepaid dental plans were
single-state companies. The Company believes that large, independent, managed
dental benefits companies will have a greater opportunity to grow and expand
because of growing interest in multi-state coverage by medium and large
employers and increased use by medical HMOs that contract with large dental
plans to provide dental coverage to the medical HMO members. The Company
believes that large dental plans have the resources and systems required to
satisfy the expectations of employers and the requirements of dentists and
regulatory authorities while achieving financial economies of scale. The
Company believes that the factors supporting the growth of large dental plans
will give rise to consolidation opportunities.
BUSINESS STRATEGY
The Company's goal is to be the leading dental benefits company in the
United States with the ability to offer prepaid dental plans to employers of
all sizes. The Company intends to maintain and develop a leadership position
within each of its existing key markets and to strategically enter new markets
that afford significant growth opportunities. At present, the Company is
licensed to operate prepaid dental plans in 28 states not including one
additional state to be entered through a pending acquisition. The Company
believes that, as a large, multi-state managed dental benefits company with
significant management depth and financial resources, it will have a
competitive advantage over smaller and single-market companies in gaining
market share and participating in the consolidation of the managed dental
benefits industry. In order to implement its strategy, the Company will:
Offer a Full Range of Comprehensive Dental Benefits Plans. One of the
keys to the Company's success has been its ability to offer a broad range of
prepaid dental plans providing different levels of dental coverage, including
specialty care. The variety of its prepaid dental plans has enabled the
Company to attract both small, single-market employers and large, multi-state
employers as well as individuals. In addition, the Company has developed
prepaid dental plans that may be offered in substantially all states where it
is licensed so that large, multi-state employers can provide the same dental
coverage to all of their employees.
Ensure Quality Dental Care Through Accessible Dentist Networks. The
Company's strategy is to have one of the three largest dentist networks in its
key markets, providing a full spectrum of dental care, including specialty
care. The Company believes that having provider relations representatives
located in each of its key markets enhances the quality of its dentist
networks. The local knowledge and expertise provided through these local
representatives enables the Company to develop highly accessible dentist
networks convenient for members, which is an important factor to employers in
selecting a prepaid dental plan. All local efforts are supported by the
Company's corporate and regional dental directors.
Utilize Multiple Distribution Channel Sales Efforts. The Company
sells its prepaid dental plans to employers through: (i) its direct sales force
of over 120 persons focusing on medium to large groups such as multi-state
employers, large independent insurance brokers and trade or professional
organizations; and (ii) a network of independent insurance brokers who market
to smaller employers and individuals. In addition, the Company sells to third-
party medical HMOs that offer its prepaid dental plans as an additional benefit
to members of the medical HMOs. The Company believes that its multiple
distribution channel approach is a competitive advantage that provides the
flexibility to meet the needs of the full spectrum of customers.
5
<PAGE> 6
Emphasize an Integrated Approach to Customer Service. The Company
utilizes an integrated service approach involving local and regional
specialized service representatives to optimize its operations and product
strategy for each target market. Local offices are maintained in each of the
Company's key markets with specialized sales and service representatives for
employer groups and insurance brokers and with the local provider relations
representatives for dentists. Customer service is performed by member service
centers, accessed via an 800-telephone number, with the objective of providing
consistent, responsive and efficient member service.
Acquire Other Managed Dental Benefits Companies. The Company intends
to continue acquisition efforts to enter target markets and to expand its
market penetration in current markets. The acquisition of U.S. Dental
Management, Inc. ("US Dental") in November 1995 resulted in approximately
163,000 additional members, and the acquisition of Associated Health Plans,
Inc. ("AHP") in January 1996 resulted in approximately 220,000 additional
members. In 1996, the Company entered into agreements to acquire five managed
dental benefits companies and one dental referral plan having approximately
500,000 members in the aggregate. These acquisitions are as follows:
<TABLE>
<CAPTION>
Effective
Approximate States of Date of
Acquired Company Membership Prepaid Operation Ownership
- ------------------------------------------------- --------------------- ------------------ -------------
<S> <C> <C> <C>
Independent Dental Plans, Inc ("Independent") . 10,000 (managed) Michigan 10/01/96
Association Dental Plan, Inc. ("Association") . 60,000 (referral) Not applicable 10/01/96
OraCare DPO, Inc. ("OraCare") . . . . . . . . . 150,000 (managed) New Jersey, Pennsylvania 11/01/96
Kansas City Dental Care, Inc. ("KCDC") . . . . 90,000 (managed) Kansas, Missouri 11/01/96
United Dental Care, Inc. ("United") . . . . . . 90,000 (managed) Oklahoma 01/01/97
International Dental Plans, Inc. ("IDP") . . . 100,000 (managed) Florida Pending
</TABLE>
The Company currently has no agreement or understanding relating to any other
acquisition.
BENEFITS PLANS
Managed Dental Plans
The Company offers a full spectrum of managed dental plans ("Plans")
through numerous state-level subsidiaries. The Plans range from lower
coverage, higher co-payment plans with low premiums to higher coverage, low
co-payment plans with higher premiums.
Under each of the Company's Plans, a premium is paid to the Company
for the type of coverage selected, making the employee and each participating
dependent a member of the Plan. Premium payments are made by the employer or
by the employee (usually by payroll deduction) with respect to employer offered
Plans or by the member directly. Over half of the Company's revenues are
derived from Plans in which the member pays the entire premium. The remainder
of the Plans are paid either entirely by the employer or partially by the
employer with the member contributing the balance of the premium. Typically,
the premiums charged are fixed for a 12-month contract, except for certain
multiple year contracts that are subject to limitations on premium increases.
Recently, the increase in the dental component of the Consumer Price Index has
averaged approximately 6% per year. The Company estimates that its increases
in premiums have averaged less than 3.5% per year and that the premiums charged
by the Company are typically 20% or more below premiums for comparable
indemnity dental plans. Consequently, the Company believes that it is able to
offer Plans that are not only less expensive than the indemnity competition,
but also have had lower increases than most dental costs and indemnity
premiums.
Many of the Company's Plans permit each member to select his or her
own individual general dentist from the Company's dentist network at the time
of enrollment. The Company intends to incorporate this flexibility into all
its Plans. Each month, the Company pays a fixed payment, or capitation, to the
member's general dentist regardless of which services are rendered in the
month. In return for the capitation payment and the specified copayments, the
general dentist agrees to provide all covered services for the member.
6
<PAGE> 7
Although the Plans vary, typically routine preventive and diagnostic
care (exams, x-rays, sealants, teeth cleanings) is provided at no charge or at
a small co-payment, while basic care (including fillings and extractions) and
specialty care (root canal therapy and gum disease, or periodontal services) is
provided at stipulated copayments. More involved major care (such as crowns
and bridges) is also provided at copayments that are frequently lower than the
member's cost of coinsurance under a comparable indemnity insurance plan.
Under many of the prepaid dental plans offered by the Company, specialty dental
care by specialty dentists is made available to members. Specialty dentists
are generally reimbursed by the Company on a discounted, fee-for-service basis
and are not reimbursed on a capitated basis. Accordingly, the Company retains
the risk for the payment of specialty care benefits in such situations. In the
event that the utilization of specialty care benefits increases under the
outstanding plans of the Company, it could substantially adversely affect the
profitability of the Company. The Company believes that a specialty care
referral program with specialty dentists providing services at fixed copayments
is necessary for the cost management of dental care services. Orthodontic care
is also available under many of the Company's Plans.
Dual Choice Plans
The Company is able to offer employers Plans providing both managed
dental benefits and traditional indemnity insurance coverage, commonly referred
to as dual choice plans. Such Plans allow an employee to select the most
suitable type of coverage at the beginning of the contract year by offering
each employee the choice of a prepaid plan utilizing the Company's dentist
network or traditional indemnity insurance coverage utilizing any dentist, but
usually at higher premiums and with lower coverage than the prepaid plan
alternative. A dual choice plan is particularly useful when some employees
reside in areas where the Company's dentist network is less developed or in
states where the Company is not yet licensed to offer managed dental benefits.
The indemnity portion of the dual choice plans is made available
either through United Dental Care Insurance Company ("UDCIC"), the Company's
subsidiary that is licensed to offer dental indemnity insurance in all states
where the Company operates a prepaid dental plan, or through contractual
arrangements with third party insurers. An employee who selects the indemnity
insurance option pays a portion of the charges for covered services (or
coinsurance) after satisfying any deductible. Although coinsurance payments
are typically higher than the copayments charged for the same services under
the other Company Plans, the employee may select any dentist for dental
services. In certain states, the Company has contracted with PPOs for
discounted fees for services covered under the Company's indemnity insurance.
Currently, the Company intends to offer its dual choice plans and its
point of service plan as an enhancement to the marketing of its core business
of prepaid dental benefits. As of December 31, 1996, the Company had
approximately 80,000 individuals covered through its indemnity insurance
subsidiary, excluding point-of-service members who are considered prepaid
members.
Third Party Plans
The Company offers customized plans and services through contractual
arrangements with medical HMOs, including contracts under which the Company
acts as a dental benefits subcontractor to HMOs that have contracted with state
agencies to provide Medicaid benefits or that provide Medicare benefits. Under
these arrangements, the Company often provides only preventive and diagnostic
dental benefits but may also provide more comprehensive coverages, in each case
either on a "private-label" basis or directly through the Company's Plans. As
of December 31, 1996, the Company had 27 such arrangements, which accounted for
approximately 21.0% of its membership and approximately 4.0% of its 1996
revenues. The Company believes its size and geographic scope give it a
competitive advantage in developing additional third party HMO relationships.
Point of Service Plan
The Company has developed a point of service plan ("POS") that
provides members of the Company's prepaid dental plans the option of receiving
dental services from dentists outside the Company's dentist network on an
indemnity basis providing less coverage. The POS Plan allows the member to
select the dentist of the member's choice each time services are obtained.
Although the Company charges higher premiums under the POS Plan, the Company
has somewhat greater risk exposure than under its managed dental benefit plans.
As of December 31, 1996, the Company had less than 6,000 POS members.
7
<PAGE> 8
Dental Referral Plan
Through its acquisition of Association Dental Plan, Inc., the Company
offers a referral plan. This plan is currently delivered through a network of
approximately 9,400 providers in 36 states. The referral plan contracts with
the dental providers to provide dental services to referral plan members at
certain scheduled fee-for-service rates. No capitation payments are made to
dentists. Members of the referral plan pay a fixed fee per month for the
member's ability to access the Company's referral plan network. There are no
claim forms or deductibles and no pre-authorization is required. The Company
bears no financial risk or responsibility for dental services provided to
members in conjunction with its referral product.
Indemnity Plans
The Company's present strategy regarding dental indemnity insurance is
to only offer its indemnity plans in those situations where an employer with
greater than 250 employees declines to use the Company's dual choice products.
To the extent future groups select the UDCIC indemnity policy, UDCIC will
become subject to additional underwriting risk.
DENTIST NETWORKS
The Company designs its Plans and capitation programs to create
dentist networks of general and specialty dentists that the Company believes
provide the quality of care and convenience needed to attract and retain
members. The Company's strategy is to have one of the three largest dentist
networks in each of its key markets. As of December 31, 1996, the Company had
provider contracts with approximately 4,000 general dentists. The Company also
had contracts with specialty dentists representing the specialities of
endodontics, oral surgery, orthodontics, periodontics and pedodontics. Since
specialty care is covered under many of the Company's Plans, the Company has a
specialty care referral review program in order to manage the specialty care
provided.
The Company employs 46 provider relations representatives, located in
local offices situated in its key markets, who recruit general and specialty
dentists, determine their qualifications for participation in the Company's
network, provide administrative training to the dentist's office staff and
assist the dentists with respect to participation in the Company's network.
Collectively, the dental directors are responsible for establishing and
monitoring the Company's quality review efforts, including credentialing and
re-credentialing for network participation, review of specialty referrals and
utilization review.
Typically, the Company seeks established, private-practice dentists
who have capacity in their practice to see at least 200 of the Company's
members as new patients. Most general dentists and specialty dentists with
whom the Company contracts have small dental offices similar to those familiar
to most consumers. Both the dentist and the facility are reviewed in the
Company's credentialing process, which incudes verification of licensure and
malpractice coverage, as well as review of any actions that may have been taken
by state regulatory authorities. In addition to professional practice
capabilities, the Company also reviews the service amenities of the office,
including available parking, days and hours of operation, a patient recall
system for routine, preventive check-ups and radiographic and sterilization
equipment and procedures. Upon determining that a dentist meets the Company's
requirements for participation in the Company's dental network, the Company
offers the dentist a provider contract setting forth the capitation payments,
copayments, limitations and exclusions and other terms and conditions
applicable to the specific Plans in which such dentist will participate.
Provider contracts are typically non-exclusive and permit the Company or the
dentist to terminate the contract with 90 days prior written notice. The
Company periodically reviews its general and specialty dentists for continued
compliance with Company requirements for participation in the Company's dentist
network.
The Company believes that the advantages to a dentist who participates
in a managed dental benefits plan include: (i) increasing the size of the
dentist's practice as a result of selection of the dentist by plan members and
referrals from plan members; (ii) increasing practice profitability through
utilization of excess capacity to accept additional patients; (iii) generation
of predictable incremental cash flow from regular capitation payments; (iv)
retention of patients seeking managed dental plan participation; and (v)
reduction of paper work and collection risks associated with conventional
fee-for-service practices.
8
<PAGE> 9
The general and specialty dentists are independent from the Company,
providing service to members of the Company's Plans based upon dental practice
standards in the community and their contractual arrangements with the Company.
The Company requires that its network dentists maintain malpractice insurance
and satisfy quality service standards.
In connection with the OraCare acquisition, the Company acquired a
dental management company that has entered into a management agreement with the
OraCare dental professional association pursuant to which the management
company will furnish the facilities and equipment and certain management
services to the dental professional association. In combination, the dental
management company and the dental professional association employed 111
employees at December 31, 1996, engaged in providing dental services to members
of the general public and members of the Company's prepaid dental plans.
The Company's business strategy is dependent to a large extent upon
the Company's continued maintenance of a large network of quality general and
specialty dentists in each of the Company's markets. Generally, the Company
and network dentists enter into nonexclusive contracts that can be terminated
by either party with limited notice (generally 90 days). Primarily for such
reasons, the Company did not allocate for financial statement purposes any
portion of the consideration paid in its acquisitions to the dentist networks
of the acquired companies. The Company's business may be adversely affected if
the Company is unable to establish and maintain contracts with an adequate
number of dentists in any market.
MARKETS AND OPERATIONS
The Company currently is licensed to sell its prepaid dental plans in
28 states, and its indemnity plan in 27 states including an acquisition that
was completed effective January 1, 1997, which added the state of Oklahoma
where the Company is licensed to sell both prepaid and indemnity plans. As of
December 31, 1996, approximately 76.5% of all UDC prepaid plan members were
located in five states, Arizona, Texas, New Jersey, New Mexico and Missouri.
The following table shows the approximate number of managed benefits members,
indemnity members, referral plan members and total members of the Company as of
December 31, 1996.
<TABLE>
<CAPTION>
Managed
Benefits Indemnity Total
State Members Members Members
----------------------------------------- --------- ------ ---------
<S> <C> <C> <C>
Arizona . . . . . . . . . . . . . . . 518,276 19,574 537,850
Texas . . . . . . . . . . . . . . . . 284,762 6,122 290,884
New Jersey . . . . . . . . . . . . . 173,564 ---- 173,564
New Mexico . . . . . . . . . . . . . 115,456 2,789 118,245
Missouri . . . . . . . . . . . . . . 104,305 3,782 108,087
Colorado . . . . . . . . . . . . . . 96,313 10,103 106,416
Ohio . . . . . . . . . . . . . . . . 70,306 296 70,602
Utah . . . . . . . . . . . . . . . . 40,870 13,837 54,707
California . . . . . . . . . . . . . 41,429 11,208 52,637
Washington . . . . . . . . . . . . . 40,697 3,973 44,670
Other States . . . . . . . . . . . . 77,324 8,935 86,259
Referral members . . . . . . . . . . ---- ---- 85,370
--------- ------ ---------
TOTALS 1,563,302 80,619 1,729,291
========= ====== =========
</TABLE>
The acquisition of US Dental added approximately 163,000 members
located in four states where the Company already operated prepaid plans. The
acquisition of AHP added approximately 220,000 members, all of whom were
located in Arizona. The acquisition of Independent added approximately 10,000
members, all of whom were located in Michigan. The acquisition of Association
added approximately 60,000 referral members spread across the United States.
The acquisition of OraCare, effective November 1, 1996, added approximately
150,000 prepaid members in New Jersey and Pennsylvania. The KCDC acquisition,
also effective November 1, 1996, added approximately 90,000 prepaid members in
Kansas and Missouri.
9
<PAGE> 10
The Company sells its Plans to small, single-market employers and
large, multi-state employers, as well as to individuals. No single employer
group accounted for more than 2% of the Company's revenues for the year ended
December 31, 1996.
The Company currently maintains its regional customer service centers
in Phoenix, Arizona; San Diego, California; Denver, Colorado; and Dallas,
Texas. In addition, the Company maintains 28 local offices with group sales
and service representatives and provider relations representatives in its key
markets having a significant concentration of members.
SALES
The Company sells its Plans primarily to employers through: (i) its
direct sales force of over 120 persons focusing on medium to large groups such
as multi-state employers, large independent insurance brokers and trade or
professional organizations; and (ii) a network of independent insurance brokers
who market to smaller employers and individuals. In addition, the Company
sells to medical HMOs to offer the Company's Plans as an additional benefit to
HMO members. The Company believes its multiple distribution channel approach
is a competitive advantage that provides the flexibility to meet the needs of
the full spectrum of customers.
The Company has focused the efforts of its direct sales
representatives on medium-to-large employers typically employing more than 250
employees and having no relationship with an insurance broker. If an employer
utilizes an insurance broker, the Company generally sells through the broker to
maintain its broker relationships. The Company's direct sales representatives
are compensated by a combination of base salary and commissions based upon
membership growth. The Company has implemented a direct sales effort in all of
its major markets.
The Company also sells its Plans through independent insurance brokers
who typically have relationships with smaller employers. Approximately
three-fourths of the Company's membership is the result of sales through
brokers who receive commissions based on premiums received by the Company from
such sales.
The Company has actively pursued alliances with HMOs to offer its
Plans to HMO members either on a private label basis or as a separate benefit
and currently has 27 such agreements in place. The Company believes that, as
HMOs seek to differentiate their services, many will consider contracting for
dental benefit plans and that the Company has a competitive advantage in
arranging alliances with HMOs as a result of the Company's experience, size and
geographic scope.
Sales to employers, regardless of distribution channel, involve
selling both the employer and its employees. Typically, the employee has the
opportunity to select the Company's Plans during an annual open enrollment
period. Frequently, representatives of the Company have the opportunity to
make presentations directly to the employees, while, in other cases, the
employer distributes the Company's marketing materials that explain the
features and benefits of the Company's Plan. The Company stresses: (i) the
quality and size of its dentist networks; (ii) the comprehensiveness of its
Plan, including specialty care coverage; (iii) its integrated customer service
approach in responding to member inquiries or complaints, including requests to
change general dentists; and (iv) the value of the Plan in relation to Plan
premiums and copayments.
CUSTOMER SERVICE
The Company employs 126 group sales and service representatives, 46
provider relations representatives and 70 customer service representatives with
primary responsibility to service the needs of its groups and brokers, general
and specialty network dentists and members, respectively. The Company's group
sales and service representatives and provider relations representatives are
based at the local market level, while the Company's customer service
representatives are located at four regional customer service centers in
Arizona, California, Colorado and Texas. Inquiries or complaints from members
are handled over the telephone via 800-telephone numbers by the regional
customer service representatives who provide consistent, responsive and
efficient member services. The Company believes this integrated approach
enables it to respond quickly and personally to group, broker and dentist
issues where direct interaction is critical.
10
<PAGE> 11
MANAGEMENT INFORMATION SYSTEMS
All administrative, accounting, finance and information services are
provided from the Company's administrative offices in Dallas, Texas. The
Company believes that, in the managed dental benefits industry, an advanced
information system can be a significant competitive advantage. Accordingly, in
1995, the Company entered into a contract to acquire an advanced software
program specifically designed for the managed dental benefits industry and,
subsequently, has acquired the necessary hardware to fully utilize such
software. The Company believes its new information system will significantly
enhance the Company's capabilities to provide customer service, analyze
provider utilization, create opportunities to take advantage of market
conditions and support new product development.
All of the Company's business is in the process of being converted to
the new information system. The conversion of the internally developed systems
formerly in use by International Dental Health, Inc. ("IDH") and AHP prior to
their respective acquisitions by the Company has been substantially completed.
The Company's internally developed system and the internally developed system
used by US Dental at the time of the US Dental acquisition are in the process
of being converted. Until the conversion is completed, the Company believes
its system and the US Dental system are adequate for the Company's current
needs. The Company expects that all of these systems will be fully converted
to the new system by the end of 1997. The information systems of the recent
and pending acquisitions will be converted to the new system as rapidly as
possible, although the timing for the completed integration of such systems
cannot currently be estimated.
The Company has an administrative services agreement with R. E.
Harrington, Inc. ("Harrington") pursuant to which Harrington provides indemnity
claim administrative services to the Company. The Company pays Harrington
4.85% of all claims paid by Harrington, which percentage may be reduced if
Harrington does not meet performance guarantees. The term of this agreement is
from January 1, 1997 to December 31, 1999, but the Company may terminate the
contract with 90-day advance written notice and the payment of a contractual
penalty.
IDH ACQUISITION
The Company acquired IDH in September 1994 in furtherance of the
Company's growth strategy. The IDH acquisition resulted in the addition of
approximately 460,000 new members, prepaid dental plan licenses in 20
additional states and dental indemnity insurance licenses in all but two of the
24 states where the Company is currently licensed to offer its Plans. Since
September 1994, the Company has consolidated the administrative functions of
IDH into the centralized administrative operations of the Company in Dallas,
Texas.
The aggregate consideration of approximately $19.7 million relating to
the IDH acquisition (consisting of approximately $14.3 million paid for IDH
stock and approximately $5.4 million payable under the non-competition and
consulting agreements with certain IDH stockholders) was allocated by the
Company for financial statement purposes in the amounts of approximately $15.7
million to goodwill, approximately $0.3 million to the non-competition
agreements, approximately $0.1 to the consulting agreements and approximately
$3.6 million to tangible assets. Goodwill relates to items traditionally
associated with going concern value such as the reputation of IDH in its
markets, name recognition, the ability to maintain and further develop systems,
and market position in geographic areas in which the Company previously did not
have a market presence. The allocation of the consideration relating to the
IDH acquisition for financial statement purposes by the Company was not based
on a third party appraisal of the IDH assets. The Company relied on its own
expertise and experience in the industry in making a valuation of the IDH
assets for such allocation. Other than the amounts allocated to the
non-competition and consulting agreements, the Company did not allocate any
portion of such consideration to other intangibles such as the IDH dentist
networks and subscriber contracts.
The Company did not allocate any portion of the IDH consideration to
the IDH dentist networks because the contracts between IDH and the dentists are
non-exclusive and may be terminated with limited notice (generally 90 days).
The Company believes that the expense attributable to recruiting new dentists
does not constitute a material portion of the Company's expenses incurred with
respect to its ongoing activities relating to credentialing dentists and
maintaining its dental provider relationships. The Company did not allocate
any portion of the IDH consideration to the IDH subscriber contracts because
the IDH employer group agreements were generally for one year with a
substantial percentage renewable in January. As such, at the time of the IDH
acquisition, the remaining life of a
11
<PAGE> 12
significant percentage of the IDH employer group agreements was less than six
months. Individual subscribers may terminate participation in the plan
periodically during the term of an employer group agreement or at any time if
they cease to be employed by the employer having a group agreement. The
Company estimates that terminations by members of the IDH plans in 1994
constituted approximately 31% of the total membership in the IDH plans during
1994. The Company considers that the significant growth in the total number of
IDH subscribers was attributable primarily to ongoing sales and account
maintenance efforts. The costs relating both to recruiting, credentialing and
maintaining the dentist networks and to sales and account maintenance efforts
are expensed by the Company as incurred.
The amounts allocated as the values of the non-competition and
consulting agreements were significantly below the contractual payments due
under such agreements. Those amounts were based on an estimate by the Company
of the value of the benefits expected under such agreements. With respect to
the non-competition agreements, the Company did not consider it likely that
significant revenues would have been lost if such IDH stockholders could have
competed with the Company after the acquisition due to factors such as the age
of the IDH stockholders, the substantial time necessary to develop and obtain
regulatory licensure for a new company in the industry and the low probability
that a significant number of employers or subscribers would contract with a new
start-up competitor upon renewal. With respect to the consulting agreements,
the allocation by the Company was based on its estimate of the value of the
consulting services actually expected to be received under such agreements
which consulting services have not been and are not expected to be significant.
US DENTAL ACQUISITION
The Company entered into a definitive agreement dated July 19, 1995,
to purchase all of the outstanding capital stock of US Dental, a managed dental
benefits company headquartered in Phoenix, Arizona. The US Dental acquisition
closed on November 27, 1995. US Dental operated prepaid dental plans in
Arizona, Colorado, Nebraska and New Mexico, and administered a prepaid dental
plan owned by a third party in Nevada. The Company also had operations in each
state where US Dental operated prepaid dental plans.
US Dental had revenues of approximately $13.3 million and $13.0
million for the years ended December 31, 1995 and 1994, respectively. Revenue
of $2.2 million was included in the UDC consolidated financial statements for
its two months of ownership in 1995. The prepaid dental plans offered by US
Dental are similar to the Company's Plans.
The consideration given by the Company in connection with the US
Dental acquisition was $12.6 million, which included the present value of
amounts payable under consulting agreements and non-competition agreements
entered into with each of the two former stockholders of US Dental. Each
consulting agreement has a term of 50 months and provides for $522,264 in the
aggregate to be paid in 48 equal monthly installments commencing the third
month after the closing. Each non-competition agreement has a three year term
and provides for $55,991 in the aggregate to be paid in 36 equal monthly
installments commencing the month of closing. In addition, at closing, US
Dental paid in full loans owed to the two former stockholders of US Dental in
the aggregate principal amount of $200,000 and a bank loan in the principal
amount of $50,000. Approximately $10.3 million of the purchase price was in
the form of a promissory note due January 18, 1996.
In allocating, for financial statement purposes, the consideration to
be paid by it in connection with the US Dental acquisition, the Company applied
the same principles that it applied in connection with the IDH acquisition.
Approximately $11.7 million of such consideration was allocated to goodwill,
approximately $0.2 million was allocated to the non-competition and consulting
agreements and the balance of such consideration was allocated to tangible
assets. No portion of such consideration was allocated to other intangibles
such as the dentist networks and subscriber contracts for the same reasons
applicable to the IDH acquisition.
ASSOCIATED ACQUISITION
The Company executed a definitive stock purchase agreement dated
December 14, 1995, to acquire Associated Health Plans, Inc. ("AHP"), a managed
dental benefits company, and Associated Companies, Inc. ("ACI"), the management
company for AHP (collectively "Associated"). The acquisition became effective
as of the close of business on January 31, 1996.
12
<PAGE> 13
Associated, headquartered in Tucson, Arizona, operates managed dental
benefit plans in Arizona, providing dental benefits to over 220,000 members.
AHP had revenues of approximately $14.2 million and $12.6 million for the years
ended December 31, 1995 and 1994, respectively.
The consideration given by the Company in connection with the
Associated acquisition was $15.0 million, which included the present value of
amounts payable under non-competition agreements entered into with four former
shareholders of Associated. The non-competition agreements totaled $600,000
and have a three year term payable in equal monthly installments commencing
February 1996.
In allocating, for financial statement purposes, the consideration to
be paid by it in connection with the Associated acquisition, the Company will
apply the same principles that it applied in connection with the IDH
acquisition and the US Dental acquisition. Approximately $14.1 million of such
consideration was allocated to goodwill, approximately $0.6 million was
allocated to the non-competition agreements and the balance of such
consideration was allocated to tangible assets. No portion of such
consideration was allocated to other intangibles such as the dentist networks
and subscriber contracts for the same reasons applicable to the IDH
acquisition.
ORACARE ACQUISITION
On September 5, 1996, the Company entered into agreements to acquire
OraCare DPO, Inc. ("OraCare"), a New Jersey prepaid dental plan having
approximately 150,000 members, and to acquire a dental management company
affiliated with OraCare. Approximately 75.6% of the OraCare's members were
Medicaid members of medical HMOs that contracted with OraCare to provide the
dental benefits under their plans. Members of one medical HMO represented
approximately 34.4% of OraCare's total membership. In addition, as a part of
the acquisition, the Company agreed to cause an affiliate to acquire a dental
professional association owned by the majority stockholder of OraCare. The
affiliated management company provides management services to both the prepaid
dental plan and the dental professional association which, as of December 31,
1996, operated nine dental clinics servicing both members of the OraCare
prepaid dental plan and other third-party prepaid and fee-for-service patients.
In connection with the OraCare acquisition, the Company entered into employment
agreements with two former OraCare stockholders as operating officers of the
OraCare management company and two former stockholders as dental directors and
dental providers of the dental professional association. The acquisition
became effective November 1, 1996.
The OraCare entities had combined revenues of $9.2 million and $7.6
million for the years ended December 31, 1995 and 1994, respectively, and $12.0
million for the nine months ended September 30, 1996. The consideration paid
by the Company in connection with the OraCare acquisition was $30.5 million
plus certain contingent payments up to a maximum aggregate amount of $6.0
million based on the financial performance of the Company in the states of New
Jersey and Pennsylvania in 1997 and 1998. Approximately $31.2 million of the
initial consideration in the OraCare acquisition was allocated to goodwill for
financial statement purposes. Approximately $24.9 million of the purchase
price was in the form of a promissory note due January 2, 1997.
In response to certain regulations in New Jersey, the capital stock of
the OraCare dental professional association was acquired by a licensed New
Jersey dentist designated by the Company. The laws of New Jersey where the
dental clinics are located prohibit dentists from sharing fees with
non-dentists and prohibits non-dentist entities from practicing dentistry.
Although the Company believes the operations of the dental management company
are and will be in material compliance with existing applicable laws, the
structure of the management relationship between the Company and the dentist
has not been the subject of any state regulatory interpretations. The Company
has not previously engaged in the dental practice management business.
The OraCare dental management company entered into a management
agreement pursuant to which it will furnish the facilities and equipment and
certain management services to the OraCare dental professional association
relating to the operation of its dental clinics. Through the terms of the
management agreement, the Company has complete control over the dental
professional association with the exception of the provision or direction of
dental services. The management agreement entered into with the dental
professional association substantially restricts the business activities of the
dental professional association and the rights of its shareholder, a licensed
New Jersey dentist who is an officer of the Company. The dental professional
association has nominal capital and an insignificant amount of net assets. The
Company is responsible for the selection of facility sites as
13
<PAGE> 14
well as all equipment and the purchase or leasing of same. Fees outlined in
the management agreement are structured to operate the dental professional
association at a break even level. Additionally, the dentist has provided the
Company, for nominal consideration, with an option to transfer, at the
Company's discretion, the ownership of the dental professional association to
another licensed dentist of the Company's choosing. Successor dentists will be
required to provide a comparable option to the Company as a condition of the
transfer of the ownership of the dental professional association to each
successor dentist.
The financial statements of the dental professional association are
consolidated with the Company's because the Company (as opposed to any
affiliate of the Company) has unilateral and perpetual control over the assets
and operations of the dental professional association and because,
notwithstanding the lack of direct ownership, consolidation is necessary to
present fairly the financial position and results of operations of the Company
due to the existence of a parent-subsidiary relationship by means other than
direct ownership of the dental professional association's voting stock. The
Company has perpetual control over the dental professional association because
the Company does not intend to terminate its management agreement with the
dental professional association and, upon termination of any such agreement by
the dentist, the Company intends to exercise the stock transfer option
described above.
UICI ACQUISITION
On September 10, 1996, the Company entered into definitive agreements
to acquire the following companies, one of which is wholly owned by UICI,
formerly known as United Insurance Companies, Inc., and one of which is
majority owned by UICI: (i) United Dental Care, Inc. ("United") which, through
an indemnity insurance subsidiary, operates a prepaid dental plan in Oklahoma
having approximately 90,000 members; and (ii) International Dental Plan, Inc.
("IDP"), which operates a prepaid dental plan in Florida having approximately
100,000 members. On the same date, the Company agreed to acquire Association
Dental Plan, Inc. ("Association"), a wholly owned subsidiary of UICI that
operates a multi-state dental referral plan having approximately 60,000
members. United, IDP and Association had combined revenues of approximately
$16.6 million for the year ended December 31, 1995 and $13.1 million for the
nine months ended September 30, 1996. The acquisition of Association was
completed effective October 1, 1996 , and the acquisition of United became
effective January 1, 1997. At March 7, 1997, the acquisition of IDP was still
pending Florida regulatory approval.
The consideration paid by the Company in connection with the United
acquisition was approximately $10.8 million. In connection with the United
acquisition, the Company entered into four-year employment agreements with two
employees of United. The consideration paid in the Association acquisition was
$2.5 million. In addition, in connection with the Association acquisition, a
note owed by Association to UICI having a balance of approximately $695,000 was
repaid in full. Approximately $5.6 million of the initial consideration in the
United acquisition and approximately $3.5 million of the initial consideration
in the Association acquisition were allocated to goodwill for financial
statement purposes.
The IDP acquisition is subject to the receipt of Florida regulatory
approval. The consideration to be paid by the Company in the IDP acquisition
is $4.5 million. The Company presently anticipates that approximately $3.2
million of the consideration in the IDP acquisition will be allocated to
goodwill for financial statement purposes.
In the Association acquisition, the Company and two marketing entities
affiliated with UICI having approximately 5,000 dedicated agents entered into a
marketing agreement pursuant to which such agents will market the dental
benefit products of the Company.
KANSAS CITY DENTAL CARE ACQUISITION
On September 11, 1996, the Company entered into an agreement to
acquire Kansas City Dental Care, Inc. ("KCDC"), which operates prepaid dental
plans in Missouri and Kansas having approximately 90,000 members in the
aggregate. KCDC had revenues of approximately $8.4 million for the year ended
December 31, 1995 and approximately $7.2 million for the nine months ended
September 30, 1996. The consideration paid by
14
<PAGE> 15
the Company in connection with the KCDC acquisition is $12.5 million plus a
contingent payment up to a maximum of $2.0 million based on the financial
performance of the Company in the states of Missouri and Kansas in the second
year after completion of the acquisition. The acquisition became effective
November 1, 1996. Approximately $12.7 million of the consideration paid in the
KCDC acquisition was allocated to goodwill for financial statement purposes.
In connection with the KCDC acquisition, the Company entered into three-year
employment agreements with two management officers of KCDC, one of whom was a
stockholder and officer of KCDC and the other of whom was the current chief
executive officer (and stock option holder) of KCDC. The company previously
operated prepaid dental plans in both states.
INDEPENDENT DENTAL PLAN ACQUISITION
On June 28, 1996, the Company entered into an agreement to acquire
Independent Dental Plan, Inc. ("Independent"), which operates a prepaid dental
plan in Michigan having approximately 10,000 members. Independent had revenues
of approximately $1.7 million for the year ended December 31, 1995 and $1.3
million for the nine months ended September 30, 1996. The Independent
acquisition was completed effective October 1, 1996. The consideration paid by
the Company in connection with the Independent acquisition was approximately
$1.3 million. The amount of $1.5 million was allocated to goodwill for
financial statement purposes. In addition, in connection with the Independent
acquisition, the Company entered into employment agreements with two of the
operating officers of Independent.
COMPETITION
There are numerous competitors wherever the Company conducts business,
creating a highly competitive marketplace. The Company's competitors include:
(i) large insurance companies with the capability to offer both managed dental
benefits and traditional dental indemnity insurance; (ii) HMOs that also offer
dental benefits; (iii) self-funded employer programs; (iv) dental PPOs; (v)
discounted, fee-for-service membership plans; and (vi) other local or regional
companies offering prepaid dental plans. The Company believes that the
competition from all of such sources will continue to increase in the future
and that insurance companies and HMOs in particular will continue to seek to
enter the managed dental benefits business and expand their dental care
markets. Many of the Company's competitors are better known to the public and
have substantially greater financial and other resources than those of the
Company.
The Company believes the key factors in selecting a particular managed
dental benefits company include: (i) the comprehensiveness and range of prepaid
plans offered; (ii) the quality, accessibility and convenience of dentist
networks; (iii) the responsiveness of customer service; and (iv) the premium
charged. In all of the Company's markets, other prepaid dental plans and
insurance companies compete aggressively on all of these factors, particularly
in situations where the selection is through a competitive bidding process. In
recent years, the Company has seen increasing competition coming from all
competitive sectors and the Company anticipates that this trend will continue.
Certain markets also have intense price competition that could occur in all
markets in the future. Price considerations have been a significant
competitive factor in the past and the Company believes pricing will continue
to be a significant competitive factor in the future, especially with respect
to contracts awarded on the basis of competitive bidding.
Larger, national indemnity insurance companies that offer both prepaid
and indemnity dental coverage may have a competitive advantage over independent
dental plans due to availability of multiple product lines, established
business relationships, better name recognition and greater financial and
information systems resources. The Company believes that it can effectively
compete with insurance companies due to the specialized focus of its management
team and resources directed towards developing competitive dental benefits
plans at generally lower premiums.
While some medical HMOs offer their own prepaid dental plans, others
contract with independent managed dental plans for those services. The Company
believes that it can compete with HMOs that offer dental benefits and pursue
opportunities to form alliances with HMOs to offer dental benefits to HMO
members.
15
<PAGE> 16
GOVERNMENT REGULATION
General
State insurance laws and other governmental regulations establish
various licensing, operational, financial and other requirements relating to
the prepaid dental plan business. State insurance departments and other
regulatory agencies are typically empowered to interpret such laws and
promulgate regulations applicable to the prepaid dental plan business. The
laws and regulations relating to the health care industry in general, and
prepaid dental plans specifically, are rapidly developing and have been the
subject of numerous past and present proposals which, if adopted, could
adversely affect the Company's business. Such proposals have included
proposals that would require the Company to admit "any willing provider" to its
dental networks, create mandatory minimum capitation payments to dental
providers and specify minimum loss ratios or mandate schedules of benefits. In
addition, the Company's insurance company subsidiary is subject to numerous
laws and regulations applicable to insurance companies generally. The Company
is unable to predict the extent to which changes to existing laws and
regulations will be adopted or the effect that any such changes may have on the
Company's business.
The Company's ability to conduct its business in additional states is
subject to regulatory approvals required in connection with either acquisitions
of existing prepaid dental plan businesses or the application of the Company to
conduct its existing business in additional states. Approvals to acquire
another licensed prepaid dental plan business often require six months or
longer to obtain, while licenses and approvals necessary to commence operations
of the Company's existing business in an additional state can require two years
or longer to obtain. In addition, no assurance can be given that the Company's
applications for any such licenses or approvals will be granted, in which case
the Company's plans to expand in additional states would be adversely affected.
In circumstances where the Company is unable to obtain licenses to conduct its
business in a particular state or pending the grant of a license, the Company
would be required to conduct business through contractual arrangements with a
licensed insurance company or a licensed HMO, which arrangements are typically
less advantageous to the Company than its independent offering of its prepaid
dental plans. See "--Business Strategy."
In addition to regulatory approvals for acquisitions and additional
licenses, various regulatory approvals and filing requirements may apply to
ongoing aspects of the Company's business such as approvals for benefits plans
offered, premium rates and certain contractual relationships with HMOs and
insurance companies. If the Company fails to maintain compliance with all
material regulations, regulatory authorities are empowered to take certain
actions against the Company such as license revocations that could adversely
affect the Company's ability to conduct business.
United Dental Care Insurance Company
UDCIC is licensed to conduct business in 27 states. UDCIC is a
traditional indemnity insurance carrier and therefore assumes underwriting
risk. Currently, UDCIC provides the indemnity portion of some of the Company's
dual choice and point of service plans. UDCIC has not issued any other form of
insurance, and its maximum coverage under each dental insurance policy is
generally $1,000.
UDCIC is regulated by the Arizona Department of Insurance and the
departments of insurance of the other states in which UDCIC is licensed to
transact insurance business. The Company's ability to expand UDCIC's insurance
operations into states in which UDCIC is not currently licensed is dependent,
for the most part on prior regulatory approval, which must be sought from the
department of insurance in each state in which the Company is applying. Such
reviews may take from six months to two years or more. Insurance companies are
heavily regulated and require significant cash deposits for capital and
surplus. The regulations of the various state insurance departments include
specific requirements with regard to such matters as minimum capital and
surplus, permitted investments, advertising, policy forms and claims processing
requirements. See "Item 3. Legal Proceedings."
In December 1992, the National Association of Insurance Commissioners
approved risk-based capital ("RBC") standards for life and/or health insurance
companies, as well as a Model Act (the "RBC Model Act") to apply to such
standards at the state level. The RBC Model Act requires an insurance company
to submit an annual RBC report which compares its total adjusted capital with
its risk-based capital as calculated by an RBC
16
<PAGE> 17
formula which takes into account the risk characteristics of the company's
investments and products. The RBC formula includes capital requirements for
four categories or risk: asset risk, insurance risk, interest rate risk and
business risk, with capital requirements increasing for higher levels of risk.
There are four levels of progressively more intense regulatory action against
insurance companies whose total adjusted capital does not meet the RBC
standards, starting with the company being required to submit a plan to improve
its capitalization and ending with the state insurance department placing the
company under regulatory control. The State of Arizona adopted the RBC Model
Act effective January 1, 1996. At December 31, 1996, UDCIC's total adjusted
capital was $4.3 million, or 106%, of the "company action level" of the RBC
standard of $4.0 million. If the capital and surplus of UDCIC do not exceed
the "company action level" at December 31, 1997, UDCIC would be required to
submit a business plan to the state regulators. The Company does not believe
that compliance with the RBC standards will adversely affect the Company's
business since the Company estimates that UDCIC will be able to satisfy such
standards without the need for significant capital contributions by the
Company. In addition, the Company does not consider that compliance with the
RBC standards will adversely affect the ability of the Company to meet its
anticipated operating cash requirements.
Medicare/Medicaid Programs
The Company contracts with certain medical HMOs that provide health
services to members under the Medicare or Medicaid programs administered by
certain state agencies. The Company provides the dental benefits coverage
under such plans of the medical HMOs. The medical HMOs receive reimbursement
under either the Medicare or Medicaid programs for the benefits provided. As a
result, the availability of such reimbursement or decreases in the level of
reimbursement or changes in regulatory requirements could have a significant
impact on the decisions of the medical HMOs to continue to offer dental
benefits. In addition, in the event that the contracts between such medical
HMOs and the state agencies are terminated or not renewed, such termination or
nonrenewal would also terminate the Company's contract with such medical HMO as
a provider for dental benefits.
EMPLOYEES
At December 31, 1996, the Company employed approximately 507
employees, of which 126 were sales personnel, 70 were customer service
personnel, 46 were provider relations personnel, 7 were dental directors, 147
were administrative personnel and 111 were part of the dental professional
association and the dental management company in New Jersey. The Company has
no collective bargaining agreements with any unions and believes that its
overall relations with its employees are good.
INSURANCE
The Company carries general liability, comprehensive property damage,
workers' compensation, professional liability and other insurance coverages
that management considers adequate for the protection of the Company's assets
and operations. There can be no assurance, however, that the coverage limits
of such policies will be adequate. A successful claim against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company.
ITEM 2. PROPERTIES
The Company leases 36,588 square feet of office space for its
corporate offices in Dallas, Texas under a lease expiring March 31, 2002. In
addition, the Company leases an aggregate of approximately 87,106 square feet
of space for its other regional and local offices with lease terms expiring at
various times through May 20, 2002.
ITEM 3. LEGAL PROCEEDINGS
On May 24, 1996, the Arizona Department of Insurance filed a Notice of
Administrative Hearing against the Company alleging that the Company
consummated its acquisition of AHP in January 1996 without complying with the
requirements of the Arizona Insurance Holding Company Act (the "Act"). On
January 31, 1997, the Company signed a consent order whereby the Company agreed
to comply with the requirements of the Act and
17
<PAGE> 18
pay a civil penalty of $10,000. The Arizona Department of Insurance is
currently reviewing the Company's Form A filing regarding the acquisition of
AHP.
The Company is, and may be in the future, party to litigation arising
in the course of its business. The Company carries insurance protecting it
against liability arising out of the provision of dental care services by
contracting dentists, who are not employees or agents of the Company. Claims
against the Company arising out of the provision of dental care services by
contracting dentists historically have been rare, but there can be no assurance
that the Company will not become involved in such litigation or otherwise
become subject to claims relating to its contracting dentists in the future.
While the Company has no significant pending claims, there can be no assurance
that the Company's insurance coverage will be adequate to cover all liabilities
arising out of such claims or that any such claims will be covered by the
Company's insurance. Any material claim which is not covered by insurance may
have an adverse effect on the Company's business. Claims against the Company,
regardless of their merit or outcome, may also have an adverse effect on the
Company's reputation and business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
There were no matters submitted to a vote of the security holders of
the Company during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On September 22, 1995, the common stock of the Company began trading
on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol
"UDCI."
The following table sets forth the range of quarterly high and low
closing sale prices on the Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
COMMON STOCK CLOSING PRICE
--------------------------
TIME PERIOD HIGH LOW
------------------------------------------------- ---------- ----------
<S> <C> <C>
September 25 - September 30, 1995 . . . . . . . . $30.00 $27.75
October 1 - December 31, 1995 . . . . . . . . . . $41.25 $29.50
January 1 - March 31, 1996 . . . . . . . . . . . $43.75 $34.25
April 1 - June 30, 1996 . . . . . . . . . . . . . $44.25 $37.25
July 1 - September 30, 1996 . . . . . . . . . . . $45.75 $32.75
October-1 - December 31, 1996 . . . . . . . . . . $36.25 $25.00
</TABLE>
The last reported sale price per share of common stock as reported by
the Nasdaq National Market on March 12, 1997 was $28-5/8. As of the date of
this report, the Company had 8,925,416 shares of common stock outstanding. As
of March 12, 1997, the Company estimates that there were approximately 1,800
owners of the Company's common stock, including approximately 125 holders of
record and approximately 1,675 persons or entities that hold common stock in
nominee name.
The Company has not paid or declared any cash dividends on its common
stock since its inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business. In addition,
future borrowings may limit the Company's ability to pay cash dividends. It is
anticipated that the line of credit financing that may be used to finance any
future acquisitions will contain a restriction on the payment of dividends.
Any payments of cash dividends in the future will depend upon the financial
condition, capital requirements and earnings of the Company, limitations on
dividend payments by subsidiaries of the Company under applicable state laws
and such other factors as the board of directors may deem relevant.
18
<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The Company's selected financial data presented below for the years
ended December 31, 1994, 1995 and 1996 and at December 31, 1995 and 1996, are
derived from the audited consolidated financial statements of the Company. The
selected financial data presented below for the Company for each of the years
ended December 31, 1992 and 1993 and at December 31, 1992, 1993 and 1994 are
derived from the audited consolidated financial statements of the Company not
included herein. This data is not necessarily indicative of the Company's
future performance. The selected financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the related Notes thereto included herein:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1992 1993 1994 (1) 1995 (2) 1996 (3)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Managed benefits . . . . . . . . . . $ 13,854 $ 16,805 $ 31,683 $ 62,004 $ 96,786
Indemnity . . . . . . . . . . . . . . -- -- 5,514 16,622 15,143
Dental centers . . . . . . . . . . . -- -- -- -- 820
Interest . . . . . . . . . . . . . . 147 173 178 603 899
-------- -------- -------- -------- --------
Total revenues . . . . . . . . . 14,001 16,978 37,375 79,229 113,648
Dental services expense:
Managed benefits . . . . . . . . . . 5,934 7,283 15,559 33,068 56,845
Indemnity . . . . . . . . . . . . . . -- -- 4,567 13,682 10,590
Dental centers. . . . . . . . . . . . -- -- -- -- 216
-------- -------- -------- -------- --------
Total dental services expense 5,934 7,283 20,126 46,750 67,651
Sales and marketing . . . . . . . . . . 2,445 3,025 5,756 9,637 12,587
General and administrative . . . . . . 3,101 3,632 7,062 14,785 18,612
Depreciation and amortization . . . . . 324 159 541 1,190 2,267
Acquisition-related expenses . . . . . -- -- 178 -- --
Interest expense . . . . . . . . . . . -- -- 360 1,005 536
-------- -------- -------- -------- --------
Total expenses 11,804 14,099 34,023 73,367 101,653
Income before provision for Federal
income taxes, cumulative effect of a
change in accounting principle and
extraordinary charge . . . . . . . . 2,197 2,879 3,352 5,862 11,995
Provision for Federal income taxes . . 747 934 1,256 2,131 4,438
-------- -------- -------- -------- --------
Net income before cumulative effect of
a change in accounting principle and
extraordinary charge. . . . . . . . . 1,450 1,945 2,096 3,731 7,557
Cumulative effect of a change in
accounting principle. . . . . . . . . -- 44 -- -- --
Extraordinary charge . . . . . . . . . -- -- -- 142 --
-------- -------- -------- -------- --------
Net income before preferred dividends . $1,450 $1,901 $2,096 $3,589 $7,557
======== ======== ======== ======== ========
Net income per common share . . . . . . $0.30 $0.40 $0.44 $0.66 $1.00
Weighted average common shares
outstanding . . . . . . . . . . . . 4,575 4,662 4,717 5,449 7,543
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . $3,474 $3,907 $1,365 $30,892 $25,420
Total assets . . . . . . . . . . . . 5,485 7,283 31,404 86,588 165,672
Total debt including current portion -- -- 14,558 15,182 28,948
Stockholders' equity . . . . . . . . 4,795 6,730 8,974 61,600 125,495
</TABLE>
- ------------------
(1) Results of operations for IDH after August 31, 1994 are included in
historical results of operations for the Company on a consolidated
basis for the years ended December 31, 1994, 1995 and 1996. See the
Company's Consolidated Financial Statements and the Notes thereto.
(2) Results of operations for US Dental after October 31, 1995 are
included in historical results of operations for the Company on a
consolidated basis for the years ended December 31, 1995 and 1996.
See the Company's Consolidated Financial Statements and the Notes
thereto.
(3) Results of operations for AHP after January 31 1996, Independent and
Association after September 30, 1996 and for KCDC and OraCare after
October 31, 1996 are included in historical results of operations for
the Company on a consolidated basis for the year ended December 31,
1996. See the Company's Consolidated Financial Statements and the
Notes thereto.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this document, including, without
limitation, statements under Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 1. "Business,"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from the
Company's expectations are disclosed throughout this Form 10-K, including,
without limitation, in conjunction with the forward-looking statements included
herein. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are hereby
expressly qualified in their entirety.
OVERVIEW
The Company's predecessor began operations in Texas in 1986, and
subsequently initiated de novo operations in Ohio in 1990 and in Missouri and
Kansas in 1993. The Company entered 15 new states with prepaid members
(Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Minnesota,
Nebraska, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming) by virtue
of the IDH acquisition in 1994. Certain of these additional states have only
limited number of prepaid members and are not considered by management to be
prime markets for future expansion.
Effective September 1, 1994, the Company completed the acquisition of
all of the outstanding common stock of IDH for $14.3 million in cash and
additional payments of $5.4 million (consulting and non-competition agreements)
over the six year period beginning September 16, 1994. The cash portion of the
purchase price was financed through bank borrowings of $11.0 million and $3.3
million of working capital. As a result of the IDH acquisition, the Company
incurred interest expense and the Company's amortization expense significantly
increased beginning in the third quarter of 1994. The Company repaid the
entire outstanding balance of the bank borrowings with the proceeds of the
September 21, 1995 initial public offering.
Effective November 1, 1995, the Company completed the acquisition of
all of the outstanding common stock of US Dental for $1.3 million in cash,
deferred payments of $1.0 million (consulting and non-competition agreements)
and a promissory note, maturing January 18, 1996, in the amount of $10.3
million (the "Promissory Note").
Effective February 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of AHP for $15.0 million, which includes
the present value of amounts payable under 36-month non-competition agreements
with four former stockholders of AHP.
Effective October 1, 1996, the Company completed the acquisitions of
all of the outstanding common stock of Independent for $1.3 million in cash and
of Association for $3.2 million in cash.
Effective November 1, 1996, the Company completed the acquisitions of
all of the outstanding common stock of KCDC for $12.5 million in cash and of
OraCare for $5.6 million in cash and a promissory note, maturing January 2,
1997, in the amount of $24.9 million (the "OraCare Promissory Note"). The
OraCare Promissory Note was paid in full at maturity on January 2, 1997.
The Company's revenues consist primarily of managed benefits premiums
for the prepaid dental plans offered by the Company, such premiums representing
85.2% and 78.2% of total revenues for the years ended December 31, 1996 and
1995, respectively. A secondary source of revenue (representing 13.3% and
21.0% of total revenues for the years ended December 31, 1996 and 1995,
respectively) is the indemnity premiums received
20
<PAGE> 21
by a subsidiary of the Company in connection with dual choice plans and
individual policies offered by the Company. Dual choice plans permit members
to select between the Company's prepaid dental plans and traditional dental
indemnity insurance. The dental indemnity insurance subsidiary was acquired
effective September 1, 1994, so the Company had no revenue from this source
prior to that date. The Company primarily seeks to generate its revenues
through employer groups, specifically medium to large groups, although
approximately 7.2% of the Company's prepaid members are individuals not
associated with a group.
The Company's premium revenues increased from $10.8 million for the
year ended December 31, 1991 to $111.9 million for the year ended December 31,
1996, a compound annual growth rate of 59.6%. Such increase would have been
approximately 21.3% assuming the acquisitions of IDH and US Dental had not
occurred in 1994 and 1995, respectively, and the acquisitions of AHP,
Independent, Association, OraCare and KCDC had not occurred in 1996. The
increase is primarily related to the growth in the number of members, both from
internal growth and from acquisitions, and secondarily due to premium rate
increases. IDH had approximately 370,000 prepaid members and 90,000 indemnity
members when it was acquired by the Company effective September 1, 1994. The
Company had approximately 267,000 prepaid members at that date. Subsequent
acquisitions added the following membership:
<TABLE>
<CAPTION>
ACQUISITION MEMBERSHIP EFFECTIVE DATE
-------------------------------------- ------------------- ----------------
<S> <C> <C>
US Dental . . . . . . . . . . . . . . 165,000 (prepaid) 11/01/95
AHP . . . . . . . . . . . . . . . . . 220,000 (prepaid) 02/01/96
Independent . . . . . . . . . . . . . 10,000 (prepaid) 10/01/96
Association . . . . . . . . . . . . . 60,000 (referral) 10/01/96
KCDC . . . . . . . . . . . . . . . . 90,000 (prepaid) 11/01/96
OraCare . . . . . . . . . . . . . . . 150,000 (prepaid) 11/01/96
</TABLE>
The Company estimates that premium rate increases have generally
averaged less than 3.5% per year during the five-year period ended December 31,
1996.
21
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages of revenues represented by certain items reflected in the Company's
consolidated statements of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues
Managed benefits . . . . . . . . . . . . . . . 84.8% 78.2% 85.1%
Indemnity . . . . . . . . . . . . . . . . . . . 14.7 21.0 13.3
Dental Centers . . . . . . . . . . . . . . . . -- -- 1.4
Less: intercompany . . . . . . . . . . . . -- -- (0.6)
Interest . . . . . . . . . . . . . . . . . . . 0.5 0.8 0.8
------- ------- -------
Total revenue . . . . . . . . . . . . . 100.0% 100.0% 100.0%
------- ------- -------
Expenses:
Dental services:
Managed benefits . . . . . . . . . . . . . . . . . 41.6% 41.7% 50.6%
Less: intercompany . . . . . . . . . . . . . . -- -- (0.6)
Indemnity . . . . . . . . . . . . . . . . . . . . . 12.2 17.3 9.3
Dental Centers . . . . . . . . . . . . . . . . . . -- -- 0.2
------- ------- -------
Subtotal . . . . . . . . . . . . . . . . . 53.8 59.0 59.5
------- ------- -------
Gross margin . . . . . . . . . . . . . . . . . . . 46.2 41.0 40.5
Sales and marketing expenses . . . . . . . . . . . 15.4 12.2 11.1
General and administrative expenses . . . . . . . . 18.9 18.7 16.4
Depreciation and amortization . . . . . . . . . . . 1.4 1.5 2.0
Acquisition-related expenses . . . . . . . . . . . 0.5 -- --
Interest expense . . . . . . . . . . . . . . . . . 1.0 1.2 0.5
------- ------- -------
Total expenses . . . . . . . . . . . . . . 91.0 92.6 89.5
------- ------- -------
Net income before provision for Federal income
taxes and extraordinary charge. . . . . . . . . . . 9.0 7.4 10.5
Provision for Federal income taxes . . . . . . . . . . 3.4 2.7 3.9
------- ------- -------
Net income before extraordinary charge . . . . . . . . 5.6 4.7 6.6
Extraordinary charge . . . . . . . . . . . . . . . . . -- 0.2 --
------- ------- -------
Net Income . . . . . . . . . . . . . . . . . . . . . . 5.6% 4.5% 6.6%
======= ======= =======
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Revenues increased by $34.4 million or 43.4%, to $113.6
million in 1996 from $79.2 million in 1995. Of this increase, $20.4 million,
or 59.3% was attributable to the operations added through the acquisition of
AHP, Association, Independent, KCDC and OraCare and $11.2 million was
attributable to the ownership of US Dental for the entire twelve months in 1996
versus only two months in 1995. Revenues increased to $82.0 million in 1996
from $79.2 million in 1995 in markets where the Company had operations in both
periods. This increase was primarily a result of an increase in the number of
members and, to a lesser extent, to premium rate increases. During the year,
members increased from 937,355 at December 31, 1995 to 1,729,291 at December
31, 1996.
Dental Services. Dental services expenses increased $20.9 million, or
44.7% to $67.6 million in 1996 from $46.7 million in 1995. Total dental
services as a percentage of revenues increased to 59.5% in 1996 from 59.0% in
1995 primarily due to the increase in the dental services expenses related to
the managed benefits business. Dental service expenses for the Company's
managed benefits business (before intercompany eliminations), which consist
primarily of capitation to dentists, increased to 59.5% of managed benefits
revenues in 1996 from 53.3% in 1995. This increase is attributable to the fact
that the managed benefits plans offered by IDH, US Dental and AHP have
historically paid dentists a higher percentage of premiums than the Company's
pre-existing plans paid. Claims expense for the indemnity business was 70.0%
of indemnity revenues.
22
<PAGE> 23
Sales and Marketing. Sales and marketing expenses increased $3.0
million, or 31.3%, to $12.6 million in 1996 from $9.6 million in 1995. Sales
and marketing expenses as a percentage of revenues declined to 11.1% in 1996
from 12.2% in 1995. This decrease was largely attributable to the change in
product mix with a higher percentage of revenues generated by managed benefits
products. Since the indemnity business generates a higher per-member-per-month
revenue than generated by the managed benefits plans, and a portion of the
sales and marketing costs, such as base salaries and printing costs, are fixed,
the expenses as a percentage of revenues decline. In addition, the
commissions paid on the indemnity business are lower as a percentage of
revenues than those paid on the managed benefits plans.
General and Administrative. General and administrative expenses
increased $3.8 million, or 25.7%, to $18.6 million in 1996 from $14.8 million
in 1995. The decline in general and administrative expenses as a percentage of
revenues to 16.4% in 1996 from 18.7% in 1995 was primarily attributable to
efficiencies achieved through the consolidation of executive staffs and
accounting departments due to the Company's integration of its acquisitions. In
addition, there was a decrease in premium taxes as a percentage of revenue
because the Company now generates a greater percentage of its revenues in
states that charge lower premium taxes.
Depreciation and Amortization. Depreciation and amortization expenses
increased $1.1 million, or 91.7% to $2.3 million in 1996 from $1.2 million in
1995. Most of this increase was the result of amortization of goodwill and the
Agreements entered into in connection with the acquisitions of IDH, US Dental
and AHP and the depreciation of the assets acquired.
Interest. Interest expense decreased to $0.5 million in 1996 from
$1.0 in 1995. The $0.5 million was entirely attributable to the imputed
interest on the Agreements incurred to finance the IDH, US Dental and AHP
acquisitions and the interest on the OraCare Promissory Note. The weighted
average interest rates on the Agreements and the OraCare Promissory Note during
1996 were 7.9% and 4.8%, respectively. The weighted average interest rate on
the Agreements includes the effects of the fees for the related letters of
credit
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenues. Revenues increased by $41.8 million, or 112.0%, to $79.2
million in 1995 from $37.4 million in 1994. Of this increase, $2.2 million, or
5.3% was attributable to the operations added through the acquisition of US
Dental in November 1995. The remaining $39.6 million increase was a 105.9%
increase in revenues to $77.0 million in 1995 from $37.4 million in 1994, in
markets where the Company had operations in both periods. This increase was
primarily a result of having IDH operations for the full year in 1995 compared
to only four months in 1994 and the increase in the membership numbers. During
1995, members increased from 740,984 at December 31, 1994 to 937,355 at
December 31, 1995. The increase in the comparable period in 1994 was from
214,455 to 740,984. Interest income increased $0.4 million, or 200.0% from
$0.2 million to $0.6 million in 1995. This increase was due to the interest
income derived from the cash proceeds of the initial public offering in
September 1995.
Dental Services. Dental services expenses increased $26.6 million, or
132.3 %, to $46.7 million in 1995 from $20.1 million in 1994. Total dental
services as a percentage of revenue increased to 59.0% in 1995 from 53.8% in
1994, primarily due to the effect of a higher dental expense loss ratio in the
indemnity insurance business that the Company acquired through IDH. Claims
expense for the indemnity business was 82.4% of indemnity revenues in 1995 as
compared to 82.8% in 1994. Dental service expenses for the Company's managed
benefits plans ("Plans"), which consist primarily of capitation payments to
general dentists, increased to 53.3% of managed benefits revenues in 1995, from
49.1% in 1994. This increase is attributable to the fact that the Plans
offered by IDH have historically paid general dentists a higher percentage of
premiums than the Company's pre-existing Plans. It is management's intention
to increase premiums over the next several years, as market conditions permit,
thereby increasing revenues. In most markets, amounts paid to general dentists
will also be increased to maintain the Company's competitive position and to
improve the economics for general dentists. The acquisition of Associated will
result in an increase of approximately 5% in the percentage of dental services
expenses for all of its managed dental benefits Plans relative to managed
benefits revenues in 1996 over the percentage experienced in 1995.
23
<PAGE> 24
Sales and Marketing. Sales and marketing expenses increased $3.8
million or 67.4%, to $9.6 million in 1995 from $5.8 million in 1994. Sales and
marketing expenses as a percentage of revenue declined to 12.2% in 1995 from
15.4% in 1994. This decrease was largely attributable to the change in product
mix from primarily Plans in 1994 to a combination of indemnity and Plans in
1995, resulting from the acquisition of IDH effective September 1, 1994. Since
the indemnity business generates a higher per-member-per-month revenue than is
generated by the Plans, and a portion of the sales and marketing costs, such as
base salaries and printing costs, are fixed, the expenses as a percentage of
revenues decline. In addition, the commissions paid on the indemnity business
are lower as a percentage of revenues than those paid on the Plans.
General and Administrative. General and administrative expenses
increased $7.7 million, or 109.4% to $14.8 million in 1995 from $7.1 million in
1994. The decline in general and administrative expenses as a percentage of
revenues to 18.7% in 1995 from 18.9% in 1994 was primarily attributable to
efficiencies achieved through the consolidation of executive staffs and
accounting departments due to the acquisition of IDH. In addition, there was a
decrease in premium taxes as a percentage of revenue because the Company now
generates a greater percentage of its revenues in states that have lower
premium taxes.
Depreciation and Amortization. Depreciation and amortization expenses
increased $0.7 million, or 120.0%, to $1.2 million in 1995 from $0.5 million in
1994. Most of this increase was the result of amortization of goodwill and
consulting and non-competition agreements (the "Agreements") attributable to
the acquisitions of IDH and US Dental and the depreciation of the assets
acquired.
Interest. Interest expense increased to $1.0 million in 1995 from
$0.4 in 1994. The $1.0 million was composed of the interest on the Bank Loan,
the Promissory Note and the imputed interest on the consulting and
non-competition agreements incurred to finance the IDH and US Dental
acquisitions (the "Agreements"). The weighted average interest rates on the
Bank Loan, the Promissory Note and the Agreements during 1995 were 9.5%, 4.4%
and 8.6%, respectively. These weighted average interest rates include the
effects of amortization of debt issuance costs and the fees for letters of
credit related to the Agreements.
Taxes. The average tax rate was 36.4% and 37.4% in 1995 and 1994,
respectively. In 1995 and 1994, the average tax rate was higher than the
statutory Federal tax rate of 34.0%, primarily as the result of the
nondeductibility of the amortization of goodwill. The average rate decrease
from 1994 to 1995 was primarily due to tax exempt interest income in 1995.
Extraordinary Charge. Upon completion of the Company's initial public
offering in September 1995, the Company used a portion of the offering's
proceeds to repay its bank debt. This required the write off of the
unamortized debt-financing expenses capitalized in connection with the bank
financing incurred to finance the IDH acquisition and the financing obtained
(but not used) for the US Dental acquisition.
LIQUIDITY AND CAPITAL RESOURCES
In September 1995, the Company completed an initial public offering of
2,375,000 shares of its common stock for $22.00 per share (the "Offering"),
resulting in net proceeds of $48.0 million. The Company used approximately
$9.9 million of such proceeds for the repayment of all outstanding bank
indebtedness, which had been incurred in 1994 to finance the acquisition of
IDH.
In October 1996, the Company completed a public offering of 2,000,000
shares of its common stock for $30.00 per share (the "1996 Offering"),
resulting in net proceeds of $56.2 million. The Company used a portion of the
proceeds to complete the acquisitions of Independent, Association, OraCare and
KCDC in 1996 and of United in 1997.
The Company's historical operating cash requirements have been met
through cash provided by operations. Net cash provided by operating activities
was $1.3 million and $2.9 million for the years ended December 31, 1996 and
1995, respectively. The reduced amount of cash provided by operating
activities in 1996 as compared to 1995 was a result of (i) a change to earlier
capitation payments to certain network dentists that resulted in a one-time
increase in cash outflow and (ii) a change to later collection of prepaid
revenues from certain groups that resulted in a one-time decrease in cash
inflows. Both changes were instituted to provide better
24
<PAGE> 25
customer service and had no direct effect on operating earnings. The increase
in premiums receivable of $4.9 million, the decrease in unearned premiums of
$2.1 million and the decrease in accounts payable, accrued expenses and claims
reserves of $2.2 million all reflect this one-time impact on cash from
operating activities. Management believes that active management of
receivables balances will result in a significant improvement in cash receipts
during 1997.
The Company's primary cash need is for debt service on the Agreements.
The principal amount of the outstanding indebtedness of the Company at December
31, 1996 was $28.9 million, consisting of the OraCare Promissory Note of $24.9
million and the liability for the Agreements of $4.1 million. The Promissory
Note was paid off on January 2, 1997. The IDH Agreements require payments of
$0.1 million on January 1 and $0.8 million on September 16 each year. The US
Dental Agreements require monthly payments totaling $0.3 million per year. The
AHP agreements require monthly payments totaling $0.2 million per year.
On November 14, 1996, the Company signed a revolving credit agreement
providing a $35.0 million revolving credit facility with an unaffiliated bank.
The purpose of the revolving credit facility is to provide (i) for funding
future acquisitions of managed dental benefits companies, (ii) for the issuance
of letters of credit, (iii) for capital expenditures and (iv) at the election
of the company, a working capital line of credit in an amount up to $5.0
million out of the total amount available under the revolving credit facility.
The revolving credit facility has a term of four years, expiring November 30,
2000. Outstanding indebtedness under the revolving line of credit will bear
interest payable quarterly, at the Company's option, at: (i) up to 0.25% over
the base rate of the lender or (ii) up to 1.85% over LIBOR, with the margin
over the respective rates decreasing as the ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreases. The Company pays an annual fee of up to 0.25% of the amount
remaining available to be drawn under the credit facility and up to 0.85% of
the amount available to be drawn under the letters of credit.
The revolving credit facility is secured by the pledge of all the
outstanding capital stock of the direct and indirect subsidiaries of the
Company and a negative pledge on all other assets. The revolving credit
facility contains numerous covenants including, among other things, that the
Company cannot, except in certain permitted instances, (i) incur any additional
indebtedness; (ii) grant liens on any of the assets of the Company or its
subsidiaries; (iii) declare or pay any dividends; or (iv) merge or consolidate
with any other entity. In addition, the Company is required to satisfy on an
ongoing basis certain financial covenants. The Company's breach of any
covenant would result in an event of default under the revolving credit
facility.
In 1994, the Company arranged for the issuance of two letters of
credit in the aggregate amount of $4.8 million. The letters of credit secure
the obligations of the Company under certain agreements executed in connection
with the IDH acquisition. The letters of credit decline in amount annually and
expire in September 1998. The Company pays an annual fee of up to 0.85% of the
amount remaining to be drawn under the letters of credit.
Under applicable insurance laws of most states in which the Company
conducts business, the Company's subsidiary operating in the particular state
is required to maintain a minimum level of net worth and reserves. In general,
minimum capital requirements are more stringent for insurance companies, such
as UDCIC. The Company may be required from time to time to invest funds in one
or more of its subsidiaries to meet regulatory capital requirements. The
implementation of risk-based capital regulations in states having jurisdiction
over UDCIC may require that the Company increase its investment in UDCIC.
However, the Company does not believe that compliance with such regulations
will adversely affect the Company's ability to meet its operating cash
requirements. The Company believes that UDCIC will be able to satisfy such
regulations without the need for significant capital contributions by the
Company. Applicable laws generally limit the ability of the Company's
subsidiaries to pay dividends to the extent that required regulatory capital
would be impaired.
Capital expenditures were $4.5 million during the year ended December
31, 1996 and $2.2 million in the year ended December 31, 1995. Such
expenditures in 1996 primarily consisted of the capitalized costs related to
the new information system, expected to be completed in 1997. In June 1995,
the Company entered into a contract to acquire a new information system to
replace its existing system. The capital cost of the conversion of all current
systems is expected to be approximately $6.6 million. This capital cost
includes the capitalization of certain direct internal costs associated with
the new system in addition to external costs such as consulting fees and
hardware and software expenditures.
25
<PAGE> 26
Management believes that cash flow generated by operations will be
sufficient to fund the Company's normal working capital needs and capital
expenditures (other than any acquisitions) for at least the next twelve months
because the Company's operations are not capital intensive.
Management believes that the Company's operations are not materially
affected by inflation. The Company's principal costs, such as dental services
expense and sales and marketing expenses are largely related to membership
levels and are, therefore, variably related to premium revenues. Historically,
the Company's rate of premium increases has been less than the rate of increase
in dental costs in general.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data are set
forth herein commencing on page F-1 of this Form 10-K. See Item 14 for the
list of documents filed as a part of this report.
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.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to Items 10, 11, 12 and 13 is
incorporated herein by reference to the Company's proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, no
later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following are filed as a part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
1. Consolidated Financial Statements Page
--------------------------------- ----
<S> <C>
Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1995
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
26
<PAGE> 27
2. Financial Statement Schedules
None.
All other schedules have been omitted because the required
information is either inapplicable, insignificant or included
in the Consolidated Financial Statements and Notes thereto.
3. List of Exhibits
3.01 Restated Certificate of Incorporation of the Company (filed
as Exhibit 3.01 to the Company's Registration Statement on
Form S-1, Registration Number 33-94356 (the "1995
Registration Statement") and incorporated herein by
reference).
3.02 Amended and Restated Bylaws of the Company (filed as Exhibit
3.02 to the 1995 Registration Statement and incorporated
herein by reference).
4.01 Specimen Common Stock Certificate (filed as Exhibit 4.01 to
the 1995 Registration Statement and incorporated herein by
reference).
10.01 Non-Competition Agreement dated as of September 16, 1994
among United Dental Care, Inc., The Adaven Group Limited
Partnership and Robert J. Nettinga (filed as Exhibit 10.06 to
the 1995 Registration Statement and incorporated herein by
reference).
10.02 Agreement for Consulting Services dated as of September 16,
1994 between United Dental Care, Inc. and The Adaven Group
Limited Partnership (filed as Exhibit 10.07 to the 1995
Registration Statement and incorporated herein by reference).
10.03 Non-Competition Agreement dated as of September 16, 1994
among United Dental Care, Inc., Omega Marine Development,
Inc. and Paul C. Nettinga (filed as Exhibit 10.08 to the 1995
Registration Statement and incorporated herein by reference).
10.04 Agreement for Consulting Services dated as of September 16,
1994 between United Dental Care, Inc. and Omega Marine
Development, Inc. (filed as Exhibit 10.09 to the 1995
Registration Statement and incorporated herein by reference).
10.05 Stockholders Agreement dated as of September 16, 1994 among
United Dental Care, Inc., certain stockholders of United
Dental Care, Inc. named therein and Robert J. Nettinga (filed
as Exhibit 10.10 to the 1995 Registration Statement and
incorporated herein by reference).
10.06 Irrevocable Letter of Credit dated September 16, 1994 in the
amount of $4,023,500 in favor of The Adaven Group Limited
Partnership (filed as Exhibit 10.11 to the 1995 Registration
Statement and incorporated herein by reference).
10.07 Amended and Restated Application and Agreement for $4,023,500
Standby Letter of Credit in favor of The Adaven Group Limited
Partnership dated September 16, 1994 by United Dental Care,
Inc. to NationsBank of Texas, N.A. (filed as Exhibit 10.09 to
the Company's Registration Statement on Form S-1,
Registration Number 333-12425 (the "1996 Registration
Statement") and incorporated herein by reference).
10.08 Administrative Services Agreement dated as of January 1, 1995
between United Dental Care, Inc. and R.E. Harrington, Inc.,
and Memorandum of Understanding in connection therewith dated
as of January 1, 1995 (filed as Exhibit 10.28 to the 1995
Registration Statement and incorporated herein by reference).
10.09 Consulting Agreement dated September 27, 1995, between United
Dental Care, Inc. and Dolores A. Kordek (filed as Exhibit
10.9 to the 1995 Form 10-Q and incorporated herein by
reference).
10.10 Consulting Agreement dated September 27, 1995, between United
Dental Care, Inc. and Christopher A. Jehle (filed as Exhibit
10.10 to the 1995 Form 10-Q and incorporated herein by
reference).
10.11 Stock Purchase Agreement dated as of December 14, 1995 among
United Dental Care, Inc., R. Bruce Buchanan, Joseph V.
Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca
Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra
Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J.
Moncher, Associated Health Plans, Inc. and Associated
Companies, Inc. (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed January 22, 1996, File No.
0-26688 (the "Form 8-K"), and incorporated herein by
reference).
27
<PAGE> 28
10.12 First Amendment to Stock Purchase Agreement dated as of
January 17, 1996 among United Dental Care, Inc., R. Bruce
Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante,
D.D.S., The Francesca Irena Errante Irrevocable Trust U/A
10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A
10/1/95, Timothy J. Moncher, Associated Health Plans, Inc.
and Associated Companies, Inc. (filed as Exhibit 10.2 to the
Form 8-K and incorporated herein by reference).
10.13 Non-Competition Agreement, dated January 22, 1995, between
United Dental Care, Inc. and R. Bruce Buchanan (filed as
Exhibit 10.3 to the Form 8-K, and incorporated herein by
reference). The three other Non-Competition Agreements
between United Dental Care, Inc. and Joseph V. Errante,
D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher,
respectively, are identical in form except as to the parties
thereto and are therefore omitted from this filing.
10.14 Post-Closing Escrow Agreement dated as of January 22, 1996,
among United Dental Care, Inc., R. Bruce Buchanan, Joseph V.
Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca
Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra
Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J.
Moncher and Lawyers Title of Arizona, Inc. (filed as Exhibit
10.4 to the Form 8-K, and incorporated herein by reference).
10.15 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, Gilbert G. Finger, Patricia L. Schubring, Edward
K. Halstead, Birchtree Enterprises and Binkley & Stewart,
P.C., as Sellers, and Independent Dental Plans, Inc. dated as
of June 28, 1996 (filed as Exhibit 10.27 to the 1996
Registration Statement and incorporated herein by reference).
10.16 Stock Purchase Agreement between United Dental Care, Inc., as
Purchaser, and UICI, as Seller, dated as of September 10,
1996, for all the issued and outstanding shares of capital
stock of Association Dental Plan, Inc., a District of
Columbia corporation (filed as Exhibit 10.28 to the 1996
Registration Statement and incorporated herein by reference).
10.17 Stock Purchase Agreement between United Dental Care, Inc., as
Purchaser, and UICI, as Seller, dated as of September 10,
1996, for all the issued and outstanding shares of capital
stock of International Dental Plans, Inc., a Florida
corporation (filed as Exhibit 10.30 to the 1996 Registration
Statement and incorporated herein by reference).
10.18 Earnest Money Escrow Agreement among United Dental Care,
Inc., UICI, and Texas Commerce Bank National Association,
dated as of September 10, 1996, regarding the purchase of all
the issued and outstanding shares of capital stock of
International Dental Plans, Inc., a Florida corporation
(filed as Exhibit 10.31 to the 1996 Registration Statement
and incorporated herein by reference).
10.19 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and UICI, United Management & Consulting, Inc.,
United Management & Consulting Retirement Plan, and Marie C.
Montgomery Revocable Trust U/T/A March 23, 1992, as Seller,
dated as of September 10, 1996, for the purchase of 90% of
the issued and outstanding shares of capital stock of United
Dental Care, Inc., an Oklahoma corporation (filed as Exhibit
10.32 to the 1996 Registration Statement and incorporated
herein by reference).
10.20 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and John E. Carlin, Ph.D., Frank J. Schloegel,
III, J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable
Remainder Unitrust, UID June 28, 1996, The Frank J. Schloegel
Charitable Remainder Unitrust I, UID July 12, 1996, The Frank
J. Schloegel Charitable Remainder Unitrust II, UID July 12,
1996, The J. Dennis Dlabal Charitable Remainder Trust UID
September 5, 1996, as Sellers, and Kansas City Dental Care,
Inc., dated as of September 11, 1996 (filed as Exhibit 10.34
to the 1996 Registration Statement and incorporated herein by
reference).
10.21 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and Frank A. Pettisani, D.D.S., Lisa M. Mazzone,
Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna
Costa, as Sellers, and OraCare Consultants, Inc., dated as of
September 5, 1996 (filed as Exhibit 10.36 to the 1996
Registration Statement and incorporated herein by reference).
10.22 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and Frank A. Pettisani, D.D.S., as Seller, and
OraCare Dental Associates, P.A., dated as of September 5,
1996 (filed as Exhibit 10.38 to the 1996 Registration
Statement and incorporated herein by reference).
28
<PAGE> 29
10.23 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and Frank A. Pettisani, D.D.S., Frank A.
Pettisani, Jr., D.D.S., Charles A. Costa, and Donna Costa, as
Sellers, and OraCare DPO, Inc., dated as of September 5, 1996
(filed as Exhibit 10.39 to the 1996 Registration Statement
and incorporated herein by reference).
10.24* Letter Agreement dated November 14, 1996 between United
Dental Care, Inc. and Peter R. Barnett, D.M.D., regarding
ownership of stock of OraCare Dental Associates, P.A.
10.25* Management Agreement dated November 14, 1996 between OraCare
Consultants, Inc. and OraCare Dental Associates, P.A.
10.26* Revolving Credit Agreement, dated as of November 14, 1996,
between United Dental Care, Inc., NationsBank of Texas, N.A.,
as Agent for the Lenders named therein, and the Lenders.
10.27* Warrant, dated February 26, 1996, held by Mark E. Pape to
purchase Common Stock of the Company. 10.28 Employment
Agreement dated as of May 13, 1996, between United Dental
Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to
the 1996 Registration Statement and incorporated herein by
reference).
10.29 Employment Agreement dated as of June 1, 1996, between United
Dental Care, Inc., and Mark E. Pape (filed as Exhibit 10.41
to the 1996 Registration Statement and incorporated herein
by reference).
10.30 Employment Agreement dated as of June 1, 1996, between United
Dental Care, Inc. and Peter R. Barnett,
D.M.D. (filed as Exhibit 10.42 to the 1996 Registration
Statement and incorporated herein by reference).
10.31 Master Software License and Services Agreement dated as of
June 20, 1995 between Software Technologies Corporation and
United Dental Care, Inc. (filed as Exhibit 10.29 to the 1995
Registration Statement and incorporated herein by reference).
10.32 United Dental Care, Inc. Amended and Restated 1989 Key
Employee Stock Option Plan (filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-8, Registration
Number 333-20043 and incorporated herein by reference).
10.33 United Dental Care, Inc. 1995 Stock Option Plan (filed as
Exhibit 4.5 to the Company's Registration Statement on Form
S-8, Registration Number 333-20043 and incorporated herein by
reference).
10.34 United Dental Care, Inc. Executive Incentive Plans for 1996
for Mr. Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit
10.47 to the 1996 Registration Statement and incorporated
herein by reference).
10.35* United Dental Care, Inc. Executive Incentive Plans for 1997
for Mr. Wilcox, Mr. Pape and Dr. Barnett.
11.1* Statement Regarding Computation of Per Share Earnings.
21.1* List of Subsidiaries of Registrant.
23.1* Consent of Price Waterhouse LLP.
27.1* Financial Data Schedule.
______________________
* Filed herewith.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, March 21, 1997.
UNITED DENTAL CARE, INC.
----------------------------------------
By: /s/ WILLIAM H. WILCOX
--------------------------------------
William H. Wilcox, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM H. WILCOX President and Chief Executive Officer March 21, 1997
- ---------------------------------------------------- (Principal Executive Officer) ---------------
William H. Wilcox
/s/ MARK E. PAPE Senior Vice President and Chief March 21, 1997
- ---------------------------------------------------- Financial Officer ---------------
Mark E. Pape (Principal Financial Officer)
/s/ PETER R. BARNETT, DMD Senior Vice President, Chief Operations March 21, 1997
- ---------------------------------------------------- Officer --------------
Peter R. Barnett, DMD
/s/ MICHAEL W. YOUNG Vice President, Finance March 21, 1997
- ---------------------------------------------------- (Principal Accounting Officer) --------------
Michael W. Young
/s/ JACK R. ANDERSON Chairman of the March 21, 1997
- ---------------------------------------------------- Board of Directors --------------
Jack R. Anderson
/s/ GEORGE E. BELLO Director March 21, 1997
- ---------------------------------------------------- --------------
George E. Bello
/s/ JAMES E. BUNCHER Director March 21, 1997
- ---------------------------------------------------- --------------
James E. Buncher
/s/ WILLIAM H. LONGFIELD Director March 21, 1997
- ------------------------------------------------------ --------------
William H. Longfield
/s/ ROBERT J. NETTINGA Director March 21, 1997
- ------------------------------------------------------ --------------
Robert J. Nettinga
/s/ JAMES KEN NEWMAN Director March 21, 1997
- ------------------------------------------------------ --------------
James Ken Newman
/s/ DONALD E. STEEN Director March 21, 1997
- ------------------------------------------------------ --------------
Donald E. Steen
</TABLE>
30
<PAGE> 31
UNITED DENTAL CARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,
1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
United Dental Care, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of United Dental Care, Inc. and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
February 6, 1997
F-2
<PAGE> 33
UNITED DENTAL CARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
--------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,940 $ 50,035
Premiums receivable, net of allowance for doubtful accounts of $307
and $1,809 at December 31, 1995 and 1996, respectively . . . . . . . . . . 4,757 11,016
Accrued interest and other current assets . . . . . . . . . . . . . . . . . . 522 832
Deferred taxes, current . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 957
--------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 52,611 62,840
Regulatory deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,155 3,433
Furniture and equipment, net of accumulated depreciation of $1,289
and $3,304 at December 31, 1995 and 1996, respectively . . . . . . . . . . 2,855 7,056
Intangible assets, net of accumulated amortization of $669 and $2,224 at
December 31, 1995 and 1996, respectively . . . . . . . . . . . . . . . . . 27,354 91,066
Pre-operational costs, net of accumulated amortization of $204 and $238 at
December 31, 1995 and 1996, respectively . . . . . . . . . . . . . . . . . 40 127
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 856
Deferred taxes, noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . 139 294
--------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,588 $ 165,672
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . $ 2,633 $ 5,805
Current portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,913 26,191
Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,446 2,172
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,612 3,177
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 115 75
--------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 21,719 37,420
Long-term debt - net of current portion . . . . . . . . . . . . . . . . . . . 3,269 2,757
--------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 24,988 40,177
--------- ----------
Stockholders' equity:
Preferred stock, $.10 par value; 500,000 shares authorized; no shares outstanding -- --
Common stock, $.10 par value; 15,000,000 shares authorized; 6,898,416 shares
issued and outstanding at December 31, 1995 and 8,908,416 at December 31,
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690 891
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 52,086 108,223
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,824 16,381
--------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 61,600 125,495
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . $ 86,588 $ 165,672
========= ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 34
UNITED DENTAL CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Dental services revenue . . . . . . . . . . . . . . . $ 37,197 $ 78,626 $ 112,749
Interest income . . . . . . . . . . . . . . . . . . . 178 603 899
--------- --------- ---------
37,375 79,229 113,648
Costs and expenses:
Dental services expense . . . . . . . . . . . . . . . 20,126 46,750 67,651
Sales and marketing . . . . . . . . . . . . . . . . . 5,756 9,637 12,587
General and administrative . . . . . . . . . . . . . . 7,062 14,785 18,612
Depreciation and amortization . . . . . . . . . . . . 541 1,190 2,267
Acquisition-related expenses . . . . . . . . . . . . . 178 -- --
Interest expense . . . . . . . . . . . . . . . . . . . 360 1,005 536
--------- --------- ---------
34,023 73,367 101,653
Income before income taxes and extraordinary charge . . . 3,352 5,862 11,995
Provision for income taxes . . . . . . . . . . . . . . . 1,256 2,131 4,438
--------- --------- ---------
Income before extraordinary charge . . . . . . . . . . . 2,096 3,731 7,557
Extraordinary charge, net of tax . . . . . . . . . . . . -- (142) --
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 2,096 $ 3,589 $ 7,557
========= ========= =========
Per share amounts:
Net income per common share before extraordinary
charge . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.68 $ 1.00
Extraordinary charge, net of tax . . . . . . . . . . . -- (0.02) --
--------- --------- ---------
Net income per common share . . . . . . . . . . . . . $ 0.44 $ 0.66 $ 1.00
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 35
UNITED DENTAL CARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------------- --------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
--------- --------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 . 1 ---- 4,086,414 $ 409 $ 3,182 $ 3,139 $ 6,730
Stock options exercised . ---- ---- 93,500 9 64 ---- 73
Tax effect of stock
options exercised . . . . ---- ---- ---- ---- 75 ---- 75
Net income . . . . . . . . ---- ---- ---- ---- ---- 2,096 2,096
--------- --------- --------- -------- --------- -------- --------
Balance, December 31, 1994 1 ---- 4,179,914 418 3,321 5,235 8,974
Conversion of preferred
to common stock . . . . 1 ---- 2 ---- ---- ---- ----
Stock options exercised . ---- ---- 343,500 34 431 ---- 465
Stock warrants issued . . ---- ---- ---- ---- 80 ---- 80
Tax effect of stock options
exercised . . . . . . . ---- ---- ---- ---- 527 ---- 527
Shares issued in public ---- ---- 2,375,000 238 47,727 ---- 47,965
Net income . . . . . . . . ---- ---- ---- ---- ---- 3,589 3,589
--------- --------- --------- -------- --------- -------- --------
Balance, December 31, 1995 ---- ---- 6,898,416 690 52,086 8,824 61,600
Stock options exercised . ---- ---- 10,000 1 14 ---- 15
Tax effect of stock options
exercised . . . . . . . ---- ---- ---- ---- 125 ---- 125
Shares issued in public ---- ---- 2,000,000 200 55,998 ---- 56,198
Net income . . . . . . . . ---- ---- ---- ---- ---- 7,557 7,557
--------- --------- --------- -------- --------- -------- --------
Balance, December 31, 1996 ---- ---- 8,908,416 $ 891 $ 108,223 $ 16,381 $125,495
========= ========= ========= ======== ========= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 36
UNITED DENTAL CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,096 $ 3,589 $ 7,557
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 616 1,190 2,267
Changes in operating assets and liabilities, net of effects
from purchase of acquisitions:
Increase in premiums receivable . . . . . . . . . . . (399) (1,049) (4,887)
Decrease (increase) in accrued interest and other
current assets . . . . . . . . . . . . . . . . . . 60 134 (286)
Decrease (increase) in deferred income taxes . . . . . 49 (27) 661
Decrease (increase) in other assets . . . . . . . . . 229 (222) 300
Increase (decrease) in accounts payable, accrued
expenses and claims reserve . . . . . . . . . . . . 386 (277) (2,168)
Increase (decrease) in unearned premiums . . . . . . . 180 (417) (2,148)
-------- -------- --------
Net cash provided by operating activities . . . . . 3,217 2,921 1,296
Investing activities:
Decrease (increase) in regulatory deposits . . . . . . . . . 33 (408) (38)
Purchases of furniture and equipment . . . . . . . . . . . . (662) (2,176) (4,518)
Maturities of temporary investments . . . . . . . . . . . . 1,295 ---- ----
Proceeds from sale of long-term investments . . . . . . . . 2,124 ---- ----
Investment in new markets . . . . . . . . . . . . . . . . . ---- (31) (206)
Purchase of acquisitions (net of cash acquired) . . . . . . (9,043) 726 (37,560)
-------- -------- --------
Net cash used in investing activities . . . . . . . (6,253) (1,889) (42,322)
Financing activities:
Proceeds from long-term debt . . . . . . . . . . . . . . . . 11,000 1,154 ----
Repayment of indebtedness . . . . . . . . . . . . . . . . . (1,734) (12,577) (12,092)
Proceeds from public offering (net) . . . . . . . . . . . . ---- 47,965 56,198
Stock options exercised . . . . . . . . . . . . . . . . . . 121 465 15
Issuance of stock warrants . . . . . . . . . . . . . . . . . ---- 80 ----
-------- -------- --------
Net cash provided by financing activities . . . . . 9,387 37,087 44,121
-------- -------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . 6,351 38,119 3,095
Cash and cash equivalents at beginning of period . . . . . . . 2,470 8,821 46,940
-------- -------- --------
Cash and cash equivalents at end of period . . . . . . . . . . $ 8,821 $ 46,940 $ 50,035
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 229 $ 989 $ 400
======== ======== ========
Income Taxes . . . . . . . . . . . . . . . . . . . . . . $ 1,147 $ 1,385 $ 4,104
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 37
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include
the accounts of United Dental Care, Inc., and its subsidiaries (the "Company")
for all periods presented. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company, through its
subsidiaries, contracts with independent practitioners to provide dental
services to members in the form of prepaid dental health contracts and/or
indemnity dental insurance. The Company is currently licensed to market its
prepaid dental plans in 28 states and its indemnity plan in 27 states. As of
December 31, 1996, approximately 76.5% of all UDC prepaid plan members were
located in five states, Arizona, Texas, New Jersey, New Mexico and Missouri.
REVENUE AND EXPENSE RECOGNITION: Premium revenue is recorded in the
month for which the member is entitled to service. Unearned premiums are
reflected as current liabilities and consist of amounts billed in the current
period for services to be rendered in a subsequent period. Included in unearned
premiums are deposits which will be applied against future months' services.
Under prepaid dental health contracts, the Company contracts with dentists for a
set per-member, per-month capitation fee to provide dental care for its
members. Specialty services not covered by capitation fees are recorded as
incurred.
INTANGIBLE ASSETS: Goodwill resulting from the Company's acquisitions
(see Note 2) is being amortized on a straight-line basis over forty years. If
facts and circumstances were to indicate the carrying amount of goodwill is
impaired, the carrying amount would be reduced to an amount representing the
undiscounted future cash flows to be generated by the operation. Also included
in intangible assets are noncompetition and consulting agreements related to:
(a) the IDH acquisition and valued at $400,000 at acquisition; (b) the US Dental
acquisition and valued at $175,000 at acquisition; (c) the AHP acquisition and
valued at $600,000 at acquisition; and (d) the OraCare acquisition and valued at
$200,000 at acquisition, all of which are being amortized on a straight-line
basis over the three to six year terms of such agreements. Accumulated
amortization related to these agreements at December 31, 1995 and 1996 was
$110,000 and $424,000, respectively.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which became effective for fiscal years beginning after December 15, 1995.
FAS 121 establishes standards for determining when impairment losses on
long-lived assets have occurred and how impairment losses should be measured.
The Company adopted FAS 121 effective December 31, 1995. The financial
statement impact of adopting FAS 121 was not material.
PRE-OPERATIONAL COSTS: Organizational costs, costs associated with the
establishment of the provider network, and pre-operational costs are
capitalized and amortized over periods not exceeding 30 months. Pre-operational
costs include office rent, salaries, site selection costs, licensing and legal
fees, and other costs directly related to commencing business in a new market.
FURNITURE AND EQUIPMENT: Furniture and equipment are recorded at cost.
Depreciation is calculated using the straight-line method over a period of
three to five years based on the estimated useful life of the related asset.
CLAIMS RESERVE: The reserve for costs expected to be incurred for
services approved during the year as well as costs incurred but not reported are
actuarial estimates based on the Company's historical claims data.
RECLASSIFICATIONS: Certain reclassifications have been made to the
1994 consolidated financial statements to conform to the classifications used
for 1995 and 1996, respectively.
F-7
<PAGE> 38
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from banks, money market
investment accounts held by brokers which are readily convertible to cash and
certificates of deposit with original maturities of less than 90 days.
INCOME TAXES: The Company accounts for income taxes as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("FAS 109"). FAS 109 prescribes an asset and liability method that
requires the recognition of deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between the
financial statement basis and the tax basis of assets and liabilities. See
Note 7 for additional information.
NET INCOME PER COMMON SHARE: Net income per common share is computed
by dividing net income by the weighted average number of common shares and
dilutive common stock equivalents outstanding during each period. Net income
per common share has been restated to reflect a two-for-one stock dividend that
was declared on July 17, 1995. The weighted average number of common shares
and dilutive common stock equivalents used in the calculation of net earnings
per common shares was 4,716,713; 5,448,892; and 7,542,997 for the years ended
December 31, 1994, 1995 and 1996, respectively. Pursuant to the requirements
of the Securities and Exchange Commission, common stock equivalent shares
issued at prices below the original assumed public offering price of $18.00 per
share during the twelve months immediately preceding the date of the initial
filing of the Registration Statement related to the Company's initial public
offering have been included in the calculation of common shares and common
equivalent shares using the treasury stock method, as if they were outstanding
for all periods presented.
STOCK OPTIONS: The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options (see Note
9). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS
Effective September 1, 1994, the Company completed the acquisition of
all of the outstanding common stock of International Dental Health, Inc.
("IDH") for $19.7 million, composed of $14.3 million in cash at the closing and
additional payments of $5.4 million over the six year period beginning
September 16, 1994. The cash portion of the purchase price was financed
through bank borrowings of $11.0 million and internal funds of $3.3 million.
The acquisition has been accounted for as a purchase and the net
assets and results of operations of IDH and its subsidiaries have been included
in the Company's consolidated financial statements beginning September 1, 1994.
The purchase price has been allocated to assets and liabilities of IDH based on
their estimated respective fair values. The purchase price exceeded the fair
value of IDH's net assets by $16.1 million of which $15.7 is recorded as
goodwill at the parent company level and $0.4 is recorded as the value of
non-competition and consulting agreements. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $13.9 million and $9.6 million,
respectively.
F-8
<PAGE> 39
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Effective November 1, 1995, the Company completed the acquisition of
all of the outstanding common stock of U.S. Dental Management, Inc. ("US
Dental") for $12.6 million, composed of $1.3 million in cash at the closing,
principal payments totaling $1.0 million over the three year period beginning
November 30, 1995 and an additional payment of $10.3 million in January 1996
from an amount held in escrow.
The acquisition has been accounted for as a purchase and the net
assets and results of operations of US Dental and its subsidiaries have been
included in the Company's consolidated financial statements beginning November
1, 1995. The purchase price has been allocated to assets and liabilities of US
Dental based on their estimated respective fair values. The purchase price
exceeded the fair value of US Dental's net assets by $11.9 million of which
$11.7 is recorded as goodwill and $0.2 is recorded as the value of
non-competition and consulting agreements. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $4.3 million and $3.6 million,
respectively. As of the purchase date, liabilities assumed included estimated
amounts accrued of $238,000 for the termination or relocation of employees and
other exit costs of the acquired company. As a result of new information
gathered in 1996, the Company increased this liability and the corresponding
cost of US Dental by $643,000.
Effective February 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of both Associated Health Plans, Inc.
("AHP") and Associated Companies, Inc. ("ACI") for $15.0 million composed of
$14.4 million in cash at closing, financed through internal funds, and
additional monthly payments totaling $0.6 million for the three-year period
beginning February 1996.
The acquisition has been accounted for as a purchase and the net
assets and results of operations of both have been included in the Company's
consolidated financial statements beginning February 1, 1996. The purchase
price has been allocated to assets and liabilities based on their estimated
respective fair values. The purchase price exceeded the fair value of net
assets by $14.7 million of which $14.1 million is recorded as goodwill and $0.6
million is recorded as the value of non-competition and consulting agreements.
The Company has not allocated any portion of the purchase price to any other
intangible assets considered to have nominal value such as the dentist networks
and subscriber contracts. Assets acquired and liabilities assumed totaled $1.6
million and $1.3 million, respectively. As of the purchase date, liabilities
assumed included an estimated amount accrued of $555,000 for the termination or
relocation of employees and other exit costs of the acquired company.
Effective October 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of Independent Dental Plans, Inc.
("Independent") for $1.3 million in cash at the closing, financed through
internal funds.
The acquisition has been accounted for as a purchase and the net
assets and results of operations of Independent have been included in the
Company's consolidated financial statements beginning October 1, 1996. The
purchase price has been allocated to assets and liabilities of Independent
based on their estimated respective fair values. The purchase price exceeded
the fair value of Independent's net assets by $1.5 million of which $1.5
million is recorded as goodwill. The Company has not allocated any portion of
the purchase price to any other intangible assets considered to have nominal
value such as the dentist networks and subscriber contracts. Assets acquired
and liabilities assumed totaled $0.5 million and $0.7 million, respectively.
Effective October 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of Association Dental Plan, Inc.
("Association") for $3.2 million in cash at the closing, financed through
internal funds.
The acquisition has been accounted for as a purchase and net assets
and results of operations of Association have been included in the Company's
consolidated financial statements beginning October 1, 1996.
F-9
<PAGE> 40
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The purchase price has been allocated to assets and liabilities of Association
based on their estimated respective fair values. The purchase price exceeded
the fair value of Association's net assets by $3.5 million of which $3.5
million is recorded as goodwill. The Company has not allocated any portion of
the purchase price to any other intangible assets considered to have nominal
value such as the subscriber contracts. Assets acquired and liabilities
assumed totaled $0.2 million and $0.5 million, respectively. As of the
purchase date, liabilities assumed included an estimated amount accrued of
$400,000 for the termination or relocation of employees and other exit costs of
the acquired company.
Effective November 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of Kansas City Dental Care, Inc. ("KCDC")
for $12.5 million, composed of $12.5 million in cash at the closing, financed
through internal funds, plus a contingent payment up to a maximum of $2.0
million based on the financial performance of the Company in the states of
Missouri and Kansas in the second year after completion of the acquisition.
The acquisition has been accounted for as a purchase and the net
assets and results of operations of KCDC have been included in the Company's
consolidated financial statements beginning November 1, 1996. The purchase
price has been allocated to assets and liabilities of KCDC based on their
estimated respective fair values. The purchase price exceeded the fair value
of KCDC's net assets by $12.7 million, of which $12.7 million is recorded as
goodwill at the parent company level. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $0.8 million and $1.0 million,
respectively. As of the purchase date, liabilities assumed included an
estimated amount accrued of $575,000 for the termination or relocation of
employees and other exit costs of the acquired company.
Effective November 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of OraCare DPO, Inc. and a dental
management company affiliated with OraCare (collectively, "OraCare"). In
addition, as a part of the acquisition, the Company agreed to cause an
affiliate to acquire a dental professional association owned by the majority
stockholder of OraCare DPO, Inc. These entities were acquired for $30.5
million, composed of $5.6 million in cash at the closing, financed through
internal funds, and an additional payment of $24.9 million in January 1997 from
an amount held in escrow, plus certain contingent payments up to a maximum
aggregate amount of $6.0 million based on the financial performance of the
Company in the states of New Jersey and Pennsylvania in 1997 and 1998.
The acquisition has been accounted for as a purchase and the net
assets and results of operations of OraCare and its subsidiaries have been
included in the Company's consolidated financial statements beginning November
1, 1996. The purchase price has been allocated to assets and liabilities of
OraCare based on their estimated respective fair values. The purchase price
exceeded the fair value of OraCare's net assets by $31.4 million of which $31.2
million is recorded as goodwill and $0.2 million is recorded as the value of
non-competition and consulting agreements. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $2.4 million and $3.3 million,
respectively. As of the purchase date, liabilities assumed included an
estimated amount accrued of $825,000 for the termination or relocation of
employees and other exit costs of the acquired company.
In response to certain regulations in New Jersey, the capital stock of
the OraCare dental professional association was acquired by a company officer
who is a licensed New Jersey dentist. Additionally, the dentist has provided
the Company, for nominal consideration, with an option to transfer, at the
Company's discretion, the ownership of the dental professional association to
another licensed dentist of the Company's choosing. Successor dentists will be
required to provide a comparable option to the Company as a condition of the
transfer of the ownership of the dental professional association to each
successor dentist.
F-10
<PAGE> 41
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The acquired OraCare dental management company entered into a
management agreement pursuant to which it will furnish the facilities and
equipment and certain management services to the OraCare dental professional
association relating to the operation of the dental clinics. The Company
believes that the management agreement conveys to the Company perpetual,
unilateral control over the assets and operations of the affiliated dental
professional association. Notwithstanding the lack of technical majority
ownership of the stock of such entity, consolidation of the dental professional
association is necessary to present fairly the financial position and results
of operations of the Company because there exists a parent-subsidiary
relationship by means other than record ownership of a majority of voting
stock. Control by the Company is perpetual rather than temporary because of:
(i) the length of the original term of the agreement, (ii) the continuing
investment of capital by the Company, (iii) the employment of the majority of
the non-physician personnel, and (iv) the nature of the services provided to
the dental professional association by the Company. The Company's financial
relationship with the dental professional association offers access to capital,
management expertise, sophisticated information systems, and managed care
contracts. Thus, a portion of the Company's revenue is derived from dental
services provided by dentists through the dental professional association,
which revenue has been assigned to the Company. The Company's profitability is
improved by enhancing operating efficiency of the dental practices, expanding
dental services provided, increasing market share and assisting affiliated
dentists in managing the delivery of dental care.
On September 10, 1996, the Company entered into a definitive agreement
to acquire International Dental Plans, Inc. ("IDP"), which operates a prepaid
dental plan in Florida, for $4.5 million pending approval by the Florida
Department of Insurance.
The following represents the unaudited pro forma results of operations
as if the Company's acquisitions described above had occurred at the beginning
of 1994 (dollars in thousands):
<TABLE>
<CAPTION>
Unaudited
--------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $113,506 $126,782 $140,761
Income before income taxes and extraordinary charge . . . 1,417 6,028 12,655
Net income (loss) applicable to common stock . . . . . . 112 2,808 8,051
</TABLE>
The pro forma information is based on historical information adjusted
to give effect to the amortization of goodwill and other intangibles as well as
the increased interest expense due to the borrowings incurred to finance the
IDH acquisition in 1994. The pro forma information does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations of the combined companies.
3. REGULATORY DEPOSITS
At December 31, 1996, regulatory deposits were recorded at cost and
consisted of $1,508,000 in U.S. government obligations and $1,925,000 in
certificates of deposit insured by the Federal Deposit Insurance Corporation.
The Company has set aside certificates of deposit bearing interest at variable
rates as required by various state statutes. The fair value of all financial
instruments, determined by reference to market data, approximated their
recorded value at each of the balance sheet dates shown.
4. ACQUISITION-RELATED EXPENSES
Certain expenditures related to the acquisition of IDH discussed in
Note 2 that have not been included in the cost of the acquisition are reported
separately for comparability of expense categories to prior reported periods.
These costs are primarily related to upgrades to UDC's facilities and computer
systems necessitated by the acquisition.
F-11
<PAGE> 42
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. LONG-TERM DEBT
On September 16, 1994, in conjunction with the acquisition of IDH (see
Note 2), the Company borrowed $11.0 million from a commercial bank under a
reducing revolver arrangement. The interest rate on the unpaid principal
amount was, at the Company's option (i) 1.0% per annum over the lender's prime
rate or (ii) 2.75% per annum over LIBOR. Interest payments were due quarterly.
On December 15, 1994, the Company repaid $275,000, on February 17, 1995, the
Company repaid $275,000, on March 15, 1995, the Company repaid $1.5 million of
such indebtedness and on September 27, 1995, the Company repaid $9.9 million,
the entire remaining balance.
An additional portion of the IDH purchase price was deferred and is
payable over the period ended January 1, 2000. The payments may be prepaid
without penalty and are not contingent upon the future operations of the
Company. The present value of the future payments (assuming no voluntary
prepayments, discounted at 7.25%) is recorded as long- term debt. One of the
former shareholders of IDH was subsequently appointed a director to the
Company. On September 16, 1994, the Company made the first of the payments
required under the agreements in a total amount of $755,000. The Company
entered into a letter of credit facility relating to the deferral agreements
that currently requires annual fees of up to 0.85% of the unpaid amounts under
these agreements.
A portion of the US Dental purchase price was financed by a promissory
note in the amount of $10.3 million that was subsequently paid in full on
January 18, 1996. In addition, a portion of the US Dental purchase price in
the amount of $1.0 million was deferred and is payable over the period ended
December 31, 1999. The payments may be prepaid without penalty and are not
contingent upon the future operations of the Company. The present value of the
future payments (assuming no voluntary prepayments, discounted at 7.50%) is
recorded as long-term debt. On November 30, 1995, the Company made the first
of the payments required under the agreements.
A portion of the AHP purchase price in the amount of $0.6 million was
deferred and payable in monthly installments over a three-year period. The
payments may be prepaid without penalty and are not contingent upon the future
operations of the Company. The interest rate on the deferred purchase price is
5.0% and the total amount of $0.6 million was recorded as long-term debt on the
purchase date. On February 22, 1996, the Company made the first of the
payments required under the agreements.
On November 14, 1996, in conjunction with the acquisition of OraCare
(see Note 2), the Company signed promissory notes in an aggregate amount of
$24.9 million. The interest rate on the promissory notes was 4.84% per annum,
payable at the notes' maturity on January 2, 1997. In addition, the Company
acquired certain capital leases primarily for dental equipment used by the
dental professional association.
The following table summarizes the minimum required future principal
reductions (dollars in thousands):
<TABLE>
<CAPTION>
Deferred Deferred Deferred
IDH US DENTAL AHP
OraCare OraCare Purchase Purchase Purchase
Promissory Capital Price Price Price Annual
Note Leases Payments Payments Payments Total
---------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997 . . . . . . . . . $ 24,864 $ 154 $ 724 $ 250 $ 199 $ 26,191
1998 . . . . . . . . . -- 89 790 263 209 1,351
1999 . . . . . . . . . -- 76 849 251 18 1,194
2000 . . . . . . . . . -- 52 142 -- -- 194
2001 . . . . . . . . . -- 18 -- -- -- 18
---------- ------- -------- -------- -------- --------
TOTAL $ 24,864 $ 389 $ 2,505 $ 764 $ 426 $ 28,948
========== ======= ======== ======== ======== ========
</TABLE>
F-12
<PAGE> 43
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On November 14, 1996, the Company signed a revolving credit agreement
providing a $35.0 million revolving credit facility with an unaffiliated bank.
The purpose of the revolving credit facility is to provide (i) for funding
future acquisitions of managed dental benefits companies, (ii) for the issuance
of letters of credit, (iii) for capital expenditures and (iv) at the election
of the Company, a working capital line of credit in an amount up to $5.0
million out of the total amount available under the revolving credit facility.
The revolving credit facility has a term of four years, expiring November 30,
2000. Outstanding indebtedness under the revolving line of credit will bear
interest payable quarterly, at the Company's option, at: (i) up to 0.25% over
the base rate of the lender or (ii) up to 1.85% over LIBOR, with the margin
over the respective rates decreasing as the ratio of total funded debt to
earnings before interest, taxes, depreciation and interest decreases. The
Company pays an annual fee of up to 0.25% of the amount remaining available to
be drawn under the credit facility and up to 0.85 % of the amount available to
be drawn under the letters of credit.
The revolving credit facility is secured by the pledge of all the
outstanding capital stock of the direct and indirect subsidiaries of the
Company and a negative pledge on all other assets. The revolving credit
facility contains numerous covenants including, among other things, that the
Company cannot, except in certain permitted instances, (i) incur any additional
indebtedness; (ii) grant liens on any of the assets of the Company or its
subsidiaries; (iii) declare or pay any dividends; or (iv) merge or consolidate
with any other entity. In addition, the Company is required to satisfy on an
ongoing basis certain financial covenants. The Company's breach of any
covenant would result in an event of default under the revolving credit
facility.
In 1994, the Company arranged for the issuance of two letters of
credit in the aggregate amount of $4.8 million. The letters of credit secure
the obligations of the Company under certain agreements executed in connection
with the IDH acquisition. The letters of credit decline in amount annually and
expire in September 1998. The Company pays an annual fee of up to 0.85% of the
amount remaining to be drawn under the letters of credit.
6. COMMITMENTS
The Company leases office space and certain equipment under operating
leases. In 1996, the Company entered into a five-year lease for office space
commencing in April 1997. Rental expense for 1994, 1995 and 1996 was $648,000,
$1,351,000 and $1,243,000, respectively.
Minimum obligations under the operating leases at December 31, 1996
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,751
1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,580
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,284
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 173
----------
$ 6,326
==========
</TABLE>
7. INCOME TAXES
The provision (benefit) for income taxes allocated to continuing
operations consisted of the following components (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . $1,253 $2,250 $3,744
Deferred (benefit). . . . . . . . . . . . . . . . . . 3 (119) 694
------ ------ ------
Provision for Federal income taxes . . . . . . . . . $1,256 $2,131 $4,438
====== ====== ======
</TABLE>
F-13
<PAGE> 44
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In September 1995, the Company incurred an extraordinary charge due to
the early retirement of debt in the amount of $142,000, net of a tax benefit in
the amount of $73,000.
The Company pays premium taxes in lieu of state income taxes in most
states where it has operations.
During 1995 and 1996, certain employees exercised 171,500 and 10,000
nonqualified stock options, respectively, resulting in tax savings of
approximately $527,000 and $125,000, respectively, and a corresponding increase
to capital.
A reconciliation of the difference between the Federal income tax rate
and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate . . . . . . . . . 34.0% 34.0% 34.0%
Amortization of goodwill . . . . . . . . 1.1 2.0 3.0
Tax exempt interest income . . . . . . . -- (1.2) (1.4)
Other . . . . . . . . . . . . . . . . . . 2.3 1.6 1.4
---- ---- ----
Effective tax rate . . . . . . . . . 37.4% 36.4% 37.0%
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) were comprised of the following at December
31:
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Premium reserve . . . . . . . . . . . . . . . . $ 69 $ 673
Prepaid assets . . . . . . . . . . . . . . . . 23 --
Depreciation . . . . . . . . . . . . . . . . . 256 303
Start Up Costs . . . . . . . . . . . . . . . . 38 24
Unearned Premium . . . . . . . . . . . . . . . 83 --
Consulting and non-competition agreements . . . 1,698 1,808
Miscellaneous accruals/reserves . . . . . . . . 49 942
------- --------
Gross deferred tax asset . . . . . . . . . . 2,216 3,750
------- --------
Consulting and non-competition agreements . . . (1,685) (2,499)
------- --------
Gross deferred tax liability . . . . . . . . (1,685) (2,499)
------- --------
Net deferred tax asset . . . . . . . . . . . . $ 531 $ 1,251
======= ========
</TABLE>
8. EXTRAORDINARY CHARGE
In September 1995, the Company incurred an extraordinary charge due to
the early retirement of debt in the amount of $142,000, consisting of bank fees
of $195,000 and legal fees of $20,000 less a tax benefit of $73,000.
9. STOCKHOLDERS' EQUITY
On September 21, 1995, the Company completed its initial public
offering of common stock, issuing 2,375,000 shares at a price of $22.00 per
share before expenses. After deduction of underwriting discounts and expenses
of the offering, the aggregate net offering proceeds were $48.0 million.
F-14
<PAGE> 45
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On October 28, 1996, the Company completed a public offering of common
stock, issuing 2,000,000 shares at a price of $30.00 per share before expenses.
After deduction of underwriting discounts and expenses of the offering, the
aggregate net offering proceeds were $56.2 million.
In January 1995, an executive officer of the Company purchased from
the Company warrants to purchase 40,000 shares of common stock at $6.00 per
share. The purchase price of the warrants was $2.00 each.
The Company had an Incentive Stock Option Plan pursuant to which
200,000 shares of common stock were reserved. During 1994 and 1995, 60,000 and
80,000 stock options were exercised, respectively, at an exercise price of
$1.25 per share. These options are considered noncompensatory. The board of
directors has terminated the Incentive Stock Option Plan for the purposes of
any additional grants thereunder.
The Company also has a Key Employee Stock Option Plan pursuant to
which 222,000 shares were reserved as of December 31, 1996. During 1995,
263,500 stock options were exercised at an average exercise price of $1.39 and,
during 1996, 10,000 stock options were exercised at an exercise price of $1.50.
At December 31, 1996, 7,500 of the 222,000 outstanding Key Employee Stock
Option Plan options were exercisable at an exercise price of $5.50. These
options are considered compensatory and have terms of five to ten years; the
options are exercisable at various times during the terms of the options at
exercise prices ranging from $4.00 to $6.25, which amounts, in management's
estimation, were equal to or exceeded market value at the date of grant. The
board of directors has terminated the Key Employee Stock Option Plan for the
purposes of any additional grants thereunder.
In 1995, the Company's board of directors adopted a new employee stock
option plan (the "1995 Plan") that provides only for the grant of non-qualified
stock options. The 1995 Plan originally provided that a total of 300,000
shares of common stock may be issued pursuant to the options granted under the
1995 Plan, and, in 1996, the stockholders approved an increase to 800,000
shares. In addition to discretionary grants of stock options to employees, the
1995 Plan provides for the automatic one-time grant of stock options for 16,000
shares of common stock to certain qualifying non-employee directors who were
either serving on the board of directors of the Company when the 1995 Plan was
adopted by the board of directors or subsequently elected to the board of
directors (to the extent that options are available under the 1995 Plan). Such
director options are exercisable in 25% increments beginning one year after the
date of grant. At December 31, 1996, options for 395,000 shares had been
granted under the 1995 Plan, 8,000 of which were exercisable at an option price
of $7.00. These options are considered compensatory and have terms of ten
years; the options are exercisable at various times during the terms of the
options at exercise prices ranging from $33.75 to $39.50, which amounts were
equal to or exceeded market value at the date of grant. Option grants to
employees other than directors generally vest and are exercisable cumulatively
in equal installments over a five year period commencing two years from the
date of grant.
F-15
<PAGE> 46
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The combined historical activity in the Company's option plans since
December 31, 1993 has been as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 577.0 $1.78 635.5 $3.06 374.0 $6.01
Granted . . . . . . . 224.0 5.97 112.0 8.60 383.0 34.51
Exercised . . . . . . (93.5) 1.29 (343.5) 1.35 (10.0) 1.50
Forfeited . . . . . . (72.0) 4.21 (30.0) 6.25 (130.0) 11.60
------- -------- --------
Outstanding at
end of year . . . . . 635.5 3.05 374.0 6.01 617.0 22.60
======= ======== ========
Exercisable at
end of year . . . . . 320.0 1.29 -- -- 15.5 6.27
Weighted average
fair value of options
granted during year . . . $5.97 $8.60 $34.51
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Number Life Price Number Price
--------- -------- ---------- -------- ------- --------
($) (Years) ($) ($)
<S> <C> <C> <C> <C> <C>
4.00 36,000 6.00 4.00 -- --
5.50 30,000 4.84 5.50 7,500 5.50
6.00 156,000 5.02 6.00 -- --
7.00 32,000 8.32 7.00 8,000 7.00
33.75 300,000 9.61 33.75 -- --
35.50 16,000 9.16 35.50 -- --
37.13 31,000 8.23 37.13 -- --
39.50 16,000 9.31 39.50 -- --
------- ------
617,000 7.85 22.60 15,500 6.27
======= ======
</TABLE>
The Company has elected to follow APB 25 and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS
123") requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
F-16
<PAGE> 47
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of FAS 123. The
fair value for each option grant has been estimated at the date of grant using
a Black-Scholes multiple option pricing model that treats each option vesting
date as a separate option for purposes of the valuation. Thus, the assumptions
concerning the risk-free interest rate may vary for each separate vesting date.
The expected life of each separate vesting date is determined by estimating the
time period between vesting and exercise, taking into account such factors as
the age and financial resources of the individual being granted the option.
The Company has not paid any dividends and does not anticipate paying dividends
at any time during the life of options granted in 1995 and 1996.
The assumed weighted average risk-free interest rate was 7.75% for
options granted in 1995 and 6.07% for options granted in 1996. The assumed
weighted average volatility was zero for options granted in 1995 (the Company
was privately owned when the options were granted) and .35 for options granted
in 1996. The assumed weighted average expected life was 4.1 years for options
granted in 1995 and 5.6 years for options granted in 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and, because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Forfeitures
are recognized as they occur. The Company's pro forma information follows (in
thousands except for earnings per share information):
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Net income:
As reported . . . . . . . . . . . . . . $3,589 $7,557
Pro forma . . . . . . . . . . . . . . . $3,558 $6,971
Earnings per share:
As reported . . . . . . . . . . . . . . $ 0.66 $ 1.00
Pro forma . . . . . . . . . . . . . . . $ 0.65 $ 0.94
</TABLE>
10. STATUTORY NET WORTH COMPARED TO STOCKHOLDERS' EQUITY PER GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
Certain assets recognized under generally accepted accounting
principles are considered nonadmissible under statutory accounting practices as
filed and submitted in the annual reports to the states of domicile of the
various subsidiaries required to submit such reports. These nonadmitted assets
create differences between statutory net worth as reported on the annual filing
and total stockholders' equity as recorded under generally accepted accounting
principles.
Statutory net worth of the Company's subsidiaries that are subject to
state insurance regulations totaled approximately $18.0 million and $17.0
million at December 31, 1995 and 1996, respectively. Of these amounts, United
Dental Care Insurance Company ("UDCIC") represents $6.3 million and $3.8
million at December 31, 1995 and 1996, respectively. UDCIC is subject to the
Arizona insurance statutes and regulations and is required to maintain minimum
capital and surplus of $500,000 and without the prior approval of the Arizona
Department
F-17
<PAGE> 48
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of Insurance may not pay a dividend greater than the lesser of 10% of capital
and surplus as of the end of the prior year or net investment income for the
prior year. UDCIC received approval from the Arizona Department of Insurance
to pay a dividend of $2.5 million in 1996.
Statutory net income of the Company's subsidiaries for 1995 and 1996
was $6.3 million and $8.9 million, respectively, and excludes a $3.9 million
intercompany realized gain on the transfer of subsidiaries among affiliates in
1995.
11. SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 Quarters 1996 Quarters
------------------------------------ ------------------------------------
First Second Third Fourth First Second Third Fourth
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . $18,871 $19,156 $19,340 $21,862 $24,794 $26,331 $26,713 $35,810
Net income:
Before extraordinary charge 523 728 960 1,520 1,411 1,645 1,876 2,625
Extraordinary charge . . . -- -- (142) -- -- -- -- ---
------- ------- ------- ------- ------- ------- ------- -------
Net income . . . . . . . . $ 523 $ 728 $ 818 $ 1,520 $ 1,411 $ 1,645 $ 1,876 $ 2,625
------- ------- ------- ------- ------- ------- ------- -------
Net income per share:
Before extraordinary charge $ 0.11 $ 0.15 $ 0.19 $ 0.21 $ 0.19 $ 0.23 $ 0.26 $ 0.31
Extraordinary charge . . . -- -- (0.03) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income per share . . . $0 .11 $ 0.15 $ 0.16 $ 0.21 $ 0.19 $ 0.23 $ 0.26 $ 0.31
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
12. SUBSEQUENT EVENTS
On January 2, 1997, the Company paid off the $24.9 million Promissory
Note made in connection with the purchase of all the outstanding capital stock
of OraCare.
On January 22, 1997, the Company completed the acquisition of United
Dental Care, Inc., an Oklahoma corporation, for $7.6 million.
F-18
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT
<S> <C>
3.01 Restated Certificate of Incorporation of the Company (filed as
Exhibit 3.01 to the Company's Registration Statement on Form
S-1, Registration Number 33-94356 (the "1995 Registration
Statement") and incorporated herein by reference).
3.02 Amended and Restated Bylaws of the Company (filed as Exhibit
3.02 to the 1995 Registration Statement and incorporated
herein by reference).
4.01 Specimen Common Stock Certificate (filed as Exhibit 4.01 to
the 1995 Registration Statement and incorporated herein by
reference).
10.01 Non-Competition Agreement dated as of September 16, 1994 among
United Dental Care, Inc., The Adaven Group Limited Partnership
and Robert J. Nettinga (filed as Exhibit 10.06 to the 1995
Registration Statement and incorporated herein by reference).
10.02 Agreement for Consulting Services dated as of September 16,
1994 between United Dental Care, Inc. and The Adaven Group
Limited Partnership (filed as Exhibit 10.07 to the 1995
Registration Statement and incorporated herein by reference).
10.03 Non-Competition Agreement dated as of September 16, 1994 among
United Dental Care, Inc., Omega Marine Development, Inc. and
Paul C. Nettinga (filed as Exhibit 10.08 to the 1995
Registration Statement and incorporated herein by reference).
10.04 Agreement for Consulting Services dated as of September 16,
1994 between United Dental Care, Inc. and Omega Marine
Development, Inc. (filed as Exhibit 10.09 to the 1995
Registration Statement and incorporated herein by reference).
10.05 Stockholders Agreement dated as of September 16, 1994 among
United Dental Care, Inc., certain stockholders of United
Dental Care, Inc. named therein and Robert J. Nettinga (filed
as Exhibit 10.10 to the 1995 Registration Statement and
incorporated herein by reference).
10.06 Irrevocable Letter of Credit dated September 16, 1994 in the
amount of $4,023,500 in favor of The Adaven Group Limited
Partnership (filed as Exhibit 10.11 to the 1995 Registration
Statement and incorporated herein by reference).
10.07 Amended and Restated Application and Agreement for $4,023,500
Standby Letter of Credit in favor of The Adaven Group Limited
Partnership dated September 16, 1994 by United Dental Care,
Inc. to NationsBank of Texas, N.A. (filed as Exhibit 10.09 to
the Company's Registration Statement on Form S-1, Registration
Number 333-12425 (the "1996 Registration Statement") and
incorporated herein by reference).
10.08 Administrative Services Agreement dated as of January 1, 1995
between United Dental Care, Inc. and R.E. Harrington, Inc.,
and Memorandum of Understanding in connection therewith dated
as of January 1, 1995 (filed as Exhibit 10.28 to the 1995
Registration Statement and incorporated herein by reference).
10.09 Consulting Agreement dated September 27, 1995, between United
Dental Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9
to the 1995 Form 10-Q and incorporated herein by reference).
10.10 Consulting Agreement dated September 27, 1995, between United
Dental Care, Inc. and Christopher A. Jehle (filed as exhibit
10.10 to the 1995 Form 10-Q and incorporated herein by
reference).
10.11 Stock Purchase Agreement dated as of December 14, 1995 among
United Dental Care, Inc., R. Bruce Buchanan, Joseph V.
Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca
Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra
Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J.
Moncher, Associated Health Plans, Inc. and Associated
Companies, Inc. (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed January 22, 1996, File No.
0-26688 (the "Form 8-K"), and incorporated herein by
reference).
10.12 First Amendment to Stock Purchase Agreement dated as of
January 17, 1996 among United Dental Care, Inc., R. Bruce
Buchanan, Joseph V. Errante, D.D.S., Margaret R. Errante,
D.D.S., The Francesca Irena Errante Irrevocable Trust U/A
10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A
10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and
Associated Companies, Inc. (filed as Exhibit 10.2 to the Form
8-K and incorporated herein by reference).
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
10.13 Non-Competition Agreement, dated January 22, 1995, between
United Dental Care, Inc. and R. Bruce Buchanan (filed as
Exhibit 10.3 to the Form 8-K, and incorporated herein by
reference). The three other Non-Competition Agreements
between United Dental Care, Inc. and Joseph V. Errante,
D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher,
respectively, are identical in form except as to the parties
thereto and are therefore omitted from this filing.
10.14 Post-Closing Escrow Agreement dated as of January 22, 1996,
among United Dental Care, Inc., R. Bruce Buchanan, Joseph V.
Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca
Irena Errante Irrevocable Trust U/A 10/1/95, The Alexandra
Nicole Errante Irrevocable Trust U/A 10/1/95, Timothy J.
Moncher and Lawyers Title of Arizona, Inc. (filed as Exhibit
10.4 to the Form 8-K, and incorporated herein by reference).
10.15 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, Gilbert G. Finger, Patricia L. Schubring, Edward
K. Halstead, Birchtree Enterprises and Binkley & Stewart,
P.C., as Sellers, and Independent Dental Plans, Inc. dated as
of June 28, 1996 (filed as Exhibit 10.27 to the 1996
Registration Statement and incorporated herein by reference).
10.16 Stock Purchase Agreement between United Dental Care, Inc., as
Purchaser, and UICI, as Seller, dated as of September 10,
1996, for all the issued and outstanding shares of capital
stock of Association Dental Plan, Inc., a District of Columbia
corporation (filed as Exhibit 10.28 to the 1996 Registration
Statement and incorporated herein by reference).
10.17 Stock Purchase Agreement between United Dental Care, Inc., as
Purchaser, and UICI, as Seller, dated as of September 10,
1996, for all the issued and outstanding shares of capital
stock of International Dental Plans, Inc., a Florida
corporation (filed as Exhibit 10.30 to the 1996 Registration
Statement and incorporated herein by reference).
10.18 Earnest Money Escrow Agreement among United Dental Care, Inc.,
UICI, and Texas Commerce Bank National Association, dated as
of September 10, 1996, regarding the purchase of all the
issued and outstanding shares of capital stock of
International Dental Plans, Inc., a Florida corporation (filed
as Exhibit 10.31 to the 1996 Registration Statement and
incorporated herein by reference).
10.19 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and UICI, United Management & Consulting, Inc.,
United Management & Consulting Retirement Plan, and Marie C.
Montgomery Revocable Trust U/T/A March 23, 1992, as Seller,
dated as of September 10, 1996, for the purchase of 90% of the
issued and outstanding shares of capital stock of United
Dental Care, Inc., an Oklahoma corporation (filed as Exhibit
10.32 to the 1996 Registration Statement and incorporated
herein by reference).
10.20 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and John E. Carlin, Ph.D., Frank J. Schloegel, III,
J. Dennis Dlabal, D.D.S., The John E. Carlin Charitable
Remainder Unitrust, UID June 28, 1996, The Frank J. Schloegel
Charitable Remainder Unitrust I, UID July 12, 1996, The Frank
J. Schloegel Charitable Remainder Unitrust II, UID July 12,
1996, The J. Dennis Dlabal Charitable Remainder Trust UID
September 5, 1996, as Sellers, and Kansas City Dental Care,
Inc., dated as of September 11, 1996 (filed as Exhibit 10.34
to the 1996 Registration Statement and incorporated herein by
reference).
10.21 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and Frank A. Pettisani, D.D.S., Lisa M. Mazzone,
Frank A. Pettisani, Jr., D.D.S., Charles A. Costa, and Donna
Costa, as Sellers, and OraCare Consultants, Inc., dated as of
September 5, 1996 (filed as Exhibit 10.36 to the 1996
Registration Statement and incorporated herein by reference).
10.22 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and Frank A. Pettisani, D.D.S., as Seller, and
OraCare Dental Associates, P.A., dated as of September 5, 1996
(filed as Exhibit 10.38 to the 1996 Registration Statement and
incorporated herein by reference).
10.23 Stock Purchase Agreement among United Dental Care, Inc., as
Purchaser, and Frank A. Pettisani, D.D.S., Frank A. Pettisani,
Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers,
and OraCare DPO, Inc., dated as of September 5, 1996 (filed as
Exhibit 10.39 to the 1996 Registration Statement and
incorporated herein by reference).
10.24* Letter Agreement dated November 14, 1996 between United Dental
Care, Inc. and Peter R. Barnett, D.M.D., regarding ownership
of stock of OraCare Dental Associates, P.A.
10.25* Management Agreement dated November 14, 1996 between OraCare
Consultants, Inc. and OraCare Dental Associates, P.A.
10.26* Revolving Credit Agreement, dated as of November 14, 1996,
between United Dental Care, Inc., NationsBank of Texas, N.A.,
as Agent for the Lenders named therein, and the Lenders.
</TABLE>
<PAGE> 51
<TABLE>
<S> <C>
10.27* Warrant, dated February 26, 1996, held by Mark E. Pape to
purchase Common Stock of the Company.
10.28 Employment Agreement
dated as of May 13, 1996, between United Dental Care, Inc.,
and William H. Wilcox (filed as Exhibit 10.40 to the 1996
Registration Statement and incorporated herein by reference).
10.29 Employment Agreement dated as of June 1, 1996, between United
Dental Care, Inc., and Mark E. Pape (filed as Exhibit
10.41 to the 1996 Registration Statement and incorporated herein by
reference).
10.30 Employment Agreement dated as of June 1, 1996, between United
Dental Care, Inc. and Peter R. Barnett, D.M.D. (filed as
Exhibit 10.42 to the 1996 Registration Statement and
incorporated herein by reference).
10.31 Master Software License and Services Agreement dated as of
June 20, 1995 between Software Technologies Corporation and
United Dental Care, Inc. (filed as Exhibit 10.29 to the 1995
Registration Statement and incorporated herein by reference).
10.32 United Dental Care, Inc. Amended and Restated 1989 Key
Employee Stock Option Plan (filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-8, Registration
Number 333-20043 and incorporated herein by reference).
10.33 United Dental Care, Inc. 1995 Stock Option Plan (filed as
Exhibit 4.5 to the Company's Registration Statement on Form
S-8, Registration Number 333-20043 and incorporated herein by
reference).
10.34 United Dental Care, Inc. Executive Incentive Plans for 1996
for Mr. Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit
10.47 to the 1996 Registration Statement and incorporated
herein by reference).
10.35* United Dental Care, Inc. Executive Incentive Plans for 1997
for Mr. Wilcox, Mr. Pape and Dr. Barnett.
11.1* Statement Regarding Computation of Per Share Earnings.
21.1* List of Subsidiaries of Registrant.
23.1* Consent of Price Waterhouse LLP.
27.1* Financial Data Schedule.
</TABLE>
- -------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 10.24
UNITED DENTAL CARE, INC.
14755 Preston Rd.
Suite 300
Dallas, Texas 75240
November 14, 1996
Peter R. Barnett, D.M.D.
14755 Preston Rd.
Suite 300
Dallas, Texas 75240
Dear Peter:
This letter is intended to summarize the transactions between United
Dental Care, Inc. ("UDC"), OraCare Dental Associates, P.A. ("OraCare PA"), and
you. As provided in the Stock Purchase Agreement between UDC, Frank A.
Pettisani, Sr., and OraCare PA, United Dental Care is required to designate an
assignee of its rights to acquire the shares of OraCare PA, and such assignee
must be a dentist duly licensed and in good standing in the State of New
Jersey. You have agreed to become the designated assignee of UDC's rights
under the Stock Purchase Agreement and to acquire the OraCare PA shares under
the Agreement.
UDC has agreed to loan to you the amount required to purchase the
issued and outstanding shares of OraCare PA. The loan will be evidenced by a
note payable to UDC in the amount of the purchase price. You will have no
personal liability under the note. Instead, the note will be secured by a
Pledge and Security Agreement executed by you and UDC, providing for a security
interest in the shares of OraCare PA as the collateral for the note.
Also you have agreed to sign an option agreement providing UDC, or its
assignee, the right to purchase all of your shares of OraCare PA on the terms
and conditions stated therein. It is also contemplated that OraCare PA will
enter into a management agreement with OraCare Consultants, Inc.
<PAGE> 2
Peter R. Barnett
November 14, 1996
Page 2
- --------------------
If this letter accurately summarizes the transaction and the documents
to be executed in connection thereunder, please so indicate by signing below.
Sincerely,
UNITED DENTAL CARE, INC.
By: /s/ Mark E. Pape
-----------------------------------
Its: Sr. Vice President
-----------------------------------
Accepted and Agreed to:
/s/ Peter R. Barnett
- -----------------------------
Peter R. Barnett, D.M.D.
<PAGE> 1
EXHIBIT 10.25
MANAGEMENT SERVICES AGREEMENT
BY AND BETWEEN
ORACARE CONSULTANTS, INC.,
A NEW JERSEY CORPORATION
AND
ORACARE DENTAL ASSOCIATES, P.A.,
A NEW JERSEY PROFESSIONAL ASSOCIATION
------------
EFFECTIVE AS OF NOVEMBER 14, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Adjusted Gross Revenue. . . . . . . . . . . . . . . . 2
1.2 Adjustments. . . . . . . . . . . . . . . . . . . . . 2
1.3 Agreement. . . . . . . . . . . . . . . . . . . . . . 2
1.4 Ancillary Revenue. . . . . . . . . . . . . . . . . . 2
1.5 Association. . . . . . . . . . . . . . . . . . . . . 2
1.6 Association Account. . . . . . . . . . . . . . . . . 2
1.7 Association Expense. . . . . . . . . . . . . . . . . 2
1.8 Budget. . . . . . . . . . . . . . . . . . . . . . . . 2
1.9 Capitation Revenues. . . . . . . . . . . . . . . . . 2
1.10 Confidential Information. . . . . . . . . . . . . . . 3
1.11 Dental Director . . . . . . . . . . . . . . . . . . . 3
1.12 Dental Services. . . . . . . . . . . . . . . . . . . 3
1.13 Dentist. . . . . . . . . . . . . . . . . . . . . . . 3
1.14 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . 3
1.15 Management Fee. . . . . . . . . . . . . . . . . . . . 4
1.16 Manager. . . . . . . . . . . . . . . . . . . . . . . 4
1.17 Manager Expense. . . . . . . . . . . . . . . . . . . 4
1.18 Office. . . . . . . . . . . . . . . . . . . . . . . . 4
1.19 Office Expense. . . . . . . . . . . . . . . . . . . . 4
1.20 Professional Services Revenues. . . . . . . . . . . . 5
1.21 Representatives. . . . . . . . . . . . . . . . . . . 5
1.22 State. . . . . . . . . . . . . . . . . . . . . . . . 5
1.23 Term. . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 2 APPOINTMENT AND AUTHORITY OF MANAGER . . . . . . . . . . . . 5
2.1 Appointment. . . . . . . . . . . . . . . . . . . . . 5
2.2 Authority. . . . . . . . . . . . . . . . . . . . . . 5
2.3 Patient Referrals. . . . . . . . . . . . . . . . . . 6
2.4 Internal Management of the Association. . . . . . . . 6
2.5 Practice of Dentistry. . . . . . . . . . . . . . . . 6
ARTICLE 3 COVENANTS AND RESPONSIBILITIES OF MANAGER . . . . . . . . . 6
3.1 Office and Equipment. . . . . . . . . . . . . . . . . 6
3.2 Dental Supplies. . . . . . . . . . . . . . . . . . . 7
3.3 Support Services. . . . . . . . . . . . . . . . . . . 7
3.4 Quality Assessment, Risk Management, and Utilization
Management. . . . . . . . . . . . . . . . . . . . . . 7
3.5 Licenses and Permits. . . . . . . . . . . . . . . . . 7
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
3.6 Personnel. . . . . . . . . . . . . . . . . . . . . . 7
3.7 Contract Negotiations. . . . . . . . . . . . . . . . 8
3.8 Billing and Collection. . . . . . . . . . . . . . . . 8
3.9 The Association Account. . . . . . . . . . . . . . . 9
3.10 Fiscal Matters. . . . . . . . . . . . . . . . . . . . 10
(a) Annual Budget . . . . . . . . . . . . . . . . 10
(b) Accounting and Financial Records . . . . . . . 10
(c) Review of Expenditures . . . . . . . . . . . . 10
(d) Tax Matters . . . . . . . . . . . . . . . . . 11
(i) In General . . . . . . . . . . . . . . 11
(ii) Sales and Use Taxes . . . . . . . . . . 11
3.11 Reports and Records. . . . . . . . . . . . . . . . . 11
(a) Dental Records . . . . . . . . . . . . . . . . 11
(b) Other Reports and Records . . . . . . . . . . 11
3.12 Recruitment of the Association Personnel and Dentists. 11
3.13 Healthcare Reimbursement and Systems Programs. . . . 12
3.14 Corporate Dental Patient Accounts. . . . . . . . . . 12
3.15 Advertising. . . . . . . . . . . . . . . . . . . . . 12
3.16 Association Board of Directors Meetings. . . . . . . 12
3.17 Legal Matters. . . . . . . . . . . . . . . . . . . . 12
3.18 Credentialing. . . . . . . . . . . . . . . . . . . . 12
3.19 Confidential and Proprietary Information. . . . . . . 12
3.20 Manager's Insurance. . . . . . . . . . . . . . . . . 13
3.21 Reserved Duties of Manager. . . . . . . . . . . . . . 13
3.22 No Warranty. . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 4 COVENANTS AND RESPONSIBILITIES OF THE ASSOCIATION . . . . . 14
4.1 Organization and Operation. . . . . . . . . . . . . . 14
4.2 Association Personnel. . . . . . . . . . . . . . . . 14
(a) Dentist Personnel . . . . . . . . . . . . . . 14
(b) Non-Dentist Health Care Personnel . . . . . . 15
(c) Dentist Compensation . . . . . . . . . . . . . 15
4.3 Professional Standards. . . . . . . . . . . . . . . . 15
4.4 Dental Services. . . . . . . . . . . . . . . . . . . 15
4.5 Peer Review/Quality Assessment. . . . . . . . . . . . 16
4.6 Association's Insurance. . . . . . . . . . . . . . . 16
4.7 Indemnification. . . . . . . . . . . . . . . . . . . 17
4.8 Confidential and Proprietary Information. . . . . . . 17
4.9 Cost Effectiveness. . . . . . . . . . . . . . . . . . 17
4.10 Name, Trademark. . . . . . . . . . . . . . . . . . . 18
4.11 Availability. . . . . . . . . . . . . . . . . . . . . 18
4.12 Covenant Not to Solicit. . . . . . . . . . . . . . . 18
ARTICLE 5 FINANCIAL ARRANGEMENT . . . . . . . . . . . . . . . . . . . 18
5.1 Management Fee. . . . . . . . . . . . . . . . . . . . 18
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
5.2 Reasonable Value. . . . . . . . . . . . . . . . . . . 19
5.3 Payment of Management Fee. . . . . . . . . . . . . . 19
5.4 Disputes Regarding Fees. . . . . . . . . . . . . . . 19
5.5 Accounts Receivable. . . . . . . . . . . . . . . . . 19
ARTICLE 6 TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . 20
6.1 Initial and Renewal Term. . . . . . . . . . . . . . . 20
6.2 Termination. . . . . . . . . . . . . . . . . . . . . 20
(a) Termination By Manager . . . . . . . . . . . . 20
(b) Termination By the Association . . . . . . . . 21
(c) Termination by Agreement . . . . . . . . . . . 21
(d) Legislative, Regulatory or Administrative Change 21
6.3 Effects of Termination. . . . . . . . . . . . . . . . 21
ARTICLE 7 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 22
7.1 Administrative Services Only. . . . . . . . . . . . . 22
7.2 Status of Contractor. . . . . . . . . . . . . . . . . 22
7.3 Notices. . . . . . . . . . . . . . . . . . . . . . . 22
7.4 Governing Law. . . . . . . . . . . . . . . . . . . . 23
7.5 Assignment. . . . . . . . . . . . . . . . . . . . . . 23
7.6 Dispute Resolution. . . . . . . . . . . . . . . . . . 23
7.7 Divisions and Headings. . . . . . . . . . . . . . . . 24
7.8 Amendments and Agreement Execution. . . . . . . . . . 24
7.9 Entire Agreement. . . . . . . . . . . . . . . . . . . 24
7.10 Severability. . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
(iii)
<PAGE> 5
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT ("Agreement") is made and entered
into effective as of this 14th day of November, 1996, by and between OraCare
Consultants, Inc., a New Jersey corporation ("Manager"), and OraCare Dental
Associates, P.A., a New Jersey professional association ("Association").
RECITALS
WHEREAS, the Association is a duly organized and validly existing New
Jersey professional association, formed for and engaged in the conduct of a
dental practice and the provision of dental services to the general public in
New Jersey through individual dentists who are licensed to practice medicine in
the State of New Jersey and who are employed or otherwise retained by the
Association;
WHEREAS, Manager is a duly formed and validly existing New Jersey
corporation, which is in the business of managing the non-medical aspects of
dental practices;
WHEREAS, the Association desires to focus its energies, expertise and
time on the practice of dentistry and on the delivery of dental services to
patients, and to accomplish this goal it desires to delegate the increasingly
more complex business functions of its dental practice to persons with business
expertise;
WHEREAS, the Association also is desirous of increasing the cost-
effectiveness of the dental care it provides and desires to enlist the
assistance of Manager in this regard;
WHEREAS, the Association desires to engage Manager to provide such
management, administrative and business services as are necessary and
appropriate for the day-to-day administration of the non-medical aspects of the
Association's dental practice, and Manager desires to provide such services all
upon the terms and conditions hereinafter set forth;
WHEREAS, the Association and Manager have determined a fair market value
for the services to be rendered by Manager, and based on this fair market
value, have developed a formula for compensation for Manager that will allow
the parties to establish a relationship permitting each party to devote its
skills and expertise to the appropriate responsibilities and functions; and
WHEREAS, Manager is willing to commit significant resources to the
Association based upon the representations and warranties of the Association
that the current employee dentists of the Association will continue to practice
medicine for the Association;
NOW, THEREFORE, for and in consideration of the mutual terms, covenants
and conditions hereinabove and hereinafter set forth, the parties agree as
follows:
MANAGEMENT SERVICES AGREEMENT - Page 1
<PAGE> 6
ARTICLE 1
DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
following meanings ascribed thereto unless otherwise clearly required by the
context in which such term is used.
1.1 Adjusted Gross Revenue. The term "Adjusted Gross Revenue" shall
mean the sum of all Professional Services Revenue and Ancillary Revenue.
1.2 Adjustments. The term "Adjustments" shall mean any adjustments
on an accrual basis for uncollectible accounts, Medicare, Medicaid and other
payor contractual adjustments, discounts, workers' compensation adjustments,
professional courtesies, and other reductions in collectible revenue that
result from activities that do not result in collectible charges.
1.3 Agreement. The term "Agreement" shall mean this Agreement by and
between the Association and Manager and any amendments hereto as may be adopted
as provided in this Agreement.
1.4 Ancillary Revenue. The term "Ancillary Revenue" shall mean all
fees actually recorded each month by the Association (net of Adjustments) which
are not Professional Services Revenues.
1.5 Association. The term "Association" shall mean OraCare Dental
Associates, P.A., a New Jersey professional association.
1.6 Association Account. The term "Association Account" shall mean
the bank account of the Association established as described in Sections 4.8
and 4.9.
1.7 Association Expense. The term "Association Expense" shall mean
an expense incurred by the Manager or the Association and for which the
Association and not the Manager, is financially liable. The Association
Expense shall include such items as Dentist salaries and benefits (including
professional dues, subscriptions, charitable donations, and continuing dental
education expenses) and professional liability insurance for the Association,
the Dentists and the Manager's employees rendering services pursuant to this
Agreement.
1.8 Budget. The term "Budget" shall mean an operating budget and
capital expenditure budget for each fiscal year as prepared by Manager and
adopted by the Association.
1.9 Capitation Revenues. The term "Capitation Revenues" shall mean
all collections from managed care organizations or third party payors where
such payment is made periodically on a per member basis for the partial or
total dental needs of a subscribing patient. Capitation Revenues shall include
any co-payments and incentive bonuses or profits in shared risk pools
MANAGEMENT SERVICES AGREEMENT - Page 2
<PAGE> 7
received as a result of a capitation plan. Capitation Revenues shall be
allocated between Professional Services Revenue and Ancillary Revenue by the
Manager.
1.10 Confidential Information. The term "Confidential Information"
shall mean any information of Manager or the Association, as appropriate
(whether written or oral), including all notes, studies, patient lists,
information, business or management methods, marketing data, fee schedules, or
trade secrets of the Manager or of the Association, as applicable, whether or
not such Confidential Information is disclosed or otherwise made available to
one party by the other party pursuant to this Agreement. Confidential
Information shall also include the terms and provisions of this Agreement and
any transaction or document executed by the parties pursuant to this Agreement.
Confidential Information does not include any information that the receiving
party can establish (i) is or becomes generally available to and known by the
public (other than as a result of an unpermitted disclosure directly or
indirectly by the receiving party or its affiliates, advisors, or
Representatives), (ii) is or becomes available to the receiving party on a
non-confidential basis from a source other than the furnishing party or its
affiliates, advisors, or Representatives, provided that such source is not and
was not bound by a confidentiality agreement with or other obligation of
secrecy to the furnishing party of which the receiving party has knowledge, or
(iii) has already been or is hereafter independently acquired or developed by
the receiving party without violating any confidentiality agreement with or
other obligation of secrecy to the furnishing party.
1.11 Dental Director. The term "Dental Director" shall mean that
director of the Association designated by the Association as the director
responsible for the overall management of the Association, who shall be a
dentist duly licensed and in good standing in the State of New Jersey.
1.12 Dental Services. The term "Dental Services" shall mean general
and specialty dental care and services, and all related health care services
provided by the Association through the Association's Dentists and other health
care providers that are retained by or professionally affiliated with the
Association.
1.13 Dentist. The term "Dentist" shall mean each individually
licensed professional who is employed or otherwise retained by or associated
with the Association, each of whom shall meet at all times the qualifications
described in Section 4.2 and Section 4.3.
1.14 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 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. For
purposes of this Agreement, GAAP shall be applied on an accrual basis in a
manner consistent with the historic practices of the person to which the term
applies.
MANAGEMENT SERVICES AGREEMENT - Page 3
<PAGE> 8
1.15 Management Fee. The term "Management Fee" shall mean Manager's
compensation established as described in Article 6 hereof.
1.16 Manager. The term "Manager" shall mean OraCare Consultants,
Inc., a New Jersey corporation, or any entity that succeeds to the interests of
OraCare Consultants, Inc. and to whom the obligations of Manager are assigned
and transferred as permitted by this Agreement.
1.17 Manager Expense. The term "Manager Expense" shall mean an
expense or cost incurred by the Manager and for which the Manager, and not the
Association is financially liable.
1.18 Office. The term "Office" shall mean any office space, clinic,
facility, including satellite facilities, that Manager shall own or lease or
otherwise procure for the use of the Association.
1.19 Office Expense. The term "Office Expense" shall mean all
operating and non-operating expenses incurred by the Manager or the Association
in the provision of services to the Association, including, but not limited to,
the following expenses:
(a) Salaries and benefits and other direct costs of all
employees of Manager at the Office and the salaries and benefits of the
non-dentist employees of the Association but shall not include the
salaries or benefits of the Dentists;
(b) The direct cost of any employee or consultant that
provides services at or in connection with the Office for improved
clinic performance, such as management, billing and collections, and
business office consultation;
(c) In the event Manager assists the Association in the
recruitment of additional dentist employees, Office Expense shall
include reasonable recruitment costs and out-of-pocket expenses of
Manager;
(d) Comprehensive and general liability insurance covering the
Office and employees of the Association and Manager at the Office;
(e) The expense of using, leasing, purchasing or otherwise
procuring the Office and related equipment, including depreciation but
not including monies paid by third parties;
(f) The cost of capital (whether as actual interest on
indebtedness incurred on behalf of the Association or as reasonable
imputed interest on capital advanced by Manager) to finance or refinance
obligations of the Association, purchase medical or nonmedical
equipment, or finance new ventures of the Association;
(g) The reasonable travel expenses of Manager's New Jersey
employees, or of the Dentists, associated with attending meetings,
conferences, or seminars to benefit the Association;
MANAGEMENT SERVICES AGREEMENT - Page 4
<PAGE> 9
(h) The cost of supplies, inventory, and utilities; and
(i) Office Expenses shall not include any State or federal
income tax on income of Manger, or any other expense reasonably
designated by Manager as a Manager Expense.
1.20 Professional Services Revenues. The term "Professional Services
Revenues" shall mean the sum of (i) all professional fees actually recorded
each month on an accrual basis under GAAP (net of Adjustments) as a result of
professional dental services rendered by the Dentists, (ii) Capitation Revenues
allocated by Manager to Professional Services Revenues, (iii) income produced
from the services of physician assistants or extenders, and (iv) all revenue or
contributions relating to research activities by dentists of the Association as
part of their employment with Association.
1.21 Representatives. The term "Representatives" shall mean a party's
officers, directors, employees, or other agents or representatives.
1.22 State. The term "State" shall mean the State of New Jersey.
1.23 Term. The term "Term" shall mean the initial and any renewal
periods of duration of this Agreement as described in Section 5.1.
ARTICLE 2
APPOINTMENT AND AUTHORITY OF MANAGER
2.1 Appointment. The Association hereby appoints Manager as its sole
and exclusive agent for the management and administration of the business
functions and business affairs of the Association, and Manager hereby accepts
such appointment, subject at all times to the provisions of this Agreement.
2.2 Authority. Consistent with the provisions of this Agreement,
Manager shall have the responsibility and commensurate authority to provide
business, administrative and full management services for the Association,
including, without limitation, provision of equipment, supplies, support
services, non-dental personnel, office space, management, administration,
financial record keeping and reporting and other business office services.
Manager is hereby expressly authorized to provide such services in any
reasonable manner Manager deems appropriate to meet the day-to-day requirements
of the business functions of the Association. Manager is also expressly
authorized to negotiate and execute on behalf of the Association contracts that
do not relate to the provision of Dental Services. The Association shall give
Manager thirty (30) days prior notice of the Association's intent to execute
any agreement obligating the Association to perform Dental Services or
otherwise creating a binding legal obligation on the Association. Unless an
expense is expressly designated as a Manager Expense in this Agreement, all
expenses incurred by Manager in providing services pursuant to this Agreement
shall be Office Expenses. The parties acknowledge and agree that the
Association,
MANAGEMENT SERVICES AGREEMENT - Page 5
<PAGE> 10
through its Dentists, shall be responsible for and shall have complete
authority, responsibility, supervision, and control over the provision of all
Dental Services and other professional health care services performed for
patients, and that all diagnoses, treatments, procedures, and other
professional health care services shall be provided and performed exclusively
by or under the supervision of Dentists as such Dentists, in their sole
discretion, deem appropriate. Manager shall have and exercise absolutely no
control or supervision over the provision of Dental Services.
2.3 Patient Referrals. Manager and the Association agree that the
benefits to the Association hereunder do not require, are not payment for, and
are not in any way contingent upon the referral, admission, or any other
arrangement for the provision of any item or service offered by Manager to
patients of the Association in any facility or health care operation
controlled, managed, or operated by Manager.
2.4 Internal Management of the Association. Matters involving the
internal management, control, or finances of the Association, including
specifically the allocation of professional income among the shareholder(s) and
Dentist employees of the Association, tax planning, and investment planning,
shall remain the responsibility of the Association and the shareholder(s) of
the Association.
2.5 Practice of Dentistry. The parties acknowledge that Manager is
not authorized or qualified to engage in any activity that may be construed or
deemed to constitute the practice of dentistry. To the extent any act or
service herein required by Manager should be construed by a court of competent
jurisdiction to constitute the practice of dentistry, the requirement to
perform that act or service by Manager shall be deemed waived and
unenforceable.
ARTICLE 3
COVENANTS AND RESPONSIBILITIES OF MANAGER
During the Term of the Agreement, Manager shall provide all such
management, administrative and business services as are necessary and
appropriate for the day-to-day administration of the business aspects of the
Association's operations, including without limitation those set forth in this
Article 4 in accordance with the law and all rules, regulations and guidelines
of applicable governmental agencies.
3.1 Office and Equipment. As necessary and appropriate, taking into
consideration the professional concerns of the Association, Manager shall
lease, acquire, or otherwise procure an Office in a location or locations
reasonably acceptable to the Association, and shall permit the Association to
use the Office and shall provide all non-dental equipment, fixtures, office
supplies, furniture and furnishings deemed reasonably necessary by Manager for
the operation of the Office and reasonably necessary for the provision of
Dental Services. Manager shall also provide, finance, or cause to be provided
or financed equipment related to the provision of Dental Services as required
by the Association. Subject to economic feasibility, the Association shall
have final authority in all dental equipment decisions, and Manager shall have
no authority in regard to dental equipment issues. Manager may, however,
advise the Association on the relationship
MANAGEMENT SERVICES AGREEMENT - Page 6
<PAGE> 11
between its dental equipment decisions and the overall administrative and
financial operations of the practice. All dental and non-dental equipment
acquired for the use of the Association shall be owned by Manager. Manager
shall be responsible for the repair and maintenance of the Office, consistent
with Manager's responsibilities under the terms of any lease or other use
arrangement, and for the repair, maintenance, and replacement of all equipment
other than such repairs, maintenance and replacement necessitated by the
negligence or willful misconduct of the Association, its Dentists or other
personnel employed by the Association, the repair or replacement of which shall
be an Association Expense and not an Office Expense.
3.2 Dental Supplies. Manager shall order, procure, purchase and
provide on behalf of and as agent for the Association all reasonable dental
supplies unless otherwise prohibited by federal and/or State law. Furthermore,
Manager shall ensure that the Office is at all times adequately stocked with
the dental supplies that are necessary and appropriate for the operation of the
Association and required for the provision of Dental Services. The ultimate
oversight, supervision and ownership for all dental supplies is and shall
remain the sole responsibility of the Association. As used in this provision
the term "dental supplies" shall mean all drugs, pharmaceuticals, products,
substances, items or devices whose purchase, possession, maintenance,
administration, prescription or security requires the authorization or order of
a licensed health care provider or requires a permit, registration,
certification or other governmental authorization held by a licensed health
care provider as specified under any federal and/or State law.
3.3 Support Services. Manager shall provide or arrange for all
printing, stationery, forms, postage, duplication or photocopying services, and
other support services as are reasonably necessary and appropriate for the
operation of the Office and the provision of Dental Services therein.
3.4 Quality Assessment, Risk Management, and Utilization Management.
Manager shall assist the Association in the establishment and implementation of
procedures to ensure the consistency, quality, appropriateness and dental
necessity of Dental Services provided by the Association, and shall provide
administrative support for the Association's overall quality assessment, risk
management, and utilization management programs.
3.5 Licenses and Permits. Manager shall, on behalf of and in the
name of the Association, coordinate all development and planning processes, and
apply for and use Manager's reasonable best efforts to obtain and maintain all
federal, state, and local licenses and regulatory permits required for or in
connection with the operation of the Association and equipment (existing and
future) located at the Office, other than those relating to the practice of
dentistry or the administration of drugs by Dentists employed by or associated
with the Association.
3.6 Personnel. Except as specifically provided in Section 4.2 of
this Agreement, Manager shall employ or otherwise retain and shall be
responsible for selecting, training, supervising, and terminating, all
management, administrative, clerical, secretarial, bookkeeping, accounting,
payroll, billing and collection and other nonprofessional personnel as Manager
deems reasonably necessary and appropriate for Manager's performance of its
duties and obligations under this Agreement. Manager shall have sole
responsibility for determining the salaries and
MANAGEMENT SERVICES AGREEMENT - Page 7
<PAGE> 12
providing such fringe benefits, and for withholding, as required by law, any
sums for income tax, unemployment insurance, social security, or any other
withholding required by applicable law or governmental requirement for any
personnel described in the previous sentence. Manager shall not discriminate
in its employment practices on the basis of race, religion, gender, sexual
orientation, disability status, or any other factor not related to job
performance.
3.7 Contract Negotiations. Manager shall advise the Association with
respect to and shall negotiate on an exclusive basis, either directly or on the
Association's behalf, as appropriate, all contractual arrangements with third
parties as are reasonably necessary and appropriate for the Association's
provision of Dental Services, including, without limitation, negotiated price
agreements with third party payors, managed care organizations, or other
purchasers of group health care services. No contract or arrangement regarding
the provision of Dental Services shall be entered without the Association's
consent.
3.8 Billing and Collection. On behalf of and for the account of the
Association, Manager shall establish and maintain credit and billing and
collection policies, procedures, and forms, and shall use Manager's reasonable
best efforts to timely bill and collect all professional and other fees for all
billable Dental Services provided by the Association, or Dentists employed by
or otherwise associated with the Association. Manager shall advise and consult
with the Association regarding the fees for Dental Services provided by the
Association; it being understood, however, that the Association shall establish
the fees to be charged for Dental Services and that Manager 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,
and throughout the Term and thereafter as provided in this Agreement, the
Association hereby grants to Manager an exclusive special power of attorney and
appoints Manager as the Association's exclusive true and lawful agent and
attorney-in-fact, and Manager hereby accepts such special power of attorney and
appointment, for the following purposes:
(a) To bill the Association's patients, in the Association's
name and on the Association's behalf, for all billable Dental Services
provided by the Association to patients.
(b) To bill, in the Association's name and on the
Association's behalf, all claims for reimbursement or indemnification
from Blue Cross/Blue Shield, insurance companies, Medicare, Medicaid,
and all other third party payors or fiscal intermediaries for all
covered billable Dental Services provided by the Association to
patients.
(c) To collect and receive, in the Association's name and on
the Association'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 deemed
necessary by the Manager in its sole discretion to require the payment
of any such accounts; provided, however, that extraordinary collection
measures, such as discharging or releasing obligors or assigning or
selling
MANAGEMENT SERVICES AGREEMENT - Page 8
<PAGE> 13
accounts at a discount to collection agencies shall not be undertaken
without the approval of the Association.
(d) To deposit all amounts collected into the Association
Account which shall be and at all times remain in the Association's
name. The Association covenants to transfer and deliver to Manager all
funds received directly by the Association from patients or third party
payors for Dental Services. Upon receipt by Manager of any funds from
patients or third party payors, or from the Association pursuant hereto,
for Dental Services, Manager shall immediately deposit same into the
Association Account. Manager shall disburse such deposited funds to
creditors and other persons on behalf of the Association, maintaining
records of such receipt and disbursement of funds as directed by the
Association.
(e) To take possession of, endorse in the name of the
Association, and deposit into the Association Account any notes, checks,
money orders, insurance payments, and any other instruments received in
payment of accounts receivable for Dental Services.
Upon request of Manager, the Association shall execute and deliver to
the financial institution wherein the Association Account is maintained, such
additional documents or instruments as may be necessary to evidence or effect
the special power of attorney granted to Manager by the Association pursuant to
this Section 3.8 or pursuant to Section 3.9 of this Agreement. The special
power of attorney granted herein shall be coupled with an interest and except
as hereinafter provided shall be irrevocable. The special power of attorney
shall be revocable if: (i) Manager consents in writing, (ii) the Association
terminates this Agreement for cause under Section 6.2 and Manager has not
purchased any of the accounts receivable of the Association, (iii) the
Association terminates this Agreement for cause under Section 6.2 and Manager
has collected all of the outstanding accounts receivable it has purchased, or
(iv) this Agreement terminates at the end of the initial term. Revocation of
the special power of attorney shall not affect the Manager's right to receive
the Management Fee.
3.9 The Association Account. Manager shall have access to the
Association Account solely for the purposes stated herein. In connection
herewith and throughout the Term (and thereafter as provided in Section 6.2),
the Association hereby grants to Manager an exclusive special power of attorney
and appoints Manager as the Association's exclusive true and lawful agent and
attorney-in-fact, and Manager hereby accepts such special power of attorney and
appointment, to deposit into the Association Account all funds, fees, and
revenues generated from the Association's provision of Dental Services and
collected by Manager, and to make withdrawals from the Association Account for
payments specified in this Agreement and as requested from time-to-time by the
Association. Notwithstanding the exclusive special power of attorney granted
to Manager hereunder, the Association, upon reasonable advance notice to
Manager, may draw checks on the Association Account; provided, however, that
the Association shall neither draw checks on the Association Account nor
request Manager to do so if the balance remaining in the Association Account
after such withdrawal would be insufficient to enable Manager to pay on behalf
of the Association any Office Expense attributable to the operations of the
Association or to the provision of Dental Services, the estimated Management
Fee for the
MANAGEMENT SERVICES AGREEMENT - Page 9
<PAGE> 14
applicable month (based on the Management Fee for the previous month), any over
due Management Fees, and/or any other obligations of the Association. Without
the prior written consent of the Association, disbursements shall be related
to, and in such amount as to be consistent with, the expenditures authorized by
the Budget. Limits on authority to sign checks and purchase orders shall be
mutually agreed upon by the Association and Manager.
3.10 Fiscal Matters.
(a) Annual Budget. Annually and at least thirty (30) days
prior to the commencement of each fiscal year of the Association,
Manager, in consultation with the Dental Director, shall prepare and
deliver to the Association a Budget, setting forth an estimate of the
Association's revenues and expenses for the upcoming fiscal year
including, without limitation, the Management Fee associated with the
services provided by Manager hereunder, and the minimum salary of the
Dentist employees of the Association as set forth in their respective
employment agreements. The Budget shall be adopted by the Association
after reasonable review and comment, and may be revised or modified by
the Dental Director only in consultation with the Manager. In the event
the parties are unable to agree on a Budget by the beginning of the
fiscal year, until an agreement is reached, the Budget for the prior
year shall be deemed to be adopted as the Budget for the current year,
with each line item in the Budget increased or decreased by (i) the
percentage by which the Adjusted Gross Revenue in the current year has
increased or decreased compared to the corresponding period of the prior
year, (ii) the increase or decrease from the prior year in the Consumer
Price Index - Health/Dental Services, and (iii) the proportionate
increase or decrease in mutually agreed upon personnel costs as measured
by the increase or decrease in full-time equivalent personnel. Manager
shall endeavor to manage and administer the operations of the
Association as herein provided so that the actual revenues, costs and
expenses of the operation and maintenance of the Association during any
applicable period of the Association's fiscal year shall be consistent
with the Budget.
(b) Accounting and Financial Records. Manager shall establish
and administer accounting procedures, controls, forms, 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 the Association and the provision of Dental
Services. Manager shall prepare and deliver to the Association, within
ninety (90) days of the end of each calendar year, a balance sheet and a
profit and loss statement reflecting the financial status of the
Association in regard to the provision of Dental Services as of the end
of such calendar year. In addition, Manager shall prepare or assist in
the preparation of any other financial statements or records as the
Association may reasonably request.
(c) Review of Expenditures. The Dental Director shall review
all expenditures related to the operation of the Association, but shall
not have the power to prohibit or invalidate any expenditure consistent
with the Budget.
MANAGEMENT SERVICES AGREEMENT - Page 10
<PAGE> 15
(d) Tax Matters.
(i) In General. Manager shall prepare or arrange for
the preparation by an accountant approved in advance by the
Association (which approval shall not be unreasonably withheld)
of all appropriate tax returns and reports required of the
Association.
(ii) Sales and Use Taxes. Manager and the Association
acknowledge and agree that to the extent that any of the services
to be provided by Manager hereunder may be subject to any State
sales and use taxes, Manager may have a legal obligation to
collect such taxes from the Association and to remit same to the
appropriate tax collection authorities. The Association agrees
to pay, in addition to the payment of the Management Fee, any
applicable State sales and use taxes in respect of the portion of
the Management Fees attributable to such services.
3.11 Reports and Records.
(a) Dental Records. Manager shall provide the personnel
support to establish, monitor, and maintain procedures and policies for
the timely creation, preparation, filing and retrieval of all dental
records generated by the Association in connection with the
Association's provision of Dental Services, and, subject to applicable
law, shall ensure that dental records are available promptly to Dentists
and any other appropriate persons. The Association shall ensure that
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 the Association.
(b) Other Reports and Records. Manager shall timely create,
prepare, and file such additional reports and records as are reasonably
necessary and appropriate for the Association's provision of Dental
Services, and shall be prepared to analyze and interpret such reports
and records upon the request of the Association.
3.12 Recruitment of the Association Personnel and Dentists. Upon the
Association's request, Manager shall perform all administrative services
reasonably necessary and appropriate to recruit potential dentist personnel to
become employees of the Association. Manager shall provide the Association
with model agreements to document the Association's employment, retention or
other service arrangements with such individuals. It will be and remain the
sole and complete responsibility of the Association to interview, select,
contract with, supervise, control and terminate all Dentists performing Dental
Services or other professional services, and Manager shall have no authority
whatsoever with respect to such activities. In performing its duties for the
Association hereunder. Manager shall not discriminate in its employment
practices on the basis of race, religion, gender, sexual orientation,
disability status, or any other factor not related to job performance.
MANAGEMENT SERVICES AGREEMENT - Page 11
<PAGE> 16
3.13 Healthcare Reimbursement and Systems Programs. Manager shall
assist the Association in qualifying for and enrolling in healthcare
reimbursement or assistance programs including, but not limited to, Medicare
and Medicaid. Any expense incurred in qualifying for or enrolling in
healthcare reimbursement or assistance programs is an Office Expense.
3.14 Corporate Dental Patient Accounts. Manager shall assist the
Association in procuring large corporate dental patient accounts by making
presentations to appropriate personnel at such businesses and by soliciting
such businesses where Manager, at its sole discretion, determines that such
solicitation would be of benefit. Any expense incurred by manager in procuring
such corporate dental patient accounts shall be an Office Expense.
3.15 Advertising. Manager will coordinate all advertising efforts of
the Association, and will place all advertisements for the Association. Any
expense incurred for such advertising shall be an Office Expense.
3.16 Association Board of Directors Meetings. A Representative of
Manager shall attend all meetings of the Board of Directors of Association, on
a non-voting basis.
3.17 Legal Matters. Manager shall be the liaison between Association
and counsel regarding any legal matters other than disputes arising from this
Agreement. Any legal expenses incurred regarding such matters shall be an
Office Expense.
3.18 Credentialing. Manager will assist the Association with a
credentialing policy for its employee dentists, including, but not limited to,
providing the following services: advising the Association regarding the
professional qualifications and credentials of Dentists; and assisting the
Association in the development of credentialing criteria and protocols. The
Association will give reasonable consideration to include as a Dentist any
dentist identified by Manager; however, the Association will have the authority
to make the final determination as to whether any particular Dentist will be
employed by the Association.
3.19 Confidential and Proprietary Information. All Confidential
Information furnished to Manager will not be discussed with other persons
without the Association's express written authorization, will not be used in
any way directly or indirectly detrimental to the Association, and will be kept
confidential by Manager and its affiliates and advisors; provided, however,
that Manager may disclose Confidential Information to those of its
Representatives who need to know Confidential Information for the purposes of
this Agreement, it being understood and agreed to by Manager that such
Representatives will be informed of the confidential nature of the Confidential
Information, will agree to be bound by this Section, and will be directed by
Manager not to disclose to any other person any Confidential Information.
Manager agrees to be responsible for any breach of this Section by its
affiliates, advisors, or Representatives. If Manager is requested or required
(by oral questions, interrogatories, requests for information or documents,
subpoenas, civil investigative demands, or similar processes) to disclose or
produce any Confidential Information furnished in the course of its dealings
with the Association or its affiliates, advisors, or Representatives, Manager
will (i) provide the Association with prompt notice thereof and copies, if
possible, and, if not, a description, of the Confidential Information
MANAGEMENT SERVICES AGREEMENT - Page 12
<PAGE> 17
requested or required to be produced so that the Association may seek an
appropriate protective order or waive compliance with the provisions of this
Section and (ii) consult with the Association as to the advisability of the
Association's taking of legally available steps to resist or narrow such
request. Manager further agrees that, if in the absence of a protective order
or the receipt of a waiver hereunder Manager is nonetheless, in the written
opinion of its legal counsel, compelled to disclose or produce Confidential
Information concerning the Association to any tribunal or to stand liable for
contempt or suffer other censure or penalty, Manager may disclose or produce
such Confidential Information to such tribunal without liability hereunder;
provided, however, that Manager shall give the Association written notice of
the Confidential Information to be so disclosed or produced as far in advance
of its disclosure or production as is practicable and shall use its best
efforts to obtain, to the greatest extent practicable, an order or other
reliable assurance that confidential treatment will be accorded to such
Confidential Information so required to be disclosed or produced.
3.20 Manager's Insurance. Throughout the Term, Manager, as an Office
Expense, shall obtain and maintain with commercial carriers, through self
insurance or some combination thereof, appropriate worker's compensation
coverage for Manager's employed personnel provided pursuant to this Agreement,
and professional, casualty and comprehensive general liability insurance
covering Manager, Manager's personnel, and all of Manager's equipment in such
amounts, on such basis and upon such terms and conditions as Manager deems
appropriate. Upon the request of the Association, Manager shall provide the
Association with a certificate evidencing such insurance coverage. Manager may
also carry, as an Office Expense, key man life and disability insurance on any
shareholder(s) of the Association, or on any Dentist employee of the
Association in amounts determined reasonable and sufficient by Manager in its
sole discretion. Manager shall be the owner of any such insurance. During the
first five (5) years of the term of this Agreement, the proceeds of any such
disability or key man life insurance shall be used to offset the Management Fee
due to the Manager. The Management Fee shall be offset dollar for dollar by
the amount of the insurance proceeds. Insurance proceeds in excess of the
unpaid total Management Fees due over the first five (5) years shall belong to
Manager. Beginning in year six (6) of this Agreement, the proceeds of any
disability or key man life insurance shall be used for recruitment of
additional or replacement dentists.
3.21 Reserved Duties of Manager. Notwithstanding anything to the
contrary herein, the Association shall not execute any managed care contract
without the prior consent of Manager, and the Manager shall have the sole
responsibility to approve the following:
(a) The renovation or expansion or capital expenditures of the
Association;
(b) The priority of capital expenditures of the Association;
(c) The relocation or addition of the Association's
facilities;
(d) All Human Resources matters relating to the Manager's
employees.
MANAGEMENT SERVICES AGREEMENT - Page 13
<PAGE> 18
3.22 No Warranty. The Association acknowledges that Manager has not
made and will not make any express or implied warranties or representations
that the services provided by Manager will result in any particular amount or
level of dental practice or income to the Association.
ARTICLE 4
COVENANTS AND RESPONSIBILITIES OF THE ASSOCIATION
4.1 Organization and Operation. The Association, as a continuing
condition of Manager's obligations under this Agreement, shall at all times
during the Term be and remain legally organized and operated to provide Dental
Services in a manner consistent with all State and federal laws. The
Association shall operate and maintain a full time practice of dentistry with a
sufficient complement of full time dentists to meet the needs of its patients,
and the Association shall maintain and enforce employment agreements with all
Dentists employed by the Association. The Association shall not amend the
employment agreements or waive any rights thereunder without the prior approval
of Manager. Recognizing that Manager would not have entered into this Agreement
but for the Association's covenant to maintain employment agreements with the
Dentists of the Association, the Association shall pay to Manager, in addition
to the Management Fee, any liquidated damages received by the Association from
a Dentist that terminates his or her employment agreement without cause. Such
payment shall constitute liquidated damages of Manager for the Association's
breach of the covenant contained in this Section 4.1.
4.2 Association Personnel.
(a) Dentist Personnel. The Association shall retain, as an
Association Expense and not as an Office Expense, a sufficient number of
Dentists, as are necessary and appropriate for the provision of Dental
Services, each of whom shall be bound by and subject to the applicable
provisions of this Agreement. The Association hereby agrees that in the
event it desires to retain additional dentists, notice of the same shall
be tendered to the Manager. Based upon a review of the circumstances
the Manager shall make its recommendation as to the necessity of adding
additional dentists. The Association, after considering Manager's
recommendation, shall then decide, in its discretion, the number of
dentists to add, if any, based upon its review of the circumstances.
Each Dentist retained by the Association shall hold and maintain a valid
and unrestricted license to practice dentistry in the State of New
Jersey. In its engagement or employment of Dentists the Association
shall not discriminate on the basis of race, religion, gender, sexual
orientation, disability status, or any other factor not related to
professional performance. The Association shall enter into and maintain
with each such retained Dentist a written employment agreement. The
Association shall be responsible for paying the compensation and
benefits as applicable, for all Dentists and for withholding, as
required by law, any sums for income tax, unemployment insurance, social
security, or any other withholding required by applicable law. Manager,
on behalf
MANAGEMENT SERVICES AGREEMENT - Page 14
<PAGE> 19
of the Association, may establish and administer the compensation with
respect to such individuals in accordance with the written agreement
between the Association and each Dentist. Manager shall neither control
nor direct any Dentist in the performance of Dental Services for
patients.
(b) Non-Dentist Health Care Personnel. All non-dentist health
care personnel who provide patient care services shall be employed by or
retained by the Association as an Office Expense and shall be under the
Association's control, supervision and direction in the performance of
or in connection with the rendering of Dental Services for patients.
The Association shall not discriminate in its employment practices on
the basis of race, religion, gender, sexual orientation, disability
status, or any other factor not related to job performance.
(c) Dentist Compensation. The Association retains the
exclusive right to establish and adjust dentist compensation and/or the
methodology to determine dentist compensation. However, the parties
acknowledge that dentist compensation methodologies are extremely
complex. Accordingly, the Association shall provide a written
description of any revisions to its Dentist's compensation methodologies
to the Manager. The Manager shall have ninety (90) days to review the
proposed revisions and provide comments to the Association regarding the
economic impact of such revisions on the strategic plans and goals of
the Association. Before finalizing any revision to the compensation
methodology the Association's shall consider the Manager's comments.
4.3 Professional Standards. As a continuing condition of Manager's
obligations hereunder, each Dentist 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 Services in
accordance with applicable federal, State and municipal laws, rules,
regulations, ordinances and orders, and the ethics and standard of care of the
community wherein the principal office of the Association is located.
Procurement of temporary staff privileges pending the completion of the dental
staff approval process shall satisfy this provision, provided the Dentist
actively pursues full appointment and actually receives full appointment within
a reasonable time.
4.4 Dental Services. The Association shall ensure that Dentists and
non-dentist health care personnel are available as necessary to provide Dental
Services to patients. In the event that Dentists employed by, or partners of,
the Association are not available to provide Dental Services coverage, the
Association shall engage and retain locum tenens coverage. Dentists retained
on a locum tenens basis shall meet all of the requirements of Section 4.3, and
the cost of providing locum tenens coverage shall be an Association Expense.
With the assistance of the Manager, the Association and the Dentists shall be
responsible for scheduling Dental and non-dentist health care personnel
coverage of all dental procedures. The Association shall cause all Dentists to
exert their best efforts to develop and promote the Association in such manner
as to ensure the Association is able to serve the diverse needs of the
community.
MANAGEMENT SERVICES AGREEMENT - Page 15
<PAGE> 20
4.5 Peer Review/Quality Assessment. The Association shall adopt
credentialing, peer review/quality assessment and utilization programs to
monitor and evaluate the quality and cost-effectiveness of Dental Services
provided by dental personnel of the Association. Upon request of the
Association, Manager shall provide administrative assistance to the Association
in performing these activities. The Association shall designate a committee of
Dentists to function as a dental peer review committee to review credentials of
potential recruits, perform quality assurance functions, and otherwise resolve
dental competence issues. The dental peer review committee shall function
pursuant to formal written polices and procedures. The Association shall
require each of its dentist employees to be subject to and comply with
reasonable credentialing, quality and efficiency criteria as it may adopt from
time to time. All such policies shall assume effective mechanisms are in place
and utilized to monitor and evaluate the delivery of cost effective quality
health care, shall assume effective remedial measures are in place and taken to
correct any quality or utilization problems and shall assume effective
proactive measures to continuously assess and improve the quality of
utilization of the Association's health care services. Additionally, these
policies shall include at least the following:
(a) All peer review, quality improvement and utilization
management activities shall be structured so as to maximize available
immunities.
(b) The Association shall report regularly to Manager as to
the performance of these activities. The purpose of this reporting is
to help assure that the peer review, quality improvement and utilization
management activities are effectively developed and implemented. This
is not intended, however, to alter the basic fact that these functions
are the Association's responsibilities, and that the proceedings and
records are and shall continue to be protected proceedings and records
of a peer review body. Reports to the Manager shall be confidential and
shall not be deemed to waive any immunities or protections conferred
upon such proceedings and records under New Jersey law.
(c) The Manager, at its sole cost and expense, shall have the
right to arrange an outside performance evaluation of the quality
improvement and utilization management functions of the Association,
including, to the extent deemed necessary by the Manager, the
performance of such functions as they relate to individual Dentists.
The results of any such evaluation shall be provided to the Dental
Director, and the parties shall use good faith and best efforts to
implement the reasonable recommendations of such performance evaluation.
4.6 Association's Insurance. The Association shall, as an Office
Expense, obtain and maintain with commercial carriers acceptable to Manager
appropriate worker's compensation coverage for the Association's employed
personnel, if any, and professional and comprehensive general liability
insurance covering the Association and each of the Dentists the Association
retains to provide Dental Services. The insurance policy or policies shall
provide for at least thirty (30) days advance written notice to the Association
from the insurer as to any alteration of coverage, cancellation, or proposed
cancellation for any cause. Upon the termination of this Agreement for any
reason, the Association shall obtain and maintain as an Association Expense
"extended reporting" coverage, in such amount and upon such conditions as
determined by
MANAGEMENT SERVICES AGREEMENT - Page 16
<PAGE> 21
Manager for three (3) years following the effective date of the termination.
The Association shall be responsible for paying all premiums for "tail"
insurance coverage.
4.7 Indemnification. In addition to the insurance required in
Section 4.6 above, the Association shall defend, protect, indemnify and hold
harmless Manager from liability for any costs, fees, damages or other financial
obligations associated with Manager being named as a defendant in a
professional liability action against the Association or any of its employees.
4.8 Confidential and Proprietary Information. All Confidential
Information furnished to the Association will not be discussed with other
persons without Manager's express written authorization, will not be used in
any way directly or indirectly detrimental to Manager, and will be kept
confidential by the Association and its affiliates and advisors; provided,
however, that the Association may disclose Confidential Information to those of
its Representatives who need to know Confidential Information for the purposes
of this Agreement, it being understood and agreed to by the Association that
such Representatives will be informed of the confidential nature of the
Confidential Information, will agree to be bound by this Section, and will be
directed by the Association not to disclose to any other person any
Confidential Information. The Association agrees to be responsible for any
breach of this Section by its affiliates, advisors, or Representatives. If the
Association is requested or required (by oral questions, interrogatories,
requests for information or documents, subpoenas, civil investigative demands,
or similar processes) to disclose or produce any Confidential Information
furnished in the course of its dealings with Manager or its affiliates,
advisors, or Representatives, the Association will (i) provide Manager with
prompt notice thereof and copies, if possible, and, if not, a description, of
the Confidential Information requested or required to be produced so that
Manager may seek an appropriate protective order or waive compliance with the
provisions of this Section and (ii) consult with Manager as to the advisability
of Manager's taking of legally available steps to resist or narrow such
request. The Association further agrees that, if in the absence of a
protective order or the receipt of a waiver hereunder the Association is
nonetheless compelled to disclose or produce Confidential Information
concerning Manager to any tribunal or to stand liable for contempt or suffer
other censure or penalty, the Association may disclose or produce such
Confidential Information to such tribunal without liability hereunder;
provided, however, that the Association shall give Manager written notice of
the Confidential Information to be so disclosed or produced as far in advance
of its disclosure or production as is practicable and shall use its best
efforts to obtain, to the greatest extent practicable, an order or other
reliable assurance that confidential treatment will be accorded to such
Confidential Information so required to be disclosed or produced.
4.9 Cost Effectiveness. The Association understands and agrees that
it has, in part, enlisted the services of Manager in increasing the cost-
effectiveness of the dental services its dentists provide. The Association
therefore covenants and agrees to assist Manager in all ways possible to
increase the cost-effectiveness of the care delivered pursuant to recognized
national standards, providing nothing Manager proposes which may adversely
affect the quality of care delivered need to be considered by the Association
or its dentists.
MANAGEMENT SERVICES AGREEMENT - Page 17
<PAGE> 22
4.10 Name, Trademark. The Association represents that it conducts its
professional practice under the name of, and only under the name of "OraCare
Dental Associates, P.A." and that the Association is the sole and absolute
owner of the name. The Association covenants and promises that, without the
prior written consent of the Manager, the Association will not:
(a) take any action or omit to take any action that is
reasonably likely to result in the change or loss of the name;
(b) license, sell, give, or otherwise transfer the name or the
right to use the name to any dental practice, dentist, professional
corporation, or any other entity; or
(c) cease conducting the professional practice of the
Association under the name.
4.11 Availability. The Association shall provide appropriate Dentist
and dentist extender staffing as necessary to assure that services are timely
available for all patients. This availability shall include effective staffing
of offices during normal hours of operation, as well as on-site or on-call
availability on a prompt, continuing basis, 24 hours per day, seven days per
week, including holidays, in accordance with generally accepted standards in
the community.
4.12 Covenant Not to Solicit. For two (2) years following the
termination of this Agreement, the Association shall not:
(a) Directly or indirectly recruit or hire, or induce any
party to recruit or hire any person who is an employee of, or who has
entered into an independent contractor arrangement with the Manager or
any Affiliate of the Manager;
(b) Directly or indirectly, whether for itself or for any
other person or entity, call upon, solicit, divert or take away, or
attempt to solicit, call upon, divert or take away any customers,
business, or clients of Manager;
(c) Disrupt, damage, impair or interfere with the business of
the Manager; or
(d) Enter into any contract or arrangement for the provision
of dental services with any managed care services contracted by the
Manager on behalf of the Association during the term of this Agreement.
ARTICLE 5
FINANCIAL ARRANGEMENT
5.1 Management Fee. The Association and Manager agree to the
compensation set forth herein as being paid to Manager in consideration of a
substantial commitment made by Manager hereunder and that such fees are fair
and reasonable. Each month Manager shall be paid a Management Fee in the amount
equal to all Office Expenses incurred by the Manager plus an
MANAGEMENT SERVICES AGREEMENT - Page 18
<PAGE> 23
amount equal to fifteen percent (15%) of the Association's Adjusted Gross
Revenue. Additionally, to the extent the Office Expenses are less than twenty-
eight percent (28%) of the Association's Adjusted Gross Revenue, the Manager
shall be paid a bonus in an amount equal to sixty percent (60%) of the
difference between the actual Office Expenses and twenty-eight percent (28%) of
the Association's Adjusted Gross Revenue.
The amounts to be paid the Manager under this Section 5.1 shall be
payable monthly. The amounts shall be estimated based upon the previous
month's operating results of the Association. Adjustments to the estimated
payments shall be made to reconcile actual amounts due under this Section 5.1,
and by the end of the month during each calendar year. Upon preparation of
quarterly financial statements, final adjustments to the Management Fee for the
quarter shall be made and any additional payments owing to the Manager or the
Association shall then be made.
5.2 Reasonable Value. Payment of the Management Fee is not intended
to be and shall not be interpreted or implied as permitting Manager to share in
the Association's fees for Dental Services or any other services, but is
acknowledged as the parties' negotiated agreement as to the reasonable fair
market value of the equipment, support services, personnel, office space,
management, administration and other items and services furnished by Manager
pursuant to this Agreement, considering the nature and volume of the services
required and the risks assumed by Manager.
5.3 Payment of Management Fee. To facilitate the payment of the
Management Fee as provided in Section 5.1 hereof, the Association hereby
expressly authorizes Manager to make withdrawals of the Management Fee from the
Association Account as such fees become due and payable during the Term and
thereafter as provided in Section 6.3.
5.4 Disputes Regarding Fees.
(a) It is the parties' intent that any disputes regarding
performance standards of the Manager be resolved to the extent possible
by good faith negotiation. To that end, the parties agree that if the
Association in good faith believes that Manager has failed to perform
its obligations, and that as a result of such failure, the Association
is entitled to a set-off or reduction in its Management Fees, the
Association shall give Manager notice of the perceived failure and
request in the notice a set-off or reduction in Management Fees. Manager
and the Association shall then negotiate the dispute in good faith, and
if an agreement is reached, the parties shall implement the resolution
without further action.
(b) If an agreement cannot be reached to resolve the dispute,
the Association may submit the dispute to mediation pursuant to Section
7.6 hereof.
5.5 Accounts Receivable. To assure that the Association receives the
entire amount of professional fees for its Dental Services and to assist the
Association in maintaining reasonable cash flow for the payment of Office
Expenses, Manager, during the Term, shall have the option to purchase, with
recourse to the Association for the amount of the purchase, the accounts
MANAGEMENT SERVICES AGREEMENT - Page 19
<PAGE> 24
receivable of the Association arising during the previous month by transferring
the amount set forth below into the Association Account. The consideration for
the purchase shall be an amount equal to the average Adjusted Gross Revenue
recorded each month (according to GAAP on an accrual basis net of Adjustments)
for the six months prior to the purchase of the accounts receivable of
Association less the average Office Expenses due to Manager under this
Agreement for the six months prior to the purchase of the accounts receivable
of Association. The Association is concurrently herewith granting to Manager a
security interest in the accounts receivable, and the Association shall
cooperate with Manager and execute all documents in connection with the pledge
of accounts receivable to Manager. All collections in respect of such accounts
receivable purchased by Manager shall be received by Manager as the agent of
the Association and shall be endorsed to Manager and deposited in a bank
account at a bank designated by Manager. To the extent the Association comes
into possession of any payments in respect of such accounts receivable, the
Association shall direct such payments to Manager for deposit in bank accounts
designated by Manager.
ARTICLE 6
TERM AND TERMINATION
6.1 Initial and Renewal Term. The Term of this Agreement will be for
an initial period of ten (10) years after the effective date, and shall be
automatically renewed for successive ten (10) year periods thereafter, provided
that neither Manager nor the Association shall have given notice of termination
of this Agreement at least three hundred sixty five (365) days before the end
of the initial term or any renewal term, or unless otherwise terminated as
provided in Section 6.2 of this Agreement.
6.2 Termination.
(a) Termination By Manager. Manager may terminate this
Agreement with sixty (60) days notice upon the occurrence of any one of
the following events:
(i) The revocation, suspension, cancellation or
restriction of any Dentist's license to practice dentistry in the
State if, in the discretion of the Manager, the Association will
not be financially viable after such revocation, suspension,
cancellation, or restriction;
(ii) The Association's loss or suspension of its
Medicare or Medicaid provider number, and/or the Association's
restriction from treating beneficiaries of the Medicare or
Medicaid programs if, in the discretion of the Manager, the
Association will not be financially viable after such loss,
suspension, or restriction;
(iii) The dissolution of the Association or the filing of
a petition in voluntary bankruptcy, an assignment for the benefit
of creditors, or other action taken voluntarily or involuntarily
under any state or federal statute for the protection of debtors;
MANAGEMENT SERVICES AGREEMENT - Page 20
<PAGE> 25
(iv) The Association materially defaults in the
performance of its duties or obligations hereunder and such
default continues for sixty (60) days after notice is given by
Manager of the default; or
(v) The parties are unable to reach an agreement on a
new service agreement or basis for compensation after the
occurrence of an event described in Section 6.2(d).
(b) Termination By the Association. The Association may
terminate this Agreement with ninety (90) days notice in the event that
Manager materially defaults in the performance of its obligations
hereunder such that the Association is unable to conduct its business
and such default continues for ninety (90) days after Manager receives
notice of the default. Termination by the Association hereunder shall
require the affirmative vote of seventy-five percent (75%) or more of
the shareholder(s) of the Association entitled to vote, each
shareholder(s) voting their ownership interest in the Association.
(c) Termination by Agreement. In the event the Association
and Manager shall mutually agree in writing, this Agreement may be
terminated on the date specified in such written agreement.
(d) Legislative, Regulatory or Administrative Change. In the
event of a change in the Medicare or Medicaid statutes, case law,
regulations or general instructions or the adoption of new legislation
any of which materially and adversely affects the manner in which either
party may perform services under this Agreement, the parties shall
immediately amend this Agreement to comply with the law, regulation, or
policy and approximate as closely as possible the Management Fee
arrangement set forth in this Agreement as it existed immediately prior
to the change in law, regulation or policy.
6.3 Effects of Termination. Upon termination of this Agreement,
neither party shall have any further obligations hereunder except for (i)
obligations accruing prior to the date of termination, including, without
limitation, payment of the Management Fees relating to services provided prior
to the effective date of termination of this Agreement, and (ii) obligations,
promises, or covenants set forth herein that are expressly made to extend
beyond the Term, including, without limitation, indemnity provisions, which
provisions shall survive the expiration or termination of this Agreement. In
effectuating the provisions of this Section 6.3, the Association specifically
acknowledges and agrees that Manager shall continue to collect and receive on
behalf of the Association all cash collections from accounts receivable in
existence at the time this Agreement is terminated to the extent that Manager
has purchased accounts receivable and that Association shall direct any
payments which it receives in respect of such accounts receivable to Manager
for deposit in bank accounts designated by Manager. It is understood that such
cash collections will represent, in part, compensation to Manager for
management services already rendered and compensation on accounts receivable
purchased by Manager. Unless this Agreement is terminated by the Association
for cause, as defined in Section 6.2(b), Manager shall be entitled to continue
to collect, on behalf of and in the name of the Association, all accounts
receivable representing Dental Services provided prior to termination.
MANAGEMENT SERVICES AGREEMENT - Page 21
<PAGE> 26
Upon the expiration or termination of this Agreement for any reason or cause
whatsoever, Manager shall surrender to the Association all books and records
pertaining to the Association's dental practice.
ARTICLE 7
MISCELLANEOUS
7.1 Administrative Services Only. Nothing in this Agreement is
intended or shall be construed to allow Manager to exercise control or
direction over the manner or method by which the Association and its Dentists
perform Dental Services or other professional health care services. The
rendition of all Dental Services and the prescription or administration of
medicine and drugs shall be the sole responsibility of the Association and its
Dentists, and Manager shall not interfere in any manner or to any extent
therewith. Nothing contained in this Agreement shall be construed to permit
Manager to engage in the practice of dentistry, it being the sole intention of
the parties hereto that the services to be rendered to the Association by
Manager are solely for the purpose of providing non-dental management and
administrative services to the Association so as to enable the Association to
devote its full time and energies to the professional conduct of its dental
practice and provision of Dental Services to its patients and not to
administration, or practice management.
7.2 Status of Contractor. It is expressly acknowledged that the
parties hereto are "independent contractors," and nothing in this Agreement is
intended and nothing shall be construed to create an employer/employee,
partnership, joint venture or other type of relationship, 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. Each party understands and agrees that (i) the other will
not be treated as an employee for federal tax purposes, (ii) neither will
withhold on behalf of the other any sums for income tax, unemployment
insurance, social security, or any other withholding pursuant to any law or
requirement of any governmental body or make available any of the benefits
afforded to its employees, (iii) all of such payments, withholdings, and
benefits, if any, are the sole responsibility of the party incurring the
liability, and (iv) each will indemnify and hold the other harmless from any
and all loss or liability arising with respect to such payments, withholdings,
and benefits, if any.
7.3 Notices. All notices, reports, records, or other communications
that are required or permitted to be given to the parties under this Agreement
shall be sufficient in all respects if given in writing and delivered in
person, by telecopy, by overnight courier, or by registered or certified mail,
postage prepaid, return receipt requested, to the receiving party at the
following address:
MANAGEMENT SERVICES AGREEMENT - Page 22
<PAGE> 27
Association: OraCare Dental Associates, P.A.
14755 Preston Road, Suite 300
Dallas, Texas 75240
Attn: Peter R. Barnett, D.M.D.
Fax No.: 972-960-7782
Manager: OraCare Consultants, Inc.
1909 E. Route 70, First Floor
Springdale Rd. & Route 70
Cherry Hill, New Jersey 08003
Attn: Mark E. Pape
Fax No.: 609-751-0606
or to such other address as such party may have given to the other by notice
pursuant to this Section. Notice shall be deemed given on the date of delivery,
in the case of personal delivery or telecopy, or on the delivery or refusal
date, as specified on the return receipt, in the case of overnight courier or
registered or certified mail.
7.4 Governing Law. This Agreement shall be governed by the laws of
the State of New Jersey applicable to agreements to be performed wholly within
the state. The federal and state courts of New Jersey shall be the exclusive
courts of jurisdiction and venue for any litigation, special proceeding or
other proceeding as between the parties that may be brought, or arise out of,
in connection with or by reason of this Agreement.
7.5 Assignment. Except as may be herein specifically provided to the
contrary, this Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective legal representatives, successors, and
assigns; provided, however, that the Association may not assign this Agreement
without the prior written consent of Manager, which consent may be withheld.
The sale, transfer, pledge, or assignment of any voting shares held by any
shareholder of the Association such that the effective voting control of the
Association is altered, shall be deemed an attempted assignment by the
Association, and shall be null and void unless consented to in writing by
Manager prior to any such transfer, pledge, assignment, 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, Manager may
terminate this Agreement upon twenty-four (24) hours notice to the Association.
In addition, Manager or the transferee shall have the right to collaterally
assign its interest in this Agreement and its right to collect Management Fees
hereunder to any financial institution or other third party without the consent
of the Association.
7.6 Dispute Resolution. The parties shall use good faith negotiation
to resolve any controversy, dispute or disagreement arising out of or relating
to this Agreement or the breach of this Agreement. Any matter not resolved by
negotiation shall be submitted to nonbinding mediation. If complete agreement
cannot be reached within thirty (30) days of submission to mediation, any
remaining issues will be resolved by binding arbitration in accordance with the
MANAGEMENT SERVICES AGREEMENT - Page 23
<PAGE> 28
following provisions of this Section. A single arbitrator mutually acceptable
to the Manager and the Association who is knowledgeable in the managed care
practice or in commercial matters will conduct the arbitration. The
arbitrator's decision and award will be final and binding and may be entered in
any court with jurisdiction. The arbitrator will not have authority to limit,
expand or otherwise modify the terms of this Agreement. If the parties cannot
agree on an arbitrator, each party will appoint one arbitrator and these
arbitrators shall choose a single arbitrator to conduct the arbitration.
The mediation and, if necessary, the arbitration will be conducted under
the then current rules of the alternate dispute resolution (ADR) firm selected
by the parties, or if the parties are unable to agree on an ADR firm, the
parties will conduct the mediation and, if necessary, the arbitration under the
then current rules and supervision of the American Arbitration Association
(AAA). Manager and the Association will each bear its own attorneys' fees
associated with the mediation and, if necessary, the arbitration. Manager and
the Association will pay all other costs and expenses of the
mediation/arbitration as the rules of the selected ADR firm provide. The
parties and their representatives shall hold the existence, content and result
of the mediation and arbitration in confidence. The mediator shall not
consider and the arbitrator shall not be empowered to award punitive damages.
There shall be no discovery during the mediation process. If an arbitration is
necessary, no discovery shall be conducted except by agreement of the parties
or after approval by the arbitrator, who shall attempt to minimize the burden
of discovery.
7.7 Divisions and Headings. The divisions of this Agreement into
articles, sections, and subsections and the use of captions and headings in
connection therewith is solely for convenience and shall not affect in any way
the meaning or interpretation of this Agreement.
7.8 Amendments and Agreement Execution. This Agreement and
amendments hereto shall be in writing and executed in multiple copies on behalf
of the Association by its Managing Director, and on behalf of Manager by its
President or by an authorized officer of any successor to Manager. Each
multiple copy shall be deemed an original, but all multiple copies together
shall constitute one and the same instrument.
7.9 Entire Agreement. With respect to the subject matter of this
Agreement, this Agreement supersedes all previous contracts and constitutes the
entire agreement between the parties. Neither party shall be entitled to
benefits other than those specified herein. No prior oral statements or
contemporaneous negotiations or understandings or prior written material not
specifically incorporated herein shall be of any force and effect, and no
changes in or additions to this Agreement shall be recognized unless
incorporated herein by amendment as provided herein, such amendment(s) to
become effective on the date stipulated in such amendment(s). The parties
specifically acknowledge that, in entering into and executing this Agreement,
the parties rely solely upon the representations and agreements contained in
this Agreement and no others.
7.10 Severability. The parties hereto have negotiated and prepared
the terms of this Agreement in good faith with the intent that each every one
of the terms, covenants and conditions herein be binding upon and inure to the
benefit of the respective parties. Accordingly,
MANAGEMENT SERVICES AGREEMENT - Page 24
<PAGE> 29
if any one or more of the terms, provisions, promises, covenants or conditions
of this Agreement or the application thereof to any person or circumstances
shall be adjudged to any extent invalid, unenforceable, void or voidable for
any reason whatsoever by a court of competent jurisdiction or an arbitration
tribunal, such provision shall be as narrowly construed as possible, and each
and all of the remaining terms, provisions, promises, covenants and conditions
of this Agreement or their application to other persons or circumstances shall
not be affected thereby and shall be valid and enforceable to the fullest
extent permitted by law. To the extent this Agreement is in violation of
applicable law, then the parties agree to negotiate in good faith to amend the
Agreement, to the extent possible consistent with its purposes, to conform to
law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
MANAGEMENT SERVICES AGREEMENT - Page 25
<PAGE> 30
IN WITNESS WHEREOF, the Association and Manager have caused this
Agreement to be executed by their duly authorized representatives, all as of
the day and year first above written.
ASSOCIATION:
ORACARE DENTAL ASSOCIATES, P.A.
By:/s/ Peter R. Barnett
-----------------------------------
Peter R. Barnett, President
MANAGER:
ORACARE CONSULTANTS, INC.
By:/s/ Mark E. Pape
-----------------------------------
Mark E. Pape, Senior Vice President
MANAGEMENT SERVICES AGREEMENT - Page 26
<PAGE> 1
EXHIBIT 10.26
REVOLVING CREDIT AGREEMENT
AMONG
UNITED DENTAL CARE, INC.,
AS BORROWER
NATIONSBANK OF TEXAS, N.A.,
AS AGENT
AND
THE LENDERS NAMED HEREIN,
AS LENDERS
$35,000,000
AS OF
NOVEMBER 14, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Principles . . . . . . . . . . . . . . . . . . . . 14
1.3 Rules of Construction . . . . . . . . . . . . . . . . . . . . 14
1.4 Covenant Computations . . . . . . . . . . . . . . . . . . . . 14
SECTION 2 THE REVOLVING CREDIT FACILITY . . . . . . . . . . . . . . . . 14
2.1 Commitment to Lend . . . . . . . . . . . . . . . . . . . . . . 14
2.2 LC Subfacility . . . . . . . . . . . . . . . . . . . . . . . . 15
2.3 Method of Borrowing . . . . . . . . . . . . . . . . . . . . . 18
2.4 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.5 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . 20
2.6 Special Provisions for Eurodollar Advances . . . . . . . . . . 21
2.7 Payments of the Note . . . . . . . . . . . . . . . . . . . . . 23
2.8 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.9 Termination of Commitment . . . . . . . . . . . . . . . . . . 25
2.10 Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . 25
2.11 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3 COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.1 Liens and Security Interests . . . . . . . . . . . . . . . . . 26
SECTION 4 CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 26
4.1 Initial Advance . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 All Advances . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 5 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 28
5.1 Organization and Good Standing . . . . . . . . . . . . . . . . 28
5.2 Authorization and Power . . . . . . . . . . . . . . . . . . . 28
5.3 No Conflicts or Consents . . . . . . . . . . . . . . . . . . . 28
5.4 Enforceable Obligations . . . . . . . . . . . . . . . . . . . 29
5.5 No Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.6 Financial Condition . . . . . . . . . . . . . . . . . . . . . 29
5.7 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.8 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . 29
5.9 No Potential Default . . . . . . . . . . . . . . . . . . . . . 29
5.10 Material Agreements . . . . . . . . . . . . . . . . . . . . . 29
5.11 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . 29
5.12 Use of Proceeds; Margin Stock . . . . . . . . . . . . . . . . 29
5.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.14 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.15 Chief Executive Office, Etc. . . . . . . . . . . . . . . . . . 30
5.16 Compliance with Law; Governmental Authorizations . . . . . . . 30
5.17 Casualties . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.18 Sufficiency of Capital . . . . . . . . . . . . . . . . . . . . 31
5.19 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
REVOLVING CREDIT AGREEMENT i
<PAGE> 3
<TABLE>
<S> <C> <C>
5.20 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . 31
5.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.22 Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.23 Investment Company Act . . . . . . . . . . . . . . . . . . . . 31
5.24 Public Utility Holding Company Act . . . . . . . . . . . . . . 31
5.25 Representations and Warranties . . . . . . . . . . . . . . . . 31
5.26 Survival of Representations and Warranties . . . . . . . . . . 32
SECTION 6 AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . 32
6.1 Financial Statements, Reports, and Documents . . . . . . . . . 32
6.2 Payment of Taxes and Other Indebtedness . . . . . . . . . . . 33
6.3 Maintenance of Existence and Rights; Conduct of Business . . . 33
6.4 Notice of Default . . . . . . . . . . . . . . . . . . . . . . 33
6.5 Other Notices . . . . . . . . . . . . . . . . . . . . . . . . 33
6.6 Operations and Properties . . . . . . . . . . . . . . . . . . 33
6.7 Books and Records; Access . . . . . . . . . . . . . . . . . . 33
6.8 Compliance with Law . . . . . . . . . . . . . . . . . . . . . 34
6.9 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.10 Authorizations and Approvals . . . . . . . . . . . . . . . . . 34
6.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 34
6.12 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 34
6.13 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.14 Information Relating to Proposed Acquisitions . . . . . . . . 35
6.15 After-Acquired Subsidiaries . . . . . . . . . . . . . . . . . 35
6.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 35
7.1 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . 36
7.2 Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . 36
7.3 Negative Pledge Agreements . . . . . . . . . . . . . . . . . . 36
7.4 Restrictions on Distributions . . . . . . . . . . . . . . . . 36
7.5 Limitation on Investments . . . . . . . . . . . . . . . . . . 36
7.6 Certain Transactions . . . . . . . . . . . . . . . . . . . . . 36
7.7 Issuance of Shares . . . . . . . . . . . . . . . . . . . . . . 36
7.8 Limitation on Sale of Properties . . . . . . . . . . . . . . . 37
7.9 Liquidation, Mergers, Consolidations and Dispositions of
Substantial Assets . . . . . . . . . . . . . . . . . . . . . . 37
7.10 Lines of Business . . . . . . . . . . . . . . . . . . . . . . 37
7.11 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.12 Leases; Sale and Leaseback . . . . . . . . . . . . . . . . . . 37
7.13 Prepayment of Indebtedness . . . . . . . . . . . . . . . . . . 37
7.14 Minimum Net Worth . . . . . . . . . . . . . . . . . . . . . . 37
7.15 Fixed Charge Coverage . . . . . . . . . . . . . . . . . . . . 37
7.16 Funded Debt to EBITDA . . . . . . . . . . . . . . . . . . . . 38
7.17 Funded Debt to Total Capitalization . . . . . . . . . . . . . 38
7.18 Liquidity Coverage Ratio . . . . . . . . . . . . . . . . . . . 38
7.19 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . 38
SECTION 8 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 38
8.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . 38
8.2 Remedies Upon Event of Default . . . . . . . . . . . . . . . . 39
</TABLE>
REVOLVING CREDIT AGREEMENT ii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 9 THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.1 The Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.3 Proportionate Absorption of Losses . . . . . . . . . . . . . . 42
9.4 Delegation of Duties; Reliance . . . . . . . . . . . . . . . . 42
9.5 Limitation of Agent's Liability . . . . . . . . . . . . . . . 42
9.6 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.7 Collateral Matters . . . . . . . . . . . . . . . . . . . . . . 43
9.8 Limitation of Liability . . . . . . . . . . . . . . . . . . . 44
9.9 Relationship of Lenders . . . . . . . . . . . . . . . . . . . 44
9.10 Benefits of Agreement . . . . . . . . . . . . . . . . . . . . 44
SECTION 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 44
10.1 Accounting Reports . . . . . . . . . . . . . . . . . . . . . . 44
10.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
10.3 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . 45
10.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
10.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 45
10.6 Choice of Forum; Consent to Service of Process and
Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . 45
10.7 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . 46
10.8 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . 46
10.9 Nonliability of Lenders . . . . . . . . . . . . . . . . . . . 46
10.10 Article 15.10(b) . . . . . . . . . . . . . . . . . . . . . . . 46
10.11 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 46
10.12 Entirety . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
10.13 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.14 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.15 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 49
10.16 No Third Party Beneficiary . . . . . . . . . . . . . . . . . . 49
10.17 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . 49
10.18 Multiple Counterparts . . . . . . . . . . . . . . . . . . . . 49
10.19 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 49
10.20 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
REVOLVING CREDIT AGREEMENT iii
<PAGE> 5
REVOLVING CREDIT AGREEMENT
THIS REVOLVING CREDIT AGREEMENT (this "AGREEMENT"), dated as of November
14, 1996, is made among UNITED DENTAL CARE, INC., a Delaware corporation
("BORROWER"), each of the Persons listed on the signature pages hereof (herein
collectively called, together with each Person that becomes a Lender pursuant
to SECTION 10.11, the "LENDERS," and individually a "LENDER"), and NATIONSBANK
OF TEXAS, N.A., a national banking association, as agent for Lenders to the
extent and in the manner provided in SECTION 9 (herein called, together with
any successors and assigns, "AGENT").
R E C I T A L S
1. Borrower has requested that Lenders provide to Borrower a
revolving credit facility of up to $35,000,000.00 (a) to support Borrower's and
its Subsidiaries' capital expenditures and working capital needs (but not to
exceed $5,000,000.00 in the aggregate at any one time outstanding), (b) to
finance Permitted Acquisitions (defined below), and (c) for the issuance of
letters of credit required in connection with such working capital needs
(subject to the limitations described in (a) above), the OraCare Acquisition
(defined below), or Permitted Acquisitions.
2. Lenders are willing to provide such a facility to Borrower, upon
the terms, and subject to the conditions, hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1 DEFINITIONS.
1.1 DEFINITIONS. As used in this Agreement, all exhibits and
schedules hereto and in any note, certificate, report, or other Loan Document
made or delivered pursuant to this Agreement, the following terms have the
respective meanings assigned to them in this SECTION 1, or in the section or
recital referred to below:
"ACQUISITION" means any transaction, or series of related transactions,
consummated on or after the date hereof, by which any Company directly or
indirectly (a) acquires all or substantially all of the assets of any Person,
whether through purchase of assets, merger, or otherwise, (b) acquires (in one
transaction or as the most recent transaction in a series of transactions) at
least a majority (in number of votes) of the securities (or other similar
ownership interests) of any Person, or (c) acquires (in one transaction or as
the most recent transaction in a series of transactions) at least a majority of
the general partnership interests of any Person.
"ADJUSTED EURODOLLAR RATE" means, with respect to any Interest Period,
an interest rate per annum (rounded upwards, if necessary, to the next 1/16th
of 1%) equal to the quotient of (a) the Eurodollar Rate with respect to such
Interest Period, divided by (b) the remainder of 1.00 minus the Eurodollar
Reserve Requirement in effect on such date.
"ADVANCE" means (a) each disbursement by Lenders of a sum or sums lent
to Borrower pursuant to this Agreement, (b) each conversion of an Advance to
another Type or Advance, (c) each rollover of a Eurodollar Advance to a
successive Interest Period, and (d) each payment of a draw under a LC.
REVOLVING CREDIT AGREEMENT 2
<PAGE> 6
"AFFILIATE" of any Person means any other Person (a) directly or
indirectly, controlling, controlled by, or under common control with, such
Person, (b) that directly or indirectly beneficially owns or holds ten percent
(10%) or more of any class of voting stock of such Person, or (c) ten percent
(10%) or more of the voting stock of which is directly or indirectly
beneficially owned or held by the Person in question; provided, however, in no
event shall Agent or any Lender be deemed an Affiliate of any Company.
"AGENT" has the meaning set forth in the first paragraph of this
Agreement.
"AGENT'S LENDING OFFICE" means Agent's lending office located at 901
Main Street, Dallas, Texas 75202, or such other address as Agent may hereafter
designate in writing as Agent's Lending Office by notice to Borrower and
Lenders.
"AGREEMENT" means this Revolving Credit Agreement, including the
schedules and exhibits hereto, as the same may be renewed, extended, or
modified from time-to-time.
"APPLICABLE LENDING OFFICE" means for each Lender and each Type of
Advance, the lending office of such Lender (or of an Affiliate of such Lender)
designated for such Type of Advance below its name on the signature pages
hereof or an Assignment and Acceptance, or such other office of such Lender (or
of an Affiliate of such Lender) as such Lender may from time-to-time specify to
Borrower and Agent as the office by which its Advances of such Type are to be
made and maintained.
"APPLICABLE MARGIN" means (a) the interest margin over the Base Rate or
the Adjusted Eurodollar Rate, as the case may be, and (b) the applicable letter
of credit fee payable pursuant to SECTION 2.8(c), in each case based upon the
Funded Debt to EBITDA Ratio as of and for the most recent four (4) quarter
period ending on or before the date of determination, the margin set forth
opposite such ratio below:
<TABLE>
<CAPTION>
================================================================================
APPLICABLE APPLICABLE APPLICABLE
MARGIN MARGIN MARGIN FOR
FUNDED DEBT BASE RATE EURODOLLAR LETTER OF CREDIT
LEVEL TO EBITDA ADVANCES ADVANCES FEES
RATIO
================================================================================
<S> <C> <C> <C> <C>
I Less than 1.0 0% 1.25% 0.55%
to 1.0
- --------------------------------------------------------------------------------
II Less than 1.5 0% 1.5% 0.65%
to 1.0 but
greater than
or equal to
1.0 to 1.0
- --------------------------------------------------------------------------------
III Less than 2.0 0% 1.75% 0.75%
to 1.0 but
greater than
or equal to
1.5 to 1.0
- --------------------------------------------------------------------------------
IV Greater than 0.25% 1.85% 0.85%
or equal to
2.0 to 1.0
================================================================================
</TABLE>
REVOLVING CREDIT AGREEMENT 2
<PAGE> 7
The Funded Debt to EBITDA Ratio shall be determined from the then-most current
of either (a) the quarterly or annual financial statements and related
compliance certificate delivered pursuant to SECTION 6.1, or (b) the most
recent Notice of Borrowing or Notice of LC for a Permitted Acquisition,
calculating any adjustments to such ratio necessitated as a result of the
Permitted Acquisition for which such Advance or Issuance was made. The
adjustment, if any, to the Applicable Margin shall be effective commencing on
the fifth (5th) Business Day after delivery of such financial statements (and
related compliance certificate) or the respective date of Advance or Insurance
for a Permitted Acquisition, as the case may be. If Borrower fails at any time
to furnish to Agent and Lenders the financial statements and related compliance
certificate as required to be delivered pursuant to SECTION 6.1, then the
maximum Applicable Margin shall apply until such time as such financial
statements and compliance certificates are so delivered.
"ASSIGNEE" has the meaning set forth in SECTION 10.11(b).
"ASSIGNING LENDER" has the meaning set forth in SECTION 10.11(b).
"ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered
into by an Assigning Bank and its Assignee and accepted by Agent pursuant to
SECTION 10.11, in substantially the form of EXHIBIT A.
"ASSUMED DEBT SERVICE" means, as of any date, (a) the sum of all Funded
Debt of the Companies as of such date divided by (b) five (5).
"BASE RATE" means, at any time, the greater of (a) the variable rate of
interest established from time-to-time by Agent as its "base rate" and set by
Agent as a general reference rate of interest charged by Agent, and (b) the
Federal Funds Rate plus one-half of one percent (.5%). Borrower acknowledges
that Agent may, from time-to-time, extend credit to other borrowers at rates of
interest varying from, and having no relationship to, such general reference
rate. Each change in the Base Rate shall become effective without prior notice
to Borrower automatically as of the opening of business on the date of such
change in the Base Rate.
"BASE RATE ADVANCE" means any Advance hereunder with respect to which
the interest rate is calculated by reference to the Base Rate.
"BORROWER" has the meaning set forth in the first paragraph of this
Agreement.
"BUSINESS DAY" means (a) any day on which Agent is open for regular
business, and (b) with respect to all borrowings, payments, conversions,
continuations, Interest Periods, and notices in connection with Eurodollar
Advances, any day which is a Business Day described in clause (a) above and
which is also a day on which dealings in Dollar deposits are carried out in the
London interbank market.
"CAPITAL EXPENDITURE" means any expenditure by a Person for an asset
which will be used in years subsequent to the year in which the expenditure is
made or which is properly classifiable in relevant financial statements of such
Person as a capital asset.
"CAPITAL LEASE OBLIGATIONS" means, as to any Person as of any date, 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 required to be classified and accounted for as a capital
lease on a balance sheet of such Person under GAAP. For purposes of this
Agreement, the amount of such Capital Lease Obligations shall be the
capitalized amount thereof, as determined in accordance with GAAP.
REVOLVING CREDIT AGREEMENT 3
<PAGE> 8
"CHANGE IN CONTROL" means either: (a) any Person or group of related
Persons shall have acquired beneficial ownership of more than thirty-five
percent (35%) of the outstanding voting shares of Borrower (within the meaning
of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended,
and the applicable rules and regulations thereunder); (b) during any period of
twelve (12) consecutive calendar months, individuals who were Directors of
Borrower on the first day of such period shall cease to constitute a majority
of the Board of Directors of Borrower; or (c) any Person other than Borrower
shall have acquired beneficial ownership of more than five percent (5%) of the
outstanding voting securities (within the meaning of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended, and the applicable rules and
regulations thereunder) of any Company (other than of Borrower).
"CODE" means the Internal Revenue Code of 1986, as amended, and all
regulations promulgated and rulings issued thereunder.
"COLLATERAL" has the meaning set forth in SECTION 3.1.
"COLLATERAL DOCUMENTS" means all security agreements, pledge agreements,
and other agreements or documents executed or delivered to secure repayment of
the Obligation, or any part thereof.
"COMMITMENT" means, as to each Lender as of any date, the obligation of
such Lender on such date to make Advances hereunder in an aggregate principal
amount at any time outstanding up to but not exceeding the amount set forth
below its name on the signature pages hereof (or in an Assignment and
Acceptance) as its Commitment, as the same may be reduced pursuant to SECTION
2.1(b), SECTION 2.1(c), or SECTION 8.2 and as the same may be increased or
decreased from time-to-time by further assignment pursuant to SECTION 10.11.
"COMMITMENTS" means the Commitments of all Lenders in the original
aggregate principal amount of $35,000,000.00.
"COMMITMENT USAGE" means, at the time of any determination thereof, the
sum of (without duplication) (a) the aggregate Principal Debt, plus (b) the LC
Exposure.
"COMPANIES" means Borrower and its Subsidiaries, and "COMPANY" means any
one of the Companies.
"CONSOLIDATED ADJUSTED NET INCOME" means, for any Person for any period,
the amount which, in conformity with GAAP, would be shown on a consolidated
income statement of such Person as net income for such period, after deduction
of any minority interests, but excluding extraordinary gains or losses due to
(a) sales or write-up of assets, (b) earnings of any Person newly acquired, if
earned prior to acquisition, or (c) acquisition of any securities of such
Person.
"CONTRACT RATE" means (a) with respect to a Base Rate Advance, the Base
Rate plus the Applicable Margin, and (b) with respect to a Eurodollar Advance,
the Adjusted Eurodollar Rate plus the Applicable Margin.
"DEBTOR LAWS" means all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization,
or similar laws, from time-to-time in effect, affecting the rights of creditors
generally.
"DEFAULTING LENDER" means any Lender that, at the time of determination
thereof, is in default with respect to any of its obligations under this
Agreement or the other Loan Documents.
REVOLVING CREDIT AGREEMENT 4
<PAGE> 9
"DEFAULT RATE" means a per annum rate of interest equal from day-to-day
to the lesser of (a) the sum of the Base Rate plus the Applicable Margin plus
four percent (4%), and (b) the Maximum Rate.
"DISTRIBUTION" means, with respect to any shares of any capital stock or
other equity securities or other ownership interests issued by a Person, (a)
the retirement, redemption, purchase, or other acquisition for value of such
securities or interests by such Person, (b) the declaration or payment of any
dividends on or with respect to such securities or interests by such Person,
and (c) any other payment by that Person with respect to such securities or
interests.
"DOLLARS" and "$" mean lawful money of the United States of America.
"EBITDA" means, for any Person for any period, the sum of (a)
Consolidated Adjusted Net Income, plus (b) depreciation and amortization
expense, plus (c) Interest Expense, plus (d) income taxes deducted from
Consolidated Adjusted Net Income in accordance with GAAP, plus (e)
extraordinary losses (and any unusual losses arising in or outside the ordinary
course of business of such Person not included in extraordinary losses)
determined in accordance with GAAP that have been reflected in the
determination of Consolidated Adjusted Net Income, minus (f) extraordinary
gains (and any unusual gains arising in or outside the ordinary course of
business of such Person not included in extraordinary gains) determined in
accordance with GAAP that have been reflected in the determination of
Consolidated Adjusted Net Income.
"ELIGIBLE ASSIGNEE" means any commercial bank, savings and loan
association, savings bank, finance company, insurance company, pension fund,
mutual fund, or other financial institution (whether a corporation,
partnership, or other entity) approved by Agent and Issuing Bank, so long as no
Potential Default or Event of Default has occurred and is continuing, Borrower,
such approvals not to be unreasonably withheld.
"ELIGIBLE MUTUAL FUNDS" means mutual funds that are (a) regularly traded
on a nationally-recognized United States public exchange on which securities,
debt instruments, and/or mutual funds are regularly traded, and (b) not subject
to any federal or state securities laws or other Legal Requirements which
restrict or limit their sale or transfer.
"ENVIRONMENTAL LAWS" means any Legal Requirement pertaining to air,
emissions, water discharge, noise emissions, solid or liquid waste disposal,
hazardous waste or materials, industrial hygiene, or other environmental,
health, or safety matters or conditions on, under, or about real property, or
any portion thereof, and similar Legal Requirements of any Governmental
Authority having jurisdiction over real property, as such laws may be amended
or supplemented from time-to-time, and regulations promulgated and rulings
issued pursuant to such Legal Requirements.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations and published interpretations thereunder.
"ERISA AFFILIATE" means any corporation, trade, or business (whether or
not incorporated) which is a member of a group of which Borrower is a member,
and which is under common control with Borrower, within the meaning of Section
414 of the Code.
"EURODOLLAR ADVANCE" means any Advance hereunder with respect to which
the interest rate is calculated by reference to the Adjusted Eurodollar Rate
for a particular Interest Period.
"EURODOLLAR RATE" means, for any Eurodollar Advance for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/16th of one percent) equal to the rate appearing on
REVOLVING CREDIT AGREEMENT 5
<PAGE> 10
the Telerate Page 3750 (or any successor page) as the London interbank offered
rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2)
Business Days prior to the first (1st) day of such Interest Period for a term
comparable to such Interest Period. If for any reason the Telerate Page 3750
rate is not available, then the "Eurodollar Rate" shall be the rate appearing
on the Reuters Screen LIBO Page as the London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Business
Days prior to the first (1st) day of the such Interest Period for a term
comparable to such Interest Period; provided, however, if more than one rate is
specified on the Reuters Screen LIBO Page, then the applicable rate shall be
the arithmetic mean of all such rates. If neither of the Telerate Page 3750 or
Reuters Screen LIBO Page rates are available, then the "Eurodollar Rate" shall
be determined on the basis of the rates at which deposits in United States
dollars are offered by Agent at approximately 11:00 a.m. (London time) on the
day that is two (2) Business Days preceding the first (1st) day of the relevant
Interest Period to prime banks in the London interbank market for a period
equal to such Interest Period commencing on the first (1st) day of such
Interest Period and in an amount comparable to the principal amount of the
Eurodollar Advance to be made by Agent for which such Interest Period relates.
"EURODOLLAR RESERVE REQUIREMENT" means, for any Lender on any day, that
percentage (expressed as a decimal fraction) that is in effect on such day, as
provided by the Board of Governors of the Federal Reserve System (or any
successor governmental body), applied for determining the reserve requirements
of such Lender (including, without limitation, basic, supplemental, marginal,
and emergency reserves) under Regulation D, with respect to "Eurocurrency
liabilities" as currently defined in Regulation D, or under any similar or
successor regulation with respect to Eurocurrency liabilities or Eurocurrency
funding. Each determination by any Lender of the Eurodollar Reserve
Requirement shall, in the absence of manifest error, be conclusive and binding.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 8.1.
"EXISTING LC AGREEMENTS" means that certain Amended and Restated
Application and Agreement for Standby Letter of Credit dated as of September
16, 1994, relating to the issuance of a letter of credit for the benefit of
Omega Marine Development, Inc. and that certain Amended and Restated
Application and Agreement for Standby Letter of Credit dated September 16,
1994, relating to the issuance of a letter of credit for the benefit of The
Adaven Group Limited Partnership.
"FEDERAL FUNDS RATE" means, on any day, the annual rate (rounded
upwards, if necessary, to the nearest 0.01%) determined by Agent (which
determination is conclusive and binding, absent manifest error) to be equal to
the weighted average of the rates on overnight federal funds transactions with
member banks of the Federal Reserve System arranged by federal funds brokers as
published by the Federal Reserve Bank of New York on the next successive
Business Day; provided, however, that (a) if such determination date is not a
Business Day, the Federal Funds Rate for such day shall be the rate for such
transactions on the next preceding Business Day as published on the next
successive Business Day, or (b) if those rates are not published for any
Business Day, the Federal Funds Rate shall be the average of the quotations at
approximately 10:00 a.m. on such Business Day received by Agent from three (3)
federal funds brokers of recognized standing selected by Agent in its sole
discretion.
"FUNDED DEBT" means (without duplication) Indebtedness of the type
described in SUBSECTIONS (a), (b), (c), (d), (e), (f) and (g) in the definition
of "Indebtedness."
"FUNDED DEBT TO EBITDA" means, as of any date, the ratio of (a) the
aggregate amount of Funded Debt of the Companies (without deduction for any
minority interests), as of such date, to (b) EBITDA of the Companies, for the
four (4) fiscal quarter period ending on the date of determination.
REVOLVING CREDIT AGREEMENT 6
<PAGE> 11
"FUNDING LOSS" has the meaning set forth in SECTION 2.6(e).
"GAAP" means those generally accepted accounting principles and
practices, applied on a consistent basis, which are recognized as such by the
American Institute of Certified Public Accountants, acting through its
Accounting Principles Board and the Financial Accounting Standards Board,
and/or their respective successors, and which are applicable as of the date of
this Agreement, except for changes approved by Agent or otherwise permitted
under the Loan Documents.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory, or administrative functions of or pertaining
to government.
"GOVERNMENTAL AUTHORIZATION" means any approval, consent, license,
permit, waiver, or other authorization issued, granted, given, or otherwise
made available by or under the authority of any Governmental Authority or
pursuant to any Legal Requirement.
"GUARANTY" of any Person means any contract or understanding of such
Person pursuant to which such Person guarantees, or in effect guarantees, any
Indebtedness of any other Person (the "PRIMARY OBLIGOR") in any manner, whether
directly or indirectly, including agreements to assure the holder of the
Indebtedness of the Primary Obligor against loss in respect thereof; except
that "Guaranty" shall not include endorsements, in the ordinary course of
business, of negotiable instruments or documents for deposit or collection.
The term "GUARANTEE" used as a verb has a corresponding meaning.
"HAZARDOUS MATERIAL" means any hazardous, toxic, or dangerous waste,
substance, or material defined as such in, or for the purpose, of any
Environmental Law.
"INDEBTEDNESS" means as to any Person at any time (without
duplication): (a) all obligations of such Person for borrowed money; (b) all
obligations of such Person evidenced by bonds, notes, debentures, or other
similar instruments; (c) all obligations of such Person to pay the deferred
purchase price of property or services, except trade accounts payable of such
Person arising in the ordinary course of business that are not past-due by more
than ninety (90) days; (d) all Capital Lease Obligations of such Person; (e)
all indebtedness or other obligations of others of the types described in this
definition, if Guaranteed by such Person; (f) all obligations secured by a Lien
existing on property owned by such Person, whether or not the obligations
secured thereby have been assumed by such Person or are non-recourse to the
credit of such Person; (g) all reimbursement obligations of such Person
(whether contingent or otherwise) in respect of letters of credit (whether
drawn or undrawn), bankers' acceptances, surety, or other bonds and similar
instruments; (h) all obligations under any Interest Hedge Agreements; and (i)
all liabilities of such Person in respect of unfunded vested benefits under any
Plan; provided, however, that the term Indebtedness shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business.
"INDEMNITY POLICIES" means insurance contracts, policies, or other
agreements providing for reimbursement of expenses or provision of services
upon the occurrence of an insured event.
"INTEREST EXPENSE" means, for any Person for any period, total interest
expense, whether paid or accrued, but without duplication (including the
interest component of Capital Lease Obligations), including, without
limitation, all commissions, discounts, and other fees and charges owed with
respect to letters of credit, all as determined in conformity with GAAP.
"INTEREST HEDGE AGREEMENTS" means any and all agreements, devices, or
arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, exchange rates, or forward
REVOLVING CREDIT AGREEMENT 7
<PAGE> 12
rates applicable to such party's assets, liabilities, or exchange transactions,
including, but not limited to, Dollar-denominated or cross-currency interest
rate exchange agreements, forward currency exchange agreements, interest rate
cap, swap, or collar protection agreements, and forward rate currency or
interest rate options, as the same may be amended or modified and in effect
from time-to-time, and any and all cancellations, buy backs, reversals,
terminations, or assignments of the foregoing.
"INTEREST PERIOD" means, with respect to a Eurodollar Advance, a period
commencing:
(a) on the borrowing date of such Eurodollar Advance; or
(b) on the conversion date pertaining to such Eurodollar Advance, if
made pursuant to a conversion as described in SECTION 2.3(c); or
(c) on the last day of the preceding Interest Period, in the case of
a rollover to a successive Interest Period;
and ending one (1), three (3) or six (6) months thereafter, as Borrower shall
elect in accordance with SECTION 2.3(c); provided that:
(i) any Interest Period that would otherwise end on a day which is
not a Business Day shall be extended to the next succeeding Business Day,
unless such Business Day falls in another calendar month, in which case such
Interest Period shall end on the next preceding Business Day;
(ii) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall, subject to
Clause (i) above, end on the last Business Day of a calendar month; and
(iii) if the Interest Period for any Eurodollar Advance would otherwise
end after the final maturity date of the Loan, then such Interest Period shall
end on the final maturity date of the Loan.
"INVESTMENT" in any Person means any investment, whether by means of
share purchase, loan, advance, extension of credit, capital contribution, or
otherwise, in or to such Person, or the subordination of any claim against such
Person to other Indebtedness of such Person.
"ISSUANCE" means each issuance of an LC pursuant to this Agreement
and/or an LC Agreement.
"ISSUING BANK" means NationsBank of Texas, N.A., and its successors and
permitted assigns.
"LC" means a standby letter of credit issued by Agent under this
Agreement and/or pursuant to an LC Agreement.
"LC AGREEMENT" means a standby letter of credit application and
agreement (in form and substance satisfactory to Agent) submitted by Borrower
to Agent for an LC for its own account (and for its benefit or the benefit of
any other Company); provided that this Agreement shall control any conflict
between this Agreement and any such LC Agreement.
"LC EXPOSURE" means, without duplication, the sum of (a) the aggregate
undrawn portion of all uncancelled and unexpired LCs plus (b) the aggregate
unpaid reimbursement obligations of Borrower in respect of drawings or drafts
under any LC.
REVOLVING CREDIT AGREEMENT 8
<PAGE> 13
"LC SUBFACILITY" means a subfacility of the Loan for the issuance of LCs
(the LC Exposure in connection with which may never exceed $32,000,000.00), as
described in and subject to the limitations of SECTION 2.2.
"LEGAL REQUIREMENT" means any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty as in effect
on the date hereof.
"LENDER" and "LENDERS" has the meanings set forth in the first paragraph
of this Agreement.
"LIEN" means any lien, mortgage, security interest, tax lien, pledge,
negative pledge, encumbrance, conditional sale, or title retention arrangement,
or any other interest in property designed to secure the repayment of
Indebtedness, whether arising by agreement, or under any statute, law, or
otherwise.
"LIQUID ASSETS" means, for any Person as of any date, the sum of (a)
cash, plus (b) Temporary Cash Investments, as of such date.
"LOAN" means the revolving credit loan made, or to be made hereunder, to
Borrower by Lenders pursuant to SECTION 2.1, and the letter of credit
subfacility made, or to be made hereunder, to Borrower by Agent and Lenders
pursuant to SECTION 2.2.
"LOAN DOCUMENTS" means this Agreement, the Notes, the Collateral
Documents, any fee letters described herein, any Interest Hedge Agreements with
any Lender, and any agreements, documents (and with respect to this Agreement,
and such other agreements and documents, any renewals, extensions, amendments,
or supplements thereto), or certificates at any time executed or delivered
pursuant to the terms of this Agreement.
"MATERIAL ADVERSE EFFECT" means any material adverse change in, or
effect upon, (a) the validity, performance, or enforceability of any Loan
Document, (b) the financial condition or business operations of Borrower or the
Companies, taken as a whole, or (c) the ability of Borrower or any Company to
fulfill its obligations under the Loan Documents.
"MAXIMUM RATE" means the highest nonusurious rate of interest (if any)
permitted from day-to-day by applicable law. Agent and Lenders hereby notify
and disclose to Borrower that, for purposes of Tex. Rev. Civ. Stat. Ann. art.
5069-1.04, as it may from time-to-time be amended, the "applicable rate
ceiling" shall be the "indicated rate" ceiling from time-to-time in effect, as
limited by article 5069-1.04(b); provided, however, that to the extent
permitted by applicable law, Agent and Lenders reserve the right to change the
"applicable rate ceiling" from time-to-time by further notice and disclosure to
Borrower.
"MOODY'S" means Moody's Investors Service, Inc., or, if Moody's no
longer publishes ratings, such other ratings agency acceptable to the Required
Lenders.
"MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section
3(37) of ERISA to which contributions have been made by Borrower or any ERISA
Affiliate of Borrower and which is covered by Title IV of ERISA.
"NET CASH PROCEEDS" means, with respect to any Permitted Equity Issuance
by any Company, the amount of cash received by such Company in connection with
such transaction after deducting therefrom the aggregate, without duplication,
of the following amounts to the extent properly attributable to such
transaction: (a) reasonable brokerage commissions, attorneys' fees, finder's
fees, financial advisory fees,
REVOLVING CREDIT AGREEMENT 9
<PAGE> 14
accounting fees, underwriting fees, investment banking fees, and other similar
commissions and fees (and expenses and disbursements of any of the foregoing),
in each case, to the extent paid or payable by such Company; (b) printing and
related expenses and filing, recording, or registration fees or charges or
similar fees or charges paid by such Company; and (c) taxes paid or payable by
such Company to any Governmental Authority as a result of such transactions.
"NET WORTH" means, for any Person as of any date, the total
stockholders' or shareholders' equity of such Person, determined in accordance
with GAAP.
"NOTES" means the Revolving Credit Notes in substantially the form of
EXHIBIT B, executed by Borrower and delivered pursuant to the terms of this
Agreement, together with any renewals, extensions, or modifications thereof,
and "NOTE" means any one of the Notes.
"NOTICE OF BORROWING" means, with respect to any Advance, a notice
substantially in the form of EXHIBIT C.
"NOTICE OF LC" means a notice substantially in the form of EXHIBIT D.
"OBLIGATION" means all present and future Indebtedness, obligations, and
liabilities, and all renewals and extensions thereof, or any part thereof, now
or hereafter owed to Agent or any Lender by Borrower arising pursuant to any of
the Loan Documents, and all renewals and extensions thereof, together with all
interest accruing thereon, and costs, expenses, and attorneys' fees incurred in
the enforcement or collection thereof.
"ORACARE ACQUISITION" means Borrower's Acquisition of OraCare
Consultants, Inc. and OraCare DPO, Inc. pursuant to the Stock Purchase
Agreements.
"OTHER PERMITTED INVESTMENTS" means Investments expressly permitted by
any Governmental Authority.
"PERMITTED ACQUISITION" means an Acquisition by a Company with respect
to which each of the following conditions has been satisfied:
(a) the Acquisition by such Company is of all or substantially all of
(i) the capital stock of a Qualified Company, or (ii) the assets of a Qualified
Company (the Qualified Company to be acquired or whose assets are being
acquired is herein called the "TARGET");
(b) as of the closing of such Acquisition, the Acquisition has been
approved and recommended by the Board of Directors or other applicable
governing body of the Target and the Person from which the Target is to be
acquired;
(c) prior to the closing of such Acquisition, the Target and the
Person from which the Target is to be acquired must be Solvent;
(d) as of the closing of such Acquisition, after giving effect to
such Acquisition, the acquiring Company must be Solvent;
(e) as of the closing of such Acquisition, after giving effect to
such Acquisition, no Potential Default or Event of Default shall exist or occur
as a result of, and after giving effect to, such Acquisition;
REVOLVING CREDIT AGREEMENT 10
<PAGE> 15
(f) prior to the closing of such Acquisition, Borrower shall have
provided to Agent (i) current financial statements and historical operating
information on the Target, (ii) a pro-forma balance sheet of the Companies
after giving effect to the Acquisition, together with pro-forma operating
projections for the three (3) year period following the Acquisition, and (iii)
a copy of the results of Borrower's due diligence with respect to the Target;
(g) Agent has received a certificate, executed by the President or a
Vice President of Borrower, confirming that all representations and warranties
set forth in the Loan Documents continue to be true and correct in all material
respects, immediately prior to, and after giving effect to, the Permitted
Acquisition, and the transactions contemplated thereby, and setting forth the
calculations supporting compliance with the limitations prescribed herein; and
(h) if the Acquisition will result in Borrower or any other Company
incurring or assuming Indebtedness (including under this Agreement) in excess
of $12,000,000.00, then Agent shall have notified Borrower that the Required
Lenders have approved the Acquisition of the Target (which shall be delivered
within ten (10) Business Days of receipt of the information required in (f) and
(g) above).
"PERMITTED EQUITY ISSUANCE" means the issuance or sale by Borrower of
any shares of capital stock or partnership, profits, capital, or member
interests, or options, warrants, or other right to subscribe for or otherwise
acquire shares of capital stock or partnership, profits, capital, or member
interests, of Borrower.
"PERMITTED LIENS" means: (a) Liens in favor of Agent, for the benefit of
Lenders, to secure the Obligation; (b) pledges or deposits made to secure
payment of worker's compensation (or to participate in any fund in connection
with worker's compensation insurance), unemployment insurance, pensions, or
social security programs; (c) encumbrances consisting of zoning restrictions,
easements, or other restrictions on the use of real property, provided that
such items do not materially impair the use of such property for the purposes
intended, and none of which is violated in any material respect by existing or
proposed structures or land use; (d) the following, to the extent no Lien has
been filed in any jurisdiction or agreed to (i) Liens for taxes not yet past-
due, and (ii) Liens imposed by mandatory provisions of law, such as for
materialmen's, mechanic's, warehousemen's, and other like Liens arising in the
ordinary course of business, securing payment of Indebtedness whose payment is
not yet due; (e) Liens for taxes, assessments, and governmental charges or
assessments, that are being contested in good faith by appropriate proceedings
diligently conducted, and in which reserves acceptable to Agent have been
provided; (f) deposits with Governmental Authorities in order to satisfy Legal
Requirements that are required in the ordinary course of business and not for
the purpose of securing past-due obligations; and (g) Liens arising out of
attachments, judgments, or awards not exceeding $1,000,000.00 in the aggregate
as to which an appeal or other appropriate proceeding or contest or review is
promptly commenced, and as to which foreclosure and other enforcement
proceedings (i) shall not have been commenced (unless fully bonded or other
effectively stayed), and (ii) in any event, shall be promptly fully bonded or
otherwise effectively stayed prior to such time as any such Lien becomes
perfected; (h) Liens securing surety or appeal bonds, provided that the value
of cash or property forming a part of the security with respect to such surety
or appeal bonds does not exceed in the aggregate $1,000,000.00; (i) Liens
securing Indebtedness permitted pursuant to SECTION 7.1(e) and covering only
those assets acquired with the proceeds of such Indebtedness; (j) Liens granted
by Kansas City Dental Care, Inc. to secure reimbursement obligations under
letters of credit issued for the benefit of the Kansas Department of Insurance
not to exceed $100,000.00 at any time outstanding; and (k) Liens in assets of a
Company acquired pursuant to a Permitted Acquisition existing at the time (but
not incurred in anticipation) of such Acquisition, provided that such Liens are
released with fifteen (15) days after such Acquisition unless such Liens are
otherwise permitted under this Agreement.
REVOLVING CREDIT AGREEMENT 11
<PAGE> 16
"PERSON" includes an individual, corporation, joint venture, general or
limited partnership, trust, unincorporated organization, or government, or any
agency or political subdivision thereof.
"PLAN" means an employee benefit plan or other plan, maintained by
Borrower or any ERISA Affiliate, and which is covered by Title IV of ERISA, or
subject to the minimum funding standards under Section 412 of the Code, as
amended.
"PLEDGE AGREEMENTS" means the Pledge Agreements executed by each Company
that owns capital stock, of or other ownership interests in, another Company in
favor of Agent, for the benefit of Lender, substantially in the form of EXHIBIT
E, as the same may be amended, supplemented, or modified from time-to-time, and
"PLEDGE AGREEMENT" means any one of the Pledge Agreements.
"POTENTIAL DEFAULT" means the occurrence of any event which with passage
of time, or giving of notice, or both, could become an Event of Default.
"PREPAID PLANS" means the single health care service plans (or similar
plans) pursuant to which any Company arranges for the provision of dental
health care services to members on a prepaid basis.
"PRINCIPAL DEBT" means, at the time of any determination thereof, the
aggregate unpaid principal balance of all Advances.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to all or any of its functions under ERISA.
"PROHIBITED TRANSACTION" means any transaction set forth in Section 406
of ERISA or Section 4975 of the Code.
"PRO RATA" and "PRO RATA PART" means, on any date of determination
thereof for any Lender (a) at any time prior to the termination of the
Commitments, the proportion that such Lender's Commitment bears to the
Commitments of all Lenders, and (b) at any time on and after the termination of
the Commitments, the proportion that (i) the sum of (without duplication) (A)
the Principal Debt owed to such Lender plus (B) such Lender's proportionate
part (whether held directly or through a participation therein and determined
after giving effect to any participations) of the LC Exposure bears to (ii) the
sum of (without duplication) (x) the Principal Debt of all Lenders plus (y) the
LC Exposure of all Lenders.
"QUALIFIED COMPANY" means a domestic Person whose business is comprised
of more than fifty percent (50%) Prepaid Plans (as opposed to Indemnity
Policies).
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System, from time-to-time in effect, and shall include any
successor or other regulation relating to reserve requirements applicable to
member banks of the Federal Reserve System.
"REPORTABLE EVENT" means any of the events set forth in Section 4043 of
ERISA.
"REQUIRED LENDERS" means, as of any date, any combination of Lenders
(other than any Defaulting Lenders) who collectively hold sixty percent (60%)
of the sum of the Commitments (other than of any Defaulting Lenders), or if the
Commitments have been terminated, then of the sum of (without duplication) (a)
the Principal Debt of all Lenders (other than of any Defaulting Lenders) plus
(b) the LC Exposure of all Lenders (other than of any Defaulting Lenders).
REVOLVING CREDIT AGREEMENT 12
<PAGE> 17
"RESERVES" means, for any Person, accrued liabilities for future
obligations under Indemnity Policies and Prepaid Plans for insured events.
"SOLVENT" means, with respect to any Person, that on the date of
determination (a) the fair market value of its assets is greater than the total
amount of liabilities, including, without limitation, contingent liabilities,
of such Person that would be required to be included on the balance sheet of
such Person or disclosed in the financial statements of such Person in
accordance with GAAP, (b) the present fair saleable value of the assets of
such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person does not intend to, and does not believe that it will,
incur debts or liabilities beyond such Person's ability to pay as such debts
and liabilities mature, and (d) such Person is not engaged in business or
transactions, and is not about to engage in business or transactions, for which
its assets would constitute an unreasonably small capital.
"S & P" means Standard & Poor's Ratings Group, a division of McGraw
Hill, Inc., a New York corporation, or if S & P no longer publishes ratings,
then such other ratings agency acceptable to the Required Lenders.
"STOCK PURCHASE AGREEMENTS" means (a) that certain Stock Purchase
Agreement dated as of September 5, 1996, between Borrower, Frank A. Pettisani,
D.D.S., Charles A. Costa, Donna Costa, and OraCare Consultants, Inc., and (b)
that certain Stock Purchase Agreement dated as of September 5, 1996, between
Borrower, Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani, Jr.,
D.D.S., Charles A. Costa and Donna Costa, and OraCare DPO, Inc.
"SUBSIDIARY" of any Person means any corporation of which more than
fifty percent (50%) (in number of votes) of the issued and outstanding
securities having ordinary voting power for the election of at least a majority
of the directors is owned or controlled, directly or indirectly, by such Person
or a Subsidiary of such Person.
"TAXES" means, for any Person, taxes, assessments, or other governmental
charges or levies imposed upon it, its income, or any of its properties,
franchises, or assets.
"TEMPORARY CASH INVESTMENT" means any Investment (a) in direct
obligations of the United States of America, or any agency thereof, or
obligations fully guaranteed by the United States of America, or any agency
thereof, provided that such obligations mature within one year of the date of
acquisition thereof, (b) commercial paper rated in the highest grade by one or
more national credit rating agencies, and maturing not more than 180 days from
the date of creation thereof, (c) time deposits with, and certificates of
deposit and bankers' acceptances issued by, Agent or any United States bank
having capital surplus and undivided profits aggregating at least
$1,000,000,000.00, (d) deposits maintained at other financial institutions
having capital and surplus aggregating at least $1,000,000,000.00, as long as
Investments in such institutions are permissible under applicable state and
federal regulations to which Borrower is subject, and (e) Eligible Mutual
Funds.
"TERMINATION DATE" means the earlier of (a) November 30, 2000, (b) the
date Lenders' commitments to fund Advances and to make Issuances hereunder are
terminated pursuant to SECTION 8.2, or (c) the date that Lenders' commitments
to fund Advances and to make Issuances hereunder are reduced to zero pursuant
to SECTION 2.1(b) and/or SECTION 2.1(c).
"TOTAL CAPITALIZATION" means, for any Person as of any date, the sum of
(a) Tangible Net Worth, and (b) all Indebtedness of such Person.
"TYPE" means any type of Advance (i.e., Base Rate Advance or Eurodollar
Advance).
REVOLVING CREDIT AGREEMENT 13
<PAGE> 18
1.2 ACCOUNTING PRINCIPLES. Under the Loan Documents, unless otherwise
stated, (a) GAAP determines all accounting and financial terms and compliance
with financial covenants, (b) GAAP in effect on the date of this Agreement
determines compliance with financial covenants, (c) otherwise, all accounting
principles applied in a current period must be comparable in all material
respects to those applied during the preceding comparable period, and (d) all
accounting and financial terms and compliance with financial covenants must be
for the Companies, on a consolidated basis.
1.3 RULES OF CONSTRUCTION. When used in this Agreement: (a) "or" is
not exclusive; (b) a reference to a law includes any amendment or modification
to such law; (c) a reference to a Person includes its permitted successors and
permitted assigns; (d) except as provided otherwise, all references to the
singular shall include the plural, and vice versa; (e) except as provided in
this Agreement, a reference to an agreement, instrument, or document shall
include such agreement, instrument, or document, as the same may be amended,
modified, or supplemented from time-to-time, in accordance with its terms and
as permitted by the Loan Documents; (f) all references to SECTIONS, EXHIBITS,
and SCHEDULES shall be to sections of and exhibits and schedules to this
Agreement, unless otherwise indicated; (g) all EXHIBITS and SCHEDULES to this
Agreement shall be incorporated into this Agreement; (h) the words "include,"
"includes," and "including" shall be deemed to be followed by the phrase
"without limitation;" and (i) except as otherwise provided herein, in the
computation of time, from a specified date to a later specified date, the word
"from" means "from and including," and words "to" and "until" each mean "to but
excluding."
1.4 COVENANT COMPUTATIONS. For purposes of the financial covenants
set forth in SECTIONS 7.15 and 7.16, EBITDA for any Person newly acquired shall
be annualized based upon such Person's EBITDA from the date of Acquisition
thereof through the date of determination.
SECTION 2 THE REVOLVING CREDIT FACILITY.
2.1 COMMITMENT TO LEND.
(a) COMMITMENT. Subject to and in reliance upon the terms,
conditions, representations, and warranties in the Loan Documents, each Lender
severally and not jointly agrees to lend to Borrower such Lender's Pro Rata
Part of one or more Advances not to exceed such Lender's Commitment, which,
subject to the Loan Documents, Borrower may borrow, repay, and reborrow under
this Agreement; provided that: (i) each such Advance must occur on a Business
Day and no later than the Business Day immediately preceding the Termination
Date; (ii) each such Advance shall be in an amount not less than (A)
$1,000,000.00 or a greater integral multiple of $500,000.00 (if a Base Rate
Advance), or (B) $1,000,000.00 or a greater integral multiple of $500,000.00
(if a Eurodollar Advance); and (iii) on any date of determination, the
Commitment Usage shall never exceed the Commitments.
(b) VOLUNTARY TERMINATION OF COMMITMENTS. Without premium or
penalty, and upon giving not less than ten (10) Business Days prior written and
irrevocable notice to Agent, Borrower may terminate in whole or in part the
unused portion of the Commitments; provided that: (i) each partial termination
shall be in an amount of not less than $1,000,000.00 or a greater integral
multiple thereof; (ii) the amount of the Commitments may not be reduced below
the Commitment Usage at such time; and (iii) each reduction shall be allocated
to each Lender's Commitment Pro Rata among all Lenders in accordance with their
respective Pro Rata Parts. Promptly after receipt of such notice or
termination or reduction, Agent shall notify each Lender of the proposed
cancellation or reduction.
(c) MANDATORY REDUCTION OF THE COMMITMENTS. The Commitments shall
automatically be reduced on the last day of each February, May, August, and
November, commencing on February 28, 1999,
REVOLVING CREDIT AGREEMENT 14
<PAGE> 19
in an amount equal to $1,750,000.00, provided that: (i) each reduction shall be
allocated to each Lender's Commitment Pro Rata among all Lenders in accordance
with their respective Pro Rata Part; and (ii) if the Commitment Usage exceeds
the Commitments, after giving effect to such reduction in the Commitments, then
Borrower shall prepay the Principal Debt or reduce (or provide cash collateral
for) the LC Exposure in an amount equal to such excess.
2.2 LC SUBFACILITY.
(a) ISSUANCE. Subject to the terms and conditions of this Agreement
and applicable law, Issuing Bank agrees to issue LCs upon Borrower's
application therefor by delivering to Agent and Issuing Bank a properly
completed Notice of LC and an LC Agreement with respect thereto no later than
11:00 a.m. Dallas, Texas time three (3) Business Days before such LC is to be
issued; provided that: (i) on any date of determination and after giving effect
to any LC to be issued on such date, the Commitment Usage shall never exceed
the Commitments; (ii) on any date of determination and after giving effect to
any LC to be issued on such date, the LC Exposure shall never exceed
$32,000,000.00; (iii) at the time of issuance of such LC, no Potential Default
or Event of Default shall exist; (iv) each LC will be issued solely for
purposes of securing obligations arising in the ordinary course of business of
the Companies or required in connection with the OraCare Acquisition or a
Permitted Acquisition; and (v) each LC must expire no later than the earlier of
the thirtieth (30th) day prior to the Termination Date and one year from its
issuance.
(b) PARTICIPATION BY LENDERS. Immediately upon the issuance by
Issuing Bank of any LC, Issuing Bank shall be deemed to have sold and
transferred to each other Lender, and each other such Lender shall be deemed
irrevocably and unconditionally to have purchased and received from Issuing
Bank, without recourse or warranty, an undivided interest and participation, to
the extent of such Lender's Pro Rata Part, in such LC and all rights of Issuing
Bank in respect thereof (other than rights to receive certain fees provided for
in SECTION 2.2(c)). Upon issuance, renewal, or extension of an LC, Issuing
Bank shall provide copies of such LC to each other Lender.
(c) REIMBURSEMENT. In order to induce Issuing Bank to issue and
maintain LCs and Lenders to participate therein, Borrower agrees to pay or
reimburse Issuing Bank (i) on the date on which any draft is presented under
any LC, the amount of any draft paid or to be paid by Issuing Bank, and (ii)
promptly, upon demand, the amount of any fees in addition to the fees described
in SECTION 4 Issuing Bank customarily charges to a Person similarly situated in
the ordinary course of its business for amending LC Agreements, for honoring
drafts, and taking similar action in connection with letters of credit;
provided that: (x) if Borrower has not reimbursed Issuing Bank for any drafts
paid or to be paid within 24 hours of demand therefor by Issuing Bank, Issuing
Bank is hereby irrevocably authorized to fund such reimbursement obligations
as, and lenders, if the conditions to making Advances have been satisfied
(other than a Notice of Borrowing with respect thereto) agree to make, a Base
Rate Advance to the extent of availability under the Commitments and the
proceeds of such Advance shall be advanced directly to Issuing Bank in payment
of Borrower's reimbursement obligation with respect to the draft under the LC;
and (y) if for any reason, funds are not advanced pursuant to the Commitments,
then Borrower's reimbursement obligation shall continue to be due and payable.
To the extent any funding of a draft has been made by Lenders pursuant to
SECTION 2.2(f), Issuing Bank shall promptly distribute any such payments
received from Borrower with respect to such draft to all Lenders funding such
draft according to their ratable share. Interest on any amounts remaining
unpaid by Borrower (and unfunded by a Advance under the Loan) under this clause
at any time from and after the date such amounts become payable until paid in
full shall be payable by Borrower to Issuing Bank (x) from (and including) the
date of payment of the draw by Issuing Bank until (but not including) the next
succeeding Business Day, at the lesser of (A) the Maximum Rate, and
REVOLVING CREDIT AGREEMENT 15
<PAGE> 20
(B) the Base Rate plus the Applicable Margin, and (y) from (and including) such
next Business Day until (but excluding) the date such reimbursement obligations
are paid, at the lesser of (A) the Maximum Rate, and (B) the Default Rate. In
the event any payment by Borrower received by Issuing Bank with respect to an
LC and distributed to Lenders on account of their participations therein is
thereafter set aside, avoided, or recovered from Issuing Bank in connection
with any receivership, liquidation, or bankruptcy proceeding, each Lender which
received such distribution shall, upon demand by Issuing Bank, contribute such
Lender's ratable portion of the amount set aside, avoided, or recovered,
together with interest at the rate required to be paid by Issuing Bank upon the
amount required to be repaid by it.
(d) ABSOLUTE OBLIGATIONS. Borrower's obligations under SECTION
2.2(b) shall be absolute and unconditional under any and all circumstances and
irrespective of any setoff, counterclaim, or defense to payment which Borrower
or any other Company may have at any time against Issuing Bank or any other
Person, and shall be made in accordance with the terms and conditions of this
Agreement under all circumstances, including, without limitation, any of the
following circumstances: (i) any lack of validity or enforceability of this
Agreement or any of the Loan Documents; (ii) the existence of any claim,
setoff, defense, or other right which Borrower or any other Company may have at
any time against a beneficiary named in a LC, any transferee of any LC (or any
Person for whom any such transferee may be acting), Agent, Issuing Bank, any
Lender, or any other Person, whether in connection with this Agreement, any LC,
the transactions contemplated herein, or any unrelated transactions (including
any underlying transaction between Borrower or any other Company and the
beneficiary named in any such LC); (iii) any draft, certificate, or any other
document presented under the LC proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect; and (iv) the occurrence of any Potential Default or Event of
Default.
(e) PRESENTMENT. If any draft shall be presented for honor under any
LC, Issuing Bank shall promptly notify Borrower of the date and amount of such
draft; provided that failure to give any such notice shall not affect the
obligations of Borrower hereunder. Issuing Bank shall make payment upon
presentment of a draft for honor unless it appears that presentment on its face
does not comply with the terms of such LC, regardless of whether (i) any
default or potential default under any other agreement has occurred and (ii)
the obligations under any other agreement have been performed by the
beneficiary or any other Person (and Issuing Bank shall not be liable for any
obligation of any Person thereunder). Issuing Bank and Lenders shall not be
responsible for, and Borrower's reimbursement obligations for honored drafts
shall not be affected by, any matter or event whatsoever (including, without
limitation, the validity or genuineness of documents or of any endorsements
thereof, even if such documents should in fact prove to be in any respect
invalid, fraudulent, or forged), or any dispute among any Company, the
beneficiary of any LC, or any other Person to whom any LC may be transferred,
or any claims whatsoever of any Company against any beneficiary of any LC or
any such transferee; provided that, nothing in this Agreement shall constitute
a waiver of Borrower's right to assert any claim based upon the gross
negligence or wilful misconduct of Issuing Bank or any Lender.
(f) REIMBURSEMENT BY LENDERS. If Borrower fails to reimburse Issuing
Bank as provided in SECTION 2.2(c) within 24 hours of the demand therefor by
Issuing Bank, Issuing Bank shall promptly notify Agent and each Lender of such
failure, of the date and amount of the draft paid, and of such Lender's Pro
Rata Part thereof. Each Lender shall promptly and unconditionally make
available to Issuing Bank in immediately available funds such Lender's Pro Rata
Part of such unpaid reimbursement obligation, which funds shall be paid to
Issuing Bank on or before the close of business on the Business Day on which
such notice was given by Issuing Bank (if given prior to 1:00 p.m., Dallas,
Texas time) or on the next succeeding Business Day (if notice was given after
1:00 p.m., Dallas, Texas time). All such amounts payable by any such Lender
shall include interest thereon accruing at the Federal Funds Rate from the day
the applicable draft is paid by Issuing Bank to (but not including) the date
such amount is paid by such Lender to Issuing Bank. The obligations of Lenders
to make payments to Issuing Bank with respect to LCs shall be irrevocable and
not subject to any qualification or exception whatsoever (other than the gross
negligence or wilful
REVOLVING CREDIT AGREEMENT 16
<PAGE> 21
misconduct of Issuing Bank) and shall be made in accordance with the terms and
conditions of this Agreement under all circumstances, including, without
limitation, any of the following circumstances: (i) any lack of validity or
enforceability of this Agreement or any of the Loan Documents; (ii) the
existence of any claim, setoff, defense, or other right which Borrower or any
other Company may have at any time against a beneficiary named in a LC, any
transferee of any LC (or any Person for whom any such transferee may be
acting), Agent, Issuing Bank, any Lender, or any other Person, whether in
connection with this Agreement, any LC, the transactions contemplated herein,
or any unrelated transactions (including any underlying transaction between
Borrower and the beneficiary named in any such LC); (iii) any draft,
certificate, or any other document presented under the LC proving to be forged,
fraudulent, invalid, or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect; and (iv) the occurrence of any
Potential Default or Event of Default.
(g) DELIVERY. Borrower acknowledges that each LC will be deemed
issued upon delivery to its beneficiary or Borrower. If Borrower requests any
LC be delivered to Borrower rather than the beneficiary, and Borrower
subsequently cancels such LC, then Borrower agrees to return it to Issuing Bank
together with Borrower's written certification that it has never been delivered
to such beneficiary. If any LC is delivered to its beneficiary pursuant to
Borrower's instructions, no cancellation thereof by Borrower shall be effective
until the return of such LC to Issuing Bank. Borrower hereby agrees that if
Issuing Bank becomes involved in any dispute as a result of Borrower's
cancellation of any LC, it shall indemnify Issuing Bank and Lenders for all
losses, costs, damages, expenses, and reasonable attorneys' fees suffered or
incurred by Issuing Bank and Lenders as a direct result thereof.
(h) STANDARD OF CARE. Issuing Bank agrees with each Lender that it
will exercise and give the same care and attention to each LC as it gives to
its other letters of credit, and Issuing Bank's sole liability to each Lender
with respect to such LCs (other than liability arising from the gross
negligence or willful misconduct of Issuing Bank) shall be to distribute
promptly to each Lender who has acquired a participating interest therein such
Lender's ratable portion of any payments made to Issuing Bank by Borrower
pursuant to SECTION 2.2(c). Each Lender and Borrower agree that, in paying any
draw under any LC, Issuing Bank shall not have any responsibility to obtain any
document (other than any documents required by the respective LC) or to
ascertain or inquire as to the validity or accuracy of any such document or the
authority of the Person delivering any such document. Issuing Bank, Lenders,
and their respective officers, agents, and other representatives shall not be
liable to any other Lender or any Company for the use which may be made of any
LC or for any acts or omissions of any beneficiary thereof in connection
therewith. Any action, inaction, error, delay, or omission taken or suffered
by Issuing Bank or any of its officers, agents or other representatives
(INCLUDING, WITHOUT LIMITATION, ANY ACTS OR OMISSIONS CONSTITUTING ORDINARY
NEGLIGENCE) under or in connection with any LC, the draws, drafts, or documents
relating thereto, or the transmission, dispatch, or delivery of any message or
advice related thereto, if in good faith and in conformity with such laws as
Issuing Bank or any of its officers, agents, or other representatives may deem
applicable and in accordance with the standards of care specified in the
Uniform Customs and Practice for Documentary Credits, as in effect on the date
of issue of such LC by the International Chamber of Commerce, shall be binding
upon the Companies and Lenders and shall not place Issuing Bank or any of its
officers, agents, or other representatives under any resulting liability to
any Company or any Lender. Any action taken or omitted or to be taken by
Issuing Bank under or in connection with any LC if taken or omitted in the
absence of gross negligence or wilful misconduct shall not create for Issuing
Bank any resulting liability to any Lender or any Company.
(i) CASH COLLATERAL. On the Termination Date or upon any demand by
Issuing Bank while an Event of Default exists, Borrower shall provide to
Issuing Bank, for the benefit of Lenders, cash collateral in an amount equal to
the LC Exposure existing on such date.
REVOLVING CREDIT AGREEMENT 17
<PAGE> 22
(j) INDEMNITY. IN ADDITION TO AMOUNTS PAYABLE AS ELSEWHERE PROVIDED
IN THIS AGREEMENT, BORROWER HEREBY AGREES TO PROTECT, INDEMNIFY, PAY AND SAVE
ISSUING BANK AND EACH LENDER HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS,
DEMANDS, LIABILITIES, DAMAGES, OR LOSSES OF, OR OWED TO THIRD PARTIES, AND ANY
AND ALL RELATED COSTS, CHARGES, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS'
FEES), WHICH ISSUING BANK OR ANY LENDER MAY INCUR OR BE SUBJECT TO AS A
CONSEQUENCE, DIRECT OR INDIRECT, OF (A) THE ISSUANCE OF ANY LC, OR (B) THE
FAILURE OF ISSUING BANK TO HONOR A DRAFT UNDER SUCH LC AS A RESULT OF ANY ACT
OR OMISSION, WHETHER RIGHTFUL OR WRONGFUL, OF ANY PRESENT OR FUTURE
GOVERNMENTAL AUTHORITY; PROVIDED THAT BORROWER SHALL HAVE NO LIABILITY TO
INDEMNIFY ISSUING BANK OR ANY LENDER IN RESPECT OF ANY LIABILITY ARISING OUT OF
THE GROSS NEGLIGENCE OR WILFUL MISCONDUCT OF SUCH PARTY OR ANY OFFICERS,
AGENTS, OR OTHER REPRESENTATIVES OF SUCH PARTY, BUT SPECIFICALLY INCLUDING ANY
LIABILITY ARISING OUT OF THE ORDINARY NEGLIGENCE OF ISSUING BANK, AGENT, ANY
LENDER, OR ANY OF THEIR OFFICERS, AGENTS, OR OTHER REPRESENTATIVES. THE
PROVISIONS OF AND UNDERTAKINGS AND INDEMNIFICATIONS SET FORTH IN THIS SECTION
2.2(j) SHALL SURVIVE THE SATISFACTION AND PAYMENT OF THE OBLIGATION AND
TERMINATION OF THIS AGREEMENT.
(k) OTHER LC PROVISIONS. Although referenced in any LC, terms of any
particular agreement or other obligation to the beneficiary are not in any
manner incorporated herein. The fees and other amounts payable with respect to
each LC shall be as provided in this Agreement, drafts under any LC shall be
deemed part of the Obligation, and in the event of any conflict between the
terms of this Agreement and any LC Agreement, the terms of this Agreement shall
be controlling.
2.3 METHOD OF BORROWING.
(a) APPLICATION FOR ADVANCE. Except for any Advances pursuant to
SECTION 2.2(c) Borrower shall deliver to Agent a Notice of Borrowing at least
one (1) Business Day prior to any Base Rate Advance and at least three (3)
Business Days prior to any Eurodollar Advance. Each Notice of Borrowing must
be received by Agent no later than 11:00 a.m. (Dallas, Texas time) as of the
applicable date. Prior to making a Notice of Borrowing, Borrower may (without
specifying whether the Advance shall be a Base Rate Advance or a Eurodollar
Advance) request that Agent provide Borrower with the most recent Eurodollar
Rate. Agent shall endeavor to provide such quoted rate to Borrower on the date
of such request.
(b) FUNDING.
(i) Promptly after receipt of a Notice of Borrowing under
SECTION 2.3(a), Agent shall notify each Lender by telex or telecopy, or
other similar form of transmission, of the proposed Advance. Each
Lender shall deposit an amount equal to its Pro Rata Part of the Advance
requested by Borrower with Agent at its Lending Office, in immediately
available funds not later than 11:00 a.m. (Dallas, Texas time) on the
date of such proposed Advance. Upon fulfillment of all applicable
conditions set forth herein, Agent shall make available to Borrower at
Agent's Lending Office, not later than 2:00 p.m. (Dallas, Texas time) on
the date of each Advance, the proceeds of such amounts received by
Agent. The failure of any Lender to deposit the amount described above
with Agent shall not relieve any other Lender of its obligations
hereunder to make its Advance.
(ii) Unless Agent shall have been notified by any Lender that
such Lender will not make available to Agent such Lender's Pro Rata Part
of a proposed Advance, Agent may in its discretion assume that such
Lender has made such Advance available to Agent in accordance with this
SECTION and Agent may, if it chooses, in reliance upon such assumption,
make such Advance available to Borrower. If and to the extent such
Lender shall not so make its Pro Rata Part of the proposed Advance
available to Agent, such Lender and Borrower severally agree to pay or
repay to Agent on
REVOLVING CREDIT AGREEMENT 18
<PAGE> 23
demand the amount of such Advance together with interest thereon, for
each day from the date such Advance is made available to Borrower until
the date such amount is paid or repaid to Agent at (A) in the case of
Borrower, the interest rate applicable at the time to other Lenders'
Advances made on the date of such Advance, and (B) in the case of such
Lender, the Federal Funds Rate. If such Lender shall repay to Agent
such amount, such amounts so repaid shall constitute such Lender's
Advance for purposes of this Agreement.
(c) SELECTION OF INTEREST OPTION PERIOD.
(i) Upon making a Notice of Borrowing under SECTION 2.3(a),
Borrower shall advise Agent as to whether the Advance shall be (A) a
Eurodollar Advance, in which case Borrower shall specify the applicable
Interest Period therefor, or (B) a Base Rate Advance.
(ii) Subject to the dollar limits and denominations of SECTION
2.1, Borrower may (a) convert a Eurodollar Advance on the last day of
the applicable Interest Period to a Base Rate Advance, (b) convert a
Base Rate Advance on any Business Day to a Eurodollar Advance, and (c)
elect a new Interest Period for a Eurodollar Advance, by giving a Notice
of Borrowing to Agent no later than 11:00 a.m. (Dallas, Texas time) on
the third (3rd) Business Day before the conversion date or the last day
of the Interest Period, as the case may be (for conversion to a
Eurodollar Advance or election of a new Interest Period), and no later
than 11:00 a.m. (Dallas, Texas time) one (1) Business Day before the
last day of the Interest Period (for conversion to a Base Rate Advance).
Absent Borrower's Notice of Borrowing, a Eurodollar Advance shall be
deemed converted to a Base Rate Advance effective when the applicable
Interest Period expires.
(iii) Notwithstanding anything to the contrary contained herein,
(A) no more than three (3) Interest Periods shall be in effect at any
one time with respect to Eurodollar Advances, and (B) Borrower shall
have no right to request a Eurodollar Advance if the Interest Rate
applicable thereto under SECTION 2.5 would exceed the Maximum Rate in
effect on the first day of the Interest Period applicable to such
Advance.
(iv) Each Notice of Borrowing shall be irrevocable and binding
on Borrower and, in respect of any Eurodollar Advance specified in such
Notice of Borrowing, Borrower shall indemnify Agent and Lenders against
any Funding Loss incurred by Agent or Lenders as a result of (A) any
failure to fulfill, on or before the date specified for such Advance,
the conditions to such Advance set forth herein, or (B) Borrower's
requesting that an Advance not be made on the date specified for such
Advance in the Notice of Borrowing. A certificate of Agent and each
Lender establishing the amount due from Borrower according to the
preceding sentence, together with a description in reasonable detail of
the manner in which such amount has been calculated, shall be presumed
to be correct in the absence of manifest error.
2.4 NOTES. The Loan made under SECTION 2.1 by Lenders shall be
evidenced by the Notes, one payable to each Lender in the stated amount of its
Commitment, in the aggregate principal amount of $35,000,000.00.
REVOLVING CREDIT AGREEMENT 19
<PAGE> 24
2.5 INTEREST RATE.
(a) ALL ADVANCES. The unpaid principal of each Base Rate Advance
shall bear interest from the date of Advance to the date of repayment thereof
at a rate per annum that shall from day-to-day be equal to the lesser of (i)
the Base Rate in effect from day-to-day plus the Applicable Margin, and (ii)
the Maximum Rate. The unpaid principal of each Eurodollar Advance shall bear
interest from the date of advance to the date of repayment thereof at a rate
per annum that shall be equal to the lesser of (i) the Adjusted Eurodollar Rate
plus the Applicable Margin, and (ii) the Maximum Rate.
(b) DEFAULT RATE. All past due principal of, and to the extent
permitted by applicable law, interest on, the Note, shall bear interest until
paid at the lesser of (i) the Default Rate, and (ii) the Maximum Rate.
(c) RECAPTURE RATE. If the applicable Contract Rate ever exceeds the
Maximum Rate, thereby causing the interest charged under the Notes to be
limited to the Maximum Rate, then, to the extent permitted by applicable law,
any subsequent reductions in the applicable Contract Rate shall not reduce the
rate of interest charged under the Notes below the Maximum Rate, until the
total amount of interest accrued on the Notes equals the amount of interest
that would have accrued thereon if the applicable Contract Rate had at all
times been in effect.
(d) GENERAL PROVISIONS AS TO INTEREST.
(i) Interest will be calculated on the basis of actual number
of days (including the first day but excluding the last day) elapsed but
computed as if each calendar year consisted of 360 days (unless the
calculation would result in an interest rate greater than the Maximum
Rate, in which event interest will be calculated on the basis of a year
of 365 or 366 days, as the case may be). All interest rate
determinations and calculations by Agent are presumed to be correct in
the absence of manifest error.
(ii) The provisions of this Agreement relating to calculation
of the Base Rate and the Eurodollar Rate are included only for the
purpose of determining the rate of interest or other amounts to be paid
under this Agreement that are based upon those rates. Each Lender may
fund and maintain its funding of all or any part of each Advance as it
selects.
2.6 SPECIAL PROVISIONS FOR EURODOLLAR ADVANCES.
(a) INADEQUACY OF EURODOLLAR PRICING. If with respect to an Interest
Period for any Eurodollar Advance:
(i) Agent determines that the basis for determining the
Eurodollar Rate is not available; or
(ii) a Lender reasonably determines that the Eurodollar Rate as
determined by Agent will not adequately and fairly reflect the cost to
such Lender of maintaining or funding the Eurodollar Advance for such
Interest Period;
then (A) in the case of (i), Agent shall forthwith give notice thereof to
Borrower and Lenders of that determination (which is presumed to be correct in
the absence of manifest error), all Advances shall be Base Rate Advances, and
until Agent notifies Borrower and Lenders that such circumstances no longer
exist, Lenders' commitments under this Agreement to make, or convert to,
Eurodollar Advances shall be
REVOLVING CREDIT AGREEMENT 20
<PAGE> 25
suspended, and (B) in the case of (ii), such Lender shall forthwith give notice
thereof to Agent and Borrower, the obligation of such Lender to make Eurodollar
Advances shall be suspended, Borrower shall, at its option, either (I) repay in
full the then-outstanding principal amount of all Eurodollar Advances, together
with accrued interest thereon on the last day of the then current Interest
Period applicable to such Eurodollar Advances, or (II) convert such Eurodollar
Advances to Base Rate Advances in accordance with SECTION 2.03(c) of this
Agreement on the last day of the then-current Interest Period applicable to
each such Eurodollar Advance, and until such Lender notifies Agent and Borrower
that such circumstances no longer exist, such Lender's commitment under this
Agreement to make, or convert to, Eurodollar Advances shall be suspended.
(b) ILLEGALITY OF EURODOLLAR ADVANCES. If, after the date of this
Agreement, the adoption of any applicable law, rule, or regulation, or any
change therein, or any change in the interpretation or administration thereof
by any Governmental Authority, central bank, or comparable agency charged with
the interpretation or administration thereof, or compliance by Agent or any
Lender with any request or directive (whether or not having the force of law)
of any such authority, central bank, or comparable agency shall make it
unlawful or impossible for any Lender to make, maintain, or fund its Eurodollar
Advances, then such Lender shall forthwith give notice thereof to Agent and
Borrower. Before giving any notice pursuant to this subsection, such Lender
shall designate a different Eurodollar lending office if such designation will
avoid the need for giving such notice and will not be otherwise disadvantageous
to any non-trivial extent to such Lender (as determined in good faith by such
Lender). Upon receipt of such notice, Borrower shall either (i) repay in full
the then-outstanding principal amount of any of such Lender's Eurodollar
Advances, together with accrued interest thereon, or (ii) convert such Lender's
Eurodollar Advances to Base Rate Advances, on either (A) the last day of the
then current Interest Period applicable to such Eurodollar Advance, if such
Lender may lawfully continue to maintain and fund such Eurodollar Advance to
such day, or (B) immediately, if such Lender may not lawfully continue to fund
and maintain such Eurodollar Advance to such day.
(c) INCREASED COSTS FOR EURODOLLAR ADVANCES. If, after the date
hereof, any Governmental Authority, central bank, or other comparable
authority, shall at any time impose, modify, or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System, but excluding any reserve requirement included in the
Eurodollar Reserve Requirement), special deposit or similar requirement against
assets of, deposits with, or for the account of, or credit extended by, any
Lender, or shall impose on any Lender (or its Applicable Lending Office) or the
interbank eurodollar market any other condition affecting its Eurodollar
Advances, the Notes or such Lender's obligation to make Eurodollar Advances;
and the result of any of the foregoing is to increase the cost to such Lender
of making or maintaining its Eurodollar Advances, or to reduce the amount of
any sum received or receivable by such Lender under this Agreement, or under
such Lender's Note, by an amount deemed by such Lender to be material, then,
within five (5) days after demand by such Lender, Borrower shall pay to Agent,
for the account of such Lender, such additional amount or amounts as will
compensate such Lender for such increased cost or reduction. Such Lender will
(i) notify Agent and Borrower 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 (but in any event within 120 days) after
such Lender obtains actual knowledge of such event, and Borrower shall not be
liable for any such increased costs that accrue between the date such
notification is required to be given and the date it was actually given, and
(ii) use good faith and reasonable efforts to designate an Applicable Lending
Office for Eurodollar Advances of such Lender, if such designation will avoid
the need for, or reduce the amount of, such compensation, and will not, in the
sole opinion of such Lender, be disadvantageous to such Lender (provided that
such Lender shall have no obligation to so designate a lending office located
in the United States of America). A certificate of such Lender claiming
compensation under this SECTION and setting forth in reasonable detail the
calculation of the additional amount or amounts to be paid to it hereunder
shall be presumed to be correct in the absence of
REVOLVING CREDIT AGREEMENT 21
<PAGE> 26
manifest error. If a Lender demands compensation under this SECTION, then
Borrower may at any time, upon at least five (5) Business Days' prior notice to
such Lender and Agent, either (i) repay in full the then outstanding Eurodollar
Advances to such Lender, together with accrued interest thereon to the date of
prepayment, or (ii) convert such Eurodollar Advances to Base Rate Advances in
accordance with the provisions of this Agreement; provided, however, that
Borrower shall be liable for any Funding Loss arising pursuant to such actions.
(d) EFFECT ON BASE RATE ADVANCES. If notice has been given pursuant
to SECTION 2.6(a) or SECTION 2.6(b), requiring the Eurodollar Advances to be
repaid or converted, then unless and until Agent notifies Borrower that the
circumstances giving rise to such repayment no longer apply, all Advances shall
be Base Rate Advances. If Agent notifies Borrower that the circumstances
giving rise to such repayment no longer apply, Borrower may thereafter select
Advances to be Eurodollar Advances in accordance with SECTION 2.3(c) of this
Agreement.
(e) FUNDING LOSSES. Borrower shall indemnify Agent and each Lender
against any loss or reasonable expense (such loss or expense is referred to
herein as a "FUNDING LOSS," such term including, but not limited to, any loss
or reasonable expense sustained or incurred or to be sustained or incurred in
liquidating or reemploying deposits from third parties acquired to effect or
maintain such Advance or any part thereof as a Eurodollar Advance) which Agent
or any Lender may sustain or incur as a consequence of (i) any failure by
Borrower to fulfill on the date of any Advance hereunder the applicable
conditions set forth in SECTION 4, (ii) any failure by Borrower to borrow
hereunder or to convert Advances hereunder after a Notice of Borrowing has been
given, (iii) any payment, prepayment, or conversion of a Eurodollar Advance
required or permitted by any other provisions of this Agreement, including,
without limitation, payments made due to the acceleration of the maturity of
Advances pursuant to SECTION 8.2, or otherwise made on a date other than the
last day of the applicable Interest Period, (iv) any default in the payment or
prepayment of the principal amount of any Advance or any part thereof or
interest accrued thereon, as and when due and payable (at the due date thereof,
by notice of prepayment or otherwise), or (v) the occurrence of an Event of
Default. The term "FUNDING LOSS" includes, without limitation, an amount equal
to the excess, if any, as determined by Agent or any Lender of (A) its cost of
obtaining the funds for the Advance being paid, prepaid, or converted or not
borrowed or converted (based on the Adjusted Eurodollar Rate applicable
thereto) for the period from the date of such payment, prepayment, or
conversion or failure to borrow or convert to the last day of the Interest
Period for such Advance (or, in the case of a failure to borrow or convert, the
Interest Period for the Advance which would have commenced on the date of such
failure to borrow or convert) over (B) the amount of interest (as estimated by
Agent or such Lender) that would be realized by Agent or such Lender in
reemploying the funds so paid, prepaid, or converted or not borrowed or
converted for such period or Interest Period, as the case may be. A
certificate of Agent or such Lender setting forth any amount or amounts which
Agent or such Lender is entitled to receive pursuant to this SECTION 2.6(e),
together with a description in reasonable detail of the manner in which such
amounts have been calculated, shall be delivered to Borrower and shall be
presumed to be correct in the absence of manifest error. Borrower shall pay to
Agent, for itself or for the account of any such Lender, the amount shown as
due on any certificate within five (5) days after its receipt of the same.
Notwithstanding the foregoing, in no event shall Lender be permitted to receive
any compensation hereunder constituting interest in excess of the Maximum Rate.
(f) TAXES. Any Taxes payable by Agent or any Lender or ruled (by a
Governmental Authority) payable by Agent or any Lender in respect of this
Agreement or any other Loan Document shall, if permitted by Governmental
Requirement, be paid by Borrower, together with interest and penalties, if any
(except for Taxes imposed on or measured by the overall net income of Agent or
such Lender). Agent or such Lender (through Agent) shall notify Borrower and
deliver to Borrower a certificate setting forth in reasonable detail the
calculation of the amount of payable Taxes, which certificate is presumed to be
correct in the absence
REVOLVING CREDIT AGREEMENT 22
<PAGE> 27
of manifest error, and Borrower shall promptly pay that amount to Agent for its
account or the account of such Lender, as the case may be. If Agent or such
Lender subsequently receives a refund of the Taxes paid to it by Borrower, then
the recipient shall promptly pay the refund to Borrower.
(g) FOREIGN LENDERS. Each Lender that is organized under the
Governmental Requirements of any jurisdiction other than the United States of
America or any State thereof (i) represents to Agent and Borrower that (A) no
Taxes are required to be withheld by Agent or Borrower with respect to any
payments to be made to it in respect of the Obligation, and (B) it has
furnished to Agent and Borrower two (2) duly completed copies of U.S. Internal
Revenue Service Form 4224, Form 1001, Form W-8, or any other tax form
acceptable to the Administrative Agent (wherein it claims entitlement to
complete exemption from U.S. federal withholding tax on all interest payments
under the Loan Documents), and (ii) covenants to (A) provide Agent and Borrower
a new tax form upon the expiration or obsolescence of any previously delivered
form according to Governmental Requirement, duly executed and completed by it,
and (B) comply from time-to-time with all Governmental Requirements with regard
to the withholding tax exemption. If any of the foregoing is not true or the
applicable forms are not provided, then Borrower or Agent (without duplication)
may deduct and withhold from interest payments under the Loan Documents United
States federal income tax at the full rate applicable under the Code.
(h) SURVIVAL. Without prejudice to the survival of any other
obligations of Borrower hereunder, the obligations of Borrower under this
SECTION 2.6 shall survive the termination of this Agreement and/or the payment
or assignment of the Notes.
2.7 PAYMENTS OF THE NOTE.
(a) PAYMENT OF INTEREST ON THE NOTES. Interest on each Eurodollar
Advance shall be due and payable as it accrues on the last day of its
respective Interest Period; provided that if any Interest Period is a period
greater than three (3) months, then accrued interest shall also be due and
payable on the date three (3) months after the commencement of such Interest
Period. Interest on each Base Rate Advance shall be due and payable as it
accrues on the last day of each February, May, August, and November, commencing
on February 28, 1997, and on the Termination Date.
(b) PAYMENT OF PRINCIPAL OF THE NOTES. The Notes shall mature, and
the principal amount thereof shall be due and payable, on the Termination Date.
(c) OPTIONAL PREPAYMENTS. Upon three (3) Business Days' notice for
Eurodollar Advances and one (1) Business Day's notice for Base Rate Advances,
Borrower may prepay the principal of any of the Notes then outstanding, in
whole or in part, at any time or from time to time; provided, however, that (i)
each prepayment of less than the full outstanding principal balance of a Note
shall be in an amount equal to $1,000,000.00 or any larger multiple thereof,
and (ii) if Borrower prepays the principal of any Eurodollar Advance on any
date other than the last day of the Interest Period applicable thereto,
Borrower shall pay any Funding Loss with respect to such payment. Any optional
prepayment of the principal of the Notes shall be applied to the Notes on a pro
rata basis based upon the outstanding principal balances of the Notes as of the
date of payment.
(d) MANDATORY PREPAYMENTS. Borrower shall prepay the outstanding
Principal Debt up to an amount equal to the greater of (i) $20,000,000.00, or
(ii) fifty percent (50%) of the Net Cash Proceeds from any Permitted Equity
Issuance (other than pursuant to options issued pursuant to employee or
director stock option plans or warrants issued to employees or directors of a
Company). Borrower shall make such prepayment within thirty (30) days of the
offering of any such Permitted Equity Issuance. Any such prepayment of the
principal of the Notes shall (i) be without premium or penalty, except for any
Funding
REVOLVING CREDIT AGREEMENT 23
<PAGE> 28
Loss arising therefrom, (ii) be applied (A) first, to the outstanding Principal
Debt on Pro Rata based upon the outstanding principal balances of the Notes as
of the date of payment, and (B) the excess, if any, shall be released to
Borrower, and (iii) not reduce the Commitments.
(e) GENERAL PROVISIONS AS TO PAYMENTS.
(i) All payments of principal of, and interest on, any Note to
or for the account of any Lender shall be made by Borrower to Agent
before 11:00 a.m. (Dallas, Texas time), in Federal or other immediately
available funds at Agent's Lending Office. If the principal of, or
interest on, a Note, or any other amount payable hereunder, becomes due
and payable on a day other than a Business Day, then the maturity
thereof shall be extended to the next succeeding Business Day. Each
payment received by Agent hereunder for the account of a Lender shall be
promptly distributed by Agent to such Lender. Except as otherwise
provided, all payments made on any Note shall be credited, to the extent
of the amount thereof, in the following manner: (A) first, against the
amount of interest accrued and unpaid on such Note as of the date of
such payment; (B) second, against all principal (if any) due and owing
on such Note as of the date of such payment; (C) third, as a prepayment
of outstanding Base Rate Advances under such Note; and (D) fourth, as a
prepayment of outstanding Eurodollar Advances under such Note. Subject
to the foregoing, so long as no Potential Default or Event of Default
exists, payments and prepayments of principal of any Note shall be
applied to such outstanding Base Rate Advances and Eurodollar Advances
under such Note as Borrower shall select; provided, however, that
Borrower shall select Base Rate Advances and Eurodollar Advances to be
repaid in a manner designed to minimize the Funding Loss, if any,
resulting from such payments; and provided further that, if Borrower
shall fail to select the Base Rate Advance or Eurodollar Advance to
which such payments are to be applied, or if a Potential Default or
Event of Default exists at the time of such payment, then Agent shall be
entitled to apply the payment to such Base Rate Advances and Eurodollar
Advances in the manner it shall deem appropriate.
(ii) Each payment received by Agent hereunder for the account
of Lenders or any of them on the Notes shall be distributed to each
Lender entitled to share in such payment, Pro Rata in proportion to the
Pro Rata Parts of each Lender (less any taxes, levies, imposts,
deductions, charges or withholdings excluded from the definition of
Taxes). Unless Agent shall have received notice from Borrower prior to
the date on which any payment is due to Lenders hereunder that Borrower
will not make such payment in full, Agent may assume that Borrower has
made such payment in full to Agent on such date and Agent may, in
reliance upon such assumption, cause to be distributed to each Lender on
such due date an amount equal to the amount then due such Lender. If
and to the extent Borrower shall not have so made such payment in full
to Agent, each Lender shall repay to Agent forthwith on demand such
amount distributed to such Lender together with interest thereon, for
each day from the date such amount is distributed to such Lender until
the date such Lender repays such amount to Agent, at the Federal Funds
Rate.
2.8 FEES.
(a) TREATMENT OF FEES. Except as otherwise provided by applicable
law, the fees described in this SECTION 2.8 (i) do not constitute compensation
for the use, detention, or forbearance of money, (ii) are in addition to, and
not in lieu of, interest and expenses otherwise described in this Agreement,
(iii) shall be payable in accordance with SECTION 2.7(e), (iv) shall be non-
refundable, (v) shall, to the fullest extent permitted by applicable law, bear
interest, if not paid when due, at the Default Rate, and (vi) shall be
calculated on the basis of actual number of days (including the first day but
excluding the last day) elapsed, but computed as if each calendar year
consisted of 360 days, unless such computation would result in interest
REVOLVING CREDIT AGREEMENT 24
<PAGE> 29
being computed in excess of the Maximum Rate in which event such computation
shall be made on the basis of a year of 365 or 366 days, as the case may be.
(b) COMMITMENT FEES AND FEES OF AGENT. Borrower shall pay to Agent,
the commitment and other fees described in that certain separate letter
agreement dated of even date herewith, between Borrower and Agent, which
payments shall be made on the dates specified, and in amounts calculated in
accordance with, such letter agreement.
(c) LC FEES. Borrower shall pay to Agent, for the ratable benefit of
Lenders, in accordance with their respective Pro Rata Parts, a fee for each LC,
payable in installments in advance, so long as such LC remains outstanding.
Such installments shall be paid commencing on the date of issuance of the
applicable LC, for the period from and including such date to but excluding the
next quarterly payment date (as hereinafter specified), and thereafter on each
March 31, June 30, September 30 and December 31, for the period from and
including such quarterly payment date to but excluding the next quarterly
payment date or (if earlier) the expiry date of such LC; provided that the LC
fees in respect of LCs issued in connection with the OraCare Acquisition shall
be due and payable on the expiry date set forth in such LCs. Each such
installment shall be in an amount equal to the product of (A) the Applicable
Margin for Letter of Credit Fees in effect on the date of payment of such fee
(and applied on a per annum basis) multiplied by (B) the face amount of such
LC, and pro rated (in accordance with SECTION 2.8(a)(vi)) for the period for
which such installment is due.
2.9 TERMINATION OF COMMITMENT. The Commitments shall terminate on
the Termination Date, and any Advances then outstanding (together with accrued
interest thereon) shall be due and payable on such date.
2.10 SHARING OF PAYMENTS, ETC. If any Lender obtains any amount
(whether voluntary, involuntary, or otherwise, including as a result of
exercising any rights under SECTION 2.10) that exceeds the part of that payment
that such Lender is entitled to receive under the Loan Documents, then such
Lender shall purchase from the other Lenders participations that will cause the
purchasing Lender to share the excess amount ratably with each other Lender.
If all or any portion of any excess amount is subsequently recovered from the
purchasing Lender, then the purchase shall be rescinded and the purchase price
restored to the extent of the recovery. Borrower agrees that any Lender
purchasing a participation from another Lender under this SECTION, may, to the
fullest extent permitted by applicable law, exercise all of its rights of
payment with respect to that participation as fully as if such lender were the
direct creditor of Borrower in the amount of that participation.
2.11 SET-OFF. If an Event of Default exists, each Lender is entitled,
but not obligated, to exercise (for the benefit of all Lenders in accordance
with SECTION 2.10) the right of off-set and banker's Lien against each and
every account and other property, or any interest therein, that Borrower may
now or hereafter have with, or which is now or hereafter in the possession of,
such Lender to the extent of the amount of the Obligation owed to it.
SECTION 3 COLLATERAL.
3.1 LIENS AND SECURITY INTERESTS. To secure the performance by
Borrower of the payment and performance of the Obligation, pursuant to the
Collateral Documents, the Companies shall grant to Agent, for the ratable
benefit of Lenders, a perfected, first priority Lien in all outstanding capital
stock of the Companies (other than of Borrower).
REVOLVING CREDIT AGREEMENT 25
<PAGE> 30
SECTION 4 CONDITIONS PRECEDENT.
4.1 INITIAL ADVANCE. The obligations of each Lender to make its
initial Advance or of Issuing Bank to make the initial Issuance hereunder are
subject to the condition precedent that Agent shall have received on or before
the day of such Advance all of the following, each dated (unless otherwise
indicated) the date hereof, in form and substance satisfactory to Agent:
(a) RESOLUTIONS. Resolutions of the Boards of Directors of each
Company certified by the Secretary or an Assistant Secretary of each of them
which authorize the execution, delivery, and performance by such Company of
this Agreement and/or the other Loan Documents to which such Company is or is
to be a party;
(b) INCUMBENCY CERTIFICATE. A certificate of incumbency certified by
the Secretary or an Assistant Secretary of each Company certifying the names of
the officers of each such Company authorized to sign this Agreement and each of
the other Loan Documents to which each such Company is or is to be a party
(including the certificates contemplated herein) together with specimen
signatures of such officers;
(c) ARTICLES OF INCORPORATION. The articles or certificate of
incorporation of each Company certified by the Secretary of State of the State
of such Company's incorporation;
(d) BYLAWS. The bylaws of each Company certified by the Secretary or
an Assistant Secretary of each such Company;
(e) GOVERNMENTAL CERTIFICATES. Certificates of the appropriate
Governmental Authorities of the State of incorporation of each Company as to
the existence and good standing of each of them;
(f) NOTES. The Notes;
(g) PLEDGE AGREEMENTS. The Pledge Agreements;
(h) FINANCING STATEMENTS. Uniform Commercial Code financing
statements executed by the Companies and covering the Collateral;
(i) STOCK CERTIFICATES. Stock certificates evidencing all stock
pledged pursuant to the Pledge Agreements, as applicable, together with stock
powers duly executed in blank;
(j) UCC AND TAX AND JUDGMENT LIEN SEARCHES. The results of Uniform
Commercial Code searches showing all financing statements and other documents
or instruments, and tax and judgment lien searches showing all tax and judgment
liens, on file against each Company in such jurisdictions as Agent shall
require, such searches to be as of a date no more than twenty (20) days prior
to the date of the initial Advance or Issuance;
(k) OPINION OF COUNSEL. Favorable opinions as to the matters set
forth in EXHIBIT F hereto of Texas legal counsel to the Companies;
(l) ATTORNEYS' FEES AND EXPENSES. Evidence that the costs and
expenses (including attorneys' fees) referred to in SECTION 10.3, to the extent
incurred, shall have been paid in full by Borrower;
(m) FEES. Borrower shall have paid to Agent (i) for its own account,
the fees owed by Borrower to Agent pursuant to the letter agreement of even
date herewith between Borrower and Agent, and (ii) for
REVOLVING CREDIT AGREEMENT 26
<PAGE> 31
the account of all Lenders, the fees owed by Borrower to Lenders on or before
the date hereof pursuant to SECTION 2.8;
(n) FEDERAL RESERVE BOARD FORM U-1. For each Lender a properly
completed Federal Reserve Board Form U-1 duly executed by each Company pledging
stock of another Company; and
(o) ACQUISITION OF ORACARE.
(i) Contemporaneously with the initial Advance or Issuance
hereunder, Borrower shall have acquired good title, free and clear of
all Liens, to all of the issued and outstanding capital stock of OraCare
Consultants, Inc., a New Jersey corporation, and OraCare DPO, Inc., a
New Jersey corporation;
(ii) The representations and warranties set forth in the Loan
Documents are true and correct in all material respects, immediately
prior to, and after giving effect to, the OraCare Acquisition, and the
transactions contemplated thereby, as though OraCare Consultants, Inc.
and OraCare DPO, Inc. were Subsidiaries of Borrower as of the date of
such Acquisition;
(iii) Agent shall have received, and be reasonably satisfied
with, the Stock Purchase Agreements and the other documents governing
the OraCare Acquisition, including purchase and sale documentation,
covenants not to compete, indemnities provided to Borrower, and opinions
of counsel (which shall provide customary assurances regarding the legal
status and authority of OraCare Consultants, Inc. and OraCare DPO, Inc.,
and their respective Subsidiaries, regulatory matters related thereto,
and the acquisition of the capital stock of such Persons, the validity
and enforceability of the transaction, and assurances that Borrower
shall have acquired all the issued and outstanding capital stock of
OraCare Consultants, Inc. and OraCare DPO, Inc.), which opinions of
counsel may be relied upon by Agent and Lenders; and
(iv) Borrower shall have delivered to Agent and Lenders an
opinion of counsel, in form and substance acceptable to Agent, relating
to the Acquisition by Peter Barnett of OraCare Dental Associates, P.A.,
a New Jersey practice association, including compliance with all
applicable Legal Requirements.
4.2 ALL ADVANCES. The obligations of each Lender to make any Advance
(including the initial Advance) and of Issuing Bank to make any Issuance of an
LC (including the initial Issuance) are subject to the following additional
conditions precedent:
(a) NOTICE OF BORROWING. Agent shall have received, in accordance
with SECTION 2.3(a) or SECTION 2.2(a), a Notice of Borrowing or LC Request, as
the case may be, executed by an authorized officer of Borrower;
(b) NO DEFAULT. No Potential Default or Event of Default shall have
occurred and be continuing, or would result from such Advance or Issuance;
(c) REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties contained in SECTION 5 and in each of the other Loan Documents shall
be true and correct on and as of the date of such Advance or Issuance with the
same force and effect as if such representations and warranties had been made
on and as of such date, except to the extent that such representations and
warranties speak to a specific date or the facts on which such representations
and warranties are based have been changed by transactions permitted by the
Loan Documents;
REVOLVING CREDIT AGREEMENT 27
<PAGE> 32
(d) ADDITIONAL DOCUMENTATION. Agent shall have received such
additional approvals, opinions, or documents as are required by the terms and
provisions of this Agreement or any other Loan Document; and
(e) ADVANCES OR ISSUANCES FOR PERMITTED ACQUISITIONS. If the Advance
or Issuance is in connection with a Permitted Acquisition, Agent shall have
received a certificate, executed by the President or a Vice President of
Borrower, confirming the satisfaction of all other requirements set forth in
the definition of "Permitted Acquisition" that are required to be completed on
or before consummation of the Permitted Acquisition.
SECTION 5 REPRESENTATIONS AND WARRANTIES.
Borrower hereby represents and warrants as follows:
5.1 ORGANIZATION AND GOOD STANDING. Each of the Companies is a
corporation duly organized and in good standing under the laws of the state of
its incorporation, is duly qualified as a foreign corporation and is in good
standing in all states in which it is doing business, has the corporate power
and authority to own its properties and assets and to transact the business in
which it is engaged in each jurisdiction in which it operates, and is or will
be qualified in those states wherein it proposes to transact business in the
future.
5.2 AUTHORIZATION AND POWER. Each of the Companies has full power
and authority to execute, deliver, and perform the Loan Documents executed by
such Person, all of which has been duly authorized by all proper and necessary
corporate action.
5.3 NO CONFLICTS OR CONSENTS. Neither the execution and delivery of
the Loan Documents, nor the consummation of any of the transactions therein
contemplated, nor compliance with the terms and provisions thereof, will
contravene or materially conflict with any provision of law, statute, or
regulation to which any Company is subject, any judgment, license, order, or
permit applicable to any Company, any indenture, loan agreement, mortgage, deed
of trust, or other agreement or instrument binding on any Company, or any
provision of the charter or bylaws of any Company. No consent, approval,
authorization, or order of any court, Governmental Authority, stockholder, or
third party is required in connection with the execution, delivery, or
performance by each Company of any of the Loan Documents executed by such
Person, except for any change in control requirements of applicable
Governmental Authorities in connection with the exercise of rights and remedies
in the Collateral under the Collateral Documents.
5.4 ENFORCEABLE OBLIGATIONS. The Loan Documents have been duly
executed and delivered by each Company, as appropriate, are the legal and
binding obligations of each Company, as appropriate, and are enforceable in
accordance with their respective terms, except as limited by Debtor Laws.
5.5 NO LIENS. Except for the Permitted Liens, all of the properties
and assets of each Company are free and clear of all Liens and other adverse
claims of any nature, and each Company has good and marketable title to such
properties and assets.
5.6 FINANCIAL CONDITION. Borrower has delivered to Agent copies of
the financial statements (a) of the Companies, as of June 30, 1996, and (b) of
OraCare Consultants, Inc., and OraCare DPO, Inc. as of June 30, 1996, such
financial statements are true and correct, fairly represent the financial
condition of the Companies, OraCare Consultants, Inc., and OraCare DPO, Inc.,
as appropriate, as of such dates and have been prepared in accordance with
GAAP; as of the date hereof, there are no obligations, liabilities, or
Indebtedness (including contingent and indirect liabilities) of any Company,
OraCare Consultants, Inc., or
REVOLVING CREDIT AGREEMENT 28
<PAGE> 33
OraCare DPO, Inc., which are material and are not reflected in such financial
statements; no Material Adverse Effect has occurred since the date of such
financial statements.
5.7 INDEBTEDNESS. As of the date hereof, the Companies have no
Indebtedness, except as disclosed in the financial statements described in
SECTION 5.6 or on SCHEDULE 5.7.
5.8 FULL DISCLOSURE. There is no fact known to Borrower that
Borrower has not disclosed to Agent which could have a Material Adverse Effect.
No certificate or statement delivered by any Company to Agent or any Lender in
connection with this Agreement contains any untrue statement of a material fact
or omits to state any material fact necessary to keep the statements contained
herein or therein from being misleading.
5.9 NO POTENTIAL DEFAULT. No event has occurred and is continuing
which constitutes a Potential Default or an Event of Default.
5.10 MATERIAL AGREEMENTS. Borrower has provided Agent with copies of
all material contracts and agreements to which it or any of the Companies is a
party, or by which any of its or their respective properties is bound, the
breach of which or the occurrence of a default under would cause a Material
Adverse Effect. No Company is in default in any material respect under any
contract or agreement to which it is a party or by which any of its properties
is bound, the breach of which or the occurrence of a default under would cause
a Material Adverse Effect.
5.11 NO LITIGATION. Except as disclosed in writing on SCHEDULE 5.11
hereto, there are no actions, suits or legal, equitable, arbitration, or
administrative proceedings pending, or to the knowledge of Borrower threatened,
against any Company that could, if adversely determined, have a Material
Adverse Effect. There are no outstanding judgments against any Company.
5.12 USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Advances have
been and will be used by Borrower solely for the purposes specified in the
preamble. None of such proceeds will be used for the purpose of purchasing or
carrying any "margin stock" as defined in Regulations G, T, U, or X of the
Board of Governors of the Federal Reserve System, or for any other purpose
which might constitute this transaction a "purpose credit" within the meaning
of such Regulations. If requested by any Lender, Borrower will furnish to such
Lender a statement in conformity with the requirements of the Federal Reserve
Form U-1 referred to in said Regulation U to the foregoing effect. No part of
the proceeds of any Advance will be used to purchase or carry any margin stock
or to extend credit to others for the purpose of purchasing or carrying margin
stock.
5.13 TAXES. All tax returns required to be filed by each Company in
any jurisdiction have been filed and all taxes (including mortgage recording
taxes), assessments, fees, and other governmental charges upon each Company, or
upon any of its properties, income, or franchises have been paid, except for
taxes being contested in good faith by appropriate proceedings diligently
projected and as to which adequate reserves have been established in accordance
with GAAP. Borrower has no knowledge of any proposed tax assessment against
any Company that will have, or is reasonably likely to have, a Material Adverse
Effect.
5.14 SUBSIDIARIES. Set forth on SCHEDULE 5.14 hereto is a complete
and accurate list of all Subsidiaries of Borrower as of the date hereof,
showing as of such date (as to each such Subsidiary) the jurisdiction of its
incorporation, the number of shares of each class of capital stock outstanding
on the date hereof, the owner of the outstanding shares of each such class
owned, and the jurisdictions in which such Subsidiary is qualified to do
business as a foreign corporation. All of the outstanding capital stock of all
REVOLVING CREDIT AGREEMENT 29
<PAGE> 34
Subsidiaries has been validly issued, is fully paid and nonassessable, and is
owned by Borrower or a Subsidiary of Borrower free and clear of all Liens,
other than the Liens under the Collateral Documents.
5.15 CHIEF EXECUTIVE OFFICE, ETC. The Chief Executive office of
Borrower and each other Company is in Dallas, Texas. Borrower and each other
Company, as the case may be, maintain their respective principal records and
books at such addresses.
5.16 COMPLIANCE WITH LAW; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as disclosed on SCHEDULE 5.16-1: (i) each Company is in
compliance with its respective articles of incorporation, charter, and bylaws,
and all Legal Requirements which are applicable to it or to the conduct or
operation of its business for the ownership or use of any of its assets; and
(ii) no Company has received any notice or other communication from any
Governmental Authority or other Person of any event or circumstance which
could constitute a violation of, or failure to comply with, any Legal
Requirement.
(b) Except as disclosed on SCHEDULE 5.16-1: (i) each Company is in
compliance with all of the terms and requirements of each Governmental
Authorization held by such Company; (ii) no Company has received any notice or
other communication from any Governmental Authority or other Person of any
event or circumstance which could constitute a violation of, or failure to
comply with, any term or requirement of any Governmental Authorization, or of
any actual or potential revocation, withdrawal, cancellation, or termination
of, or material modification to, any Governmental Authorization; (iii) all
applications required to have been filed for the renewal of any required
Governmental Authorizations have been duly filed on a timely basis with the
appropriate Governmental Authorities, and all other filings required to have
been made with respect to such Governmental Authorizations have been duly made
on a timely basis with the appropriate Governmental Authorities; (iv) all
Governmental Authorizations of the Companies are transferrable to the
Companies; (v) upon consummation of the transactions contemplated hereby, the
Companies will lawfully hold all such Governmental Authorizations; and (vi)
none of the Governmental Authorizations will terminate upon consummation of the
transactions contemplated hereby.
(c) Set forth on SCHEDULE 5.16-2 is a list of each of the
Governmental Authorizations of the Companies: (i) necessary to permit each
Company to lawfully conduct and operate its respective business in the manner
it currently conducts and operates such business and to permit such Company to
own and use its assets in the manner in which it currently owns and uses such
assets; and (ii) necessary to permit each Company, upon the consummation of the
transactions contemplated hereby, to lawfully conduct and operate its business
and to permit each Company to own and use its assets, where the failure to have
such Governmental Authorization would have a Material Adverse Effect.
5.17 CASUALTIES. Neither the business nor the properties of any
Company has been adversely affected by any environmental hazard, fire,
explosion, accident, drought, storm, hail, earthquake, embargo, act of God, or
other casualty (whether or not covered by insurance), which could have a
Material Adverse Effect.
5.18 SUFFICIENCY OF CAPITAL. Each Company is, and after consummation
of this Agreement and after giving effect to all Indebtedness incurred and
Liens created by the Companies in connection herewith will be, Solvent.
5.19 ERISA. The Companies are in compliance in all material respects
with all applicable provisions of ERISA. Neither a Reportable Event nor a
Prohibited Transaction has occurred and is continuing with respect to any Plan.
No notice of intent to terminate a Plan has been filed, nor has any Plan been
terminated. No circumstances exist which constitute grounds entitling the PBGC
to institute
REVOLVING CREDIT AGREEMENT 30
<PAGE> 35
proceedings to terminate, or appoint a trustee to administer, a Plan, nor has
the PBGC instituted any such proceedings. None of the Companies nor any ERISA
Affiliate has completely or partially withdrawn from a Multiemployer Plan. The
Companies and each ERISA Affiliate have met their minimum funding requirements
under ERISA with respect to all of their Plans, and the present value of all
vested benefits under each Plan does not exceed the fair market value of all
Plan assets allocable to such benefits, as determined on the most recent
valuation, date of the Plan and in accordance with ERISA. None of the
Companies nor any ERISA Affiliate has incurred any liability to the PBGC under
ERISA.
5.20 LABOR MATTERS. There are no strikes, lockouts, disputes, or
other controversies pending between any Company and any of its employees, which
could have a Material Adverse Effect.
5.21 INSURANCE. Each Company maintains insurance policies and
programs in amounts sufficient to cover the replacement value of properties and
assets of such Company.
5.22 ACQUISITION. The Stock Purchase Agreements previously delivered
to Agent are true and correct copies of such agreements, and Borrower has
delivered to Agent true and correct copies of all amendments, supplements, and
modifications thereto. Borrower has provided to Agent all material information
regarding the OraCare Acquisition.
5.23 INVESTMENT COMPANY ACT. No Company is an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
5.24 PUBLIC UTILITY HOLDING COMPANY ACT. No Company is a "holding
company" or a "subsidiary company" of a "holding company" or an "affiliate" of
a "holding company" or a "public utility" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
5.25 REPRESENTATIONS AND WARRANTIES. Each Notice of Borrowing and
Notice of LC shall constitute, without the necessity of specifically containing
a written statement, a representation and warranty by Borrower that no
Potential Default or Event of Default exists, and that all representations and
warranties contained in this SECTION 5 or in any other Loan Document are true
and correct on and as of the date the requested Advance or Issuance is to be
made.
5.26 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties by Borrower herein shall survive delivery of the Notes and the
making of the Loan, and any investigation at any time made by or on behalf of
Agent or any Lender shall not diminish Agent's or Lenders' right to rely
thereon.
SECTION 6 AFFIRMATIVE COVENANTS.
So long as Lenders have any commitment to make Advances or Issuances
hereunder, and until payment in full of the Obligation, Borrower covenants
that:
6.1 FINANCIAL STATEMENTS, REPORTS, AND DOCUMENTS. Borrower shall
deliver to Agent, with copies for each Lender, each of the following:
(a) QUARTERLY STATEMENTS. As soon as available, and in any event
within forty-five (45) days after the end of each quarterly fiscal period
(except the last) of each fiscal year of Borrower, copies of the consolidated
and consolidating balance sheet of the Companies as of the end of such
quarterly fiscal period, and statements of income, retained earnings, and
changes in cash flow of the Companies for that quarterly fiscal period and for
the portion of the fiscal year ending with such period, in each case setting
forth in
REVOLVING CREDIT AGREEMENT 31
<PAGE> 36
comparative form the figures for the corresponding period of the preceding
fiscal year, all in reasonable detail, and certified by the chief financial
officer of Borrower as being true and correct in all material respects and as
having been prepared in accordance with GAAP, subject to year-end audit
adjustments;
(b) ANNUAL STATEMENTS. As soon as available and in any event within
ninety (90) days after the close of each fiscal year of Borrower, copies of the
consolidated and consolidating balance sheet of the Companies as of the close
of such fiscal year and statements of income, retained earnings, and changes in
cash flow of the Companies for such fiscal year, in each case setting forth in
comparative form the figures for the preceding fiscal year, all in reasonable
detail and accompanied by an opinion thereon (which shall not be qualified by
reason of any limitation imposed by Borrower) of independent public accountants
of recognized national standing, selected by Borrower and reasonably
satisfactory to Agent, to the effect that (i) such consolidated financial
statements have been prepared in accordance with GAAP (except for changes in
which such accountants concur), (ii) the examination of such accounts in
connection with such financial statements has been made in accordance with
generally accepted auditing standards and, accordingly, includes such tests of
the accounting records and such other auditing procedures as were considered
necessary in the circumstances, and (iii) in making their audit, such
accountants have not become aware of any condition or event which would
constitute a Potential Default or an Event of Default under any of the terms or
provisions of this Agreement (insofar as any such terms or provisions pertain
to accounting matters) and, if any such condition or event then exists,
specifying the nature and period of existence thereof;
(c) COMPLIANCE CERTIFICATE. Within forty-five (45) days after the
end of each fiscal quarter of Borrower hereafter, a certificate executed by the
chief financial officer or chief executive officer of Borrower, stating that a
review of the activities of Borrower during such fiscal quarter has been made
under his supervision, and that Borrower has performed each and every
obligation and covenant contained herein, and is not in default under any of
the same, or, if any such default shall have occurred, specifying the nature
and status thereof, and setting forth a computation in reasonable detail as of
the end of the period covered by such statements, of compliance with SECTIONS
7.14 through 7.19;
(d) QUARTERLY ACTUARIAL RESERVES. As soon as available, and in any
event within forty five (45) days after the end of each quarterly fiscal period
of each fiscal year of Borrower, copies of all actuarial Reserves reports of
each Company;
(e) OTHER INFORMATION. Such other information concerning the
business, properties, or financial condition of Borrower or any other Company
as Agent or any Lender shall reasonably request including (i) audit reports,
(ii) registration statements or other reports or notices provided to
shareholders of Borrower or filed with the Securities and Exchange Commission,
(iii) all material reports, filings, and other notices filed with any
Governmental Authority, and (iv) all press releases and other statements made
available generally by Borrower to the public concerning material developments
in the business of Borrower or any other Company.
6.2 PAYMENT OF TAXES AND OTHER INDEBTEDNESS. Borrower shall, and
shall cause each of the other Companies to, pay and discharge (a) all taxes,
assessments, and governmental charges or levies imposed upon it or upon its
income or profits, or upon any property belonging to it, before delinquent, (b)
all lawful claims (including claims for labor, materials, and supplies), which,
if unpaid, might give rise to a Lien upon any of its property, and (c) all of
its other Indebtedness, except as prohibited under the Loan Documents;
provided, however, that Borrower and each of the other Companies shall not be
required to pay any such tax, assessment, charge, or levy if and so long as the
amount, applicability, or validity thereof shall currently be contested in good
faith by appropriate proceedings and appropriate accruals and cash reserves
therefor have been established in accordance with GAAP.
REVOLVING CREDIT AGREEMENT 32
<PAGE> 37
6.3 MAINTENANCE OF EXISTENCE AND RIGHTS; CONDUCT OF BUSINESS.
Borrower shall, and shall cause each of the other Companies to, preserve and
maintain its corporate existence (except as permitted by SECTION 7.9) and all
of its rights, privileges, and franchises necessary or desirable in the normal
conduct of its business, and conduct its business in an orderly and efficient
manner consistent with good business practices and in accordance with all valid
regulations and orders of any Governmental Authority.
6.4 NOTICE OF DEFAULT. Borrower shall furnish to Agent, immediately
upon becoming aware of the existence of any condition or event which
constitutes a Potential Default or an Event of Default, written notice
specifying the nature and period of existence thereof, and the action that
Borrower is taking or proposes to take with respect thereto.
6.5 OTHER NOTICES. Borrower shall, and shall cause each of the other
Companies to, promptly notify Agent of (a) any event or circumstance which
could have a Material Adverse Effect, (b) any default by a Company under any
material agreement, contract, or other instrument to which it is a party or by
which any of its properties are bound, or any acceleration of the maturity of
any Indebtedness owing by any Company, (c) any material adverse claim against
or affecting any Company or any of its Properties, which could result in a
Material Adverse Effect, and (d) the commencement of, and any material adverse
determination in, any litigation with any third party or any proceeding before
any Governmental Authority affecting any Company.
6.6 OPERATIONS AND PROPERTIES. Borrower shall, and shall cause each
of the other Companies to, (a) act prudently and in accordance with customary
industry standards in managing and operating its assets and properties, and (b)
keep in good working order and condition, ordinary wear and tear excepted, all
of its assets and properties which are necessary to the conduct of its
business.
6.7 BOOKS AND RECORDS; ACCESS. Borrower shall, and shall cause each
of the other Companies to, give any representative of Agent and each Lender
access during all business hours to, and permit such representative to examine,
copy, or make excerpts from, any and all books, records, and documents in the
possession of Borrower or such other Company and relating to its affairs, and
to inspect any of the properties of Borrower or such other Company. Borrower
shall, and shall cause each of the other Companies to, maintain complete and
accurate books and records of its transactions in accordance with good
accounting practices.
6.8 COMPLIANCE WITH LAW. Borrower shall, and shall cause each of the
other Companies to, comply with all Legal Requirements, and all orders of any
Governmental Authority, a breach of which could have a Material Adverse Effect.
6.9 INSURANCE. Borrower shall, and shall cause each of the other
Companies to, keep all insurable property, real and personal, adequately
insured at all times in such amounts and against such risks as are customary
for Persons in similar businesses operating in the same vicinity, specifically
to include a policy of hazard, casualty, fire, and extended coverage insurance
covering all assets, business interruption insurance (where feasible),
liability insurance, and worker's compensation insurance, in every case under a
policy with a financially sound and reputable insurance company, and with only
such deductibles as are customary.
6.10 AUTHORIZATIONS AND APPROVALS. Borrower shall, and shall cause
each of the other Companies to, promptly obtain, from time-to-time at its own
expense, all such Governmental Authorizations as may be required to enable it
to comply with its obligations hereunder and under the other Loan Documents.
REVOLVING CREDIT AGREEMENT 33
<PAGE> 38
6.11 FURTHER ASSURANCES. Borrower shall, and shall cause each of the
other Companies to, make, execute and deliver, or file, or cause the same to be
done, all such notices, additional agreements, mortgages, assignments,
financing statements, or other assurances, and take any and all such other
action, as Agent may, from time-to-time, deem reasonably necessary or proper in
connection with any of the Loan Documents, the obligations of the Companies
thereunder.
6.12 INDEMNIFICATION.
(a) AS USED IN THIS SECTION: (i) "INDEMNITOR" MEANS THE COMPANIES;
(ii) "INDEMNITEE" MEANS AGENT, ISSUING BANK, EACH LENDER, EACH PRESENT AND
FUTURE AFFILIATE OF AGENT, ISSUING BANK, OR ANY LENDER, EACH PRESENT AND FUTURE
OFFICER, AGENT, OR OTHER REPRESENTATIVE OF AGENT, ISSUING BANK, ANY LENDER, OR
ANY OF THOSE AFFILIATES, AND EACH PRESENT AND FUTURE SUCCESSOR AND ASSIGN OF
AGENT, ISSUING BANK, ANY LENDER, OR ANY OF THOSE AFFILIATES OR OFFICERS,
AGENTS, OR OTHER REPRESENTATIVES; AND (iii) "INDEMNIFIED LIABILITIES" MEANS
ALL PRESENT AND FUTURE, KNOWN AND UNKNOWN, FIXED AND CONTINGENT,
ADMINISTRATIVE, INVESTIGATIVE, JUDICIAL, AND OTHER CLAIMS, DEMANDS, ACTIONS,
CAUSES OF ACTION, INVESTIGATIONS, SUITS, PROCEEDINGS, AMOUNTS PAID IN
SETTLEMENT, DAMAGES, JUDGMENTS, PENALTIES, COURT COSTS, LIABILITIES, AND
OBLIGATIONS -- AND ALL PRESENT AND FUTURE COSTS, EXPENSES, AND DISBURSEMENTS
(INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS' FEES AND EXPENSES
WHETHER OR NOT SUIT OR OTHER PROCEEDING EXISTS OR ANY INDEMNITEE IS PARTY TO
ANY SUIT OR OTHER PROCEEDING) IN ANY WAY RELATED TO ANY OF THE FOREGOING --
THAT MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST ANY
INDEMNITEE AND IN ANY WAY RELATING TO OR ARISING OUT OF ANY (A) LOAN DOCUMENT,
TRANSACTION CONTEMPLATED BY ANY LOAN DOCUMENT, OR COLLATERAL, (B) ENVIRONMENTAL
LIABILITY IN ANY WAY RELATED TO ANY COMPANY, THE COLLATERAL, OR ANY ACT,
OMISSION, STATUS, OWNERSHIP, OR OTHER RELATIONSHIP, CONDITION, OR CIRCUMSTANCE
CONTEMPLATED BY, CREATED UNDER, OR ARISING PURSUANT TO OR IN CONNECTION WITH
ANY LOAN DOCUMENT, OR (C) INDEMNITEE'S SOLE OR CONCURRENT ORDINARY NEGLIGENCE.
(b) EACH INDEMNITOR SHALL JOINTLY AND SEVERALLY INDEMNIFY EACH
INDEMNITEE FROM AND AGAINST, PROTECT AND DEFEND EACH INDEMNITEE FROM AND
AGAINST, HOLD EACH INDEMNITEE HARMLESS FROM AND AGAINST, AND ON DEMAND PAY OR
REIMBURSE EACH INDEMNITEE FOR, ALL INDEMNIFIED LIABILITIES.
(c) THE FOREGOING PROVISIONS (i) ARE NOT LIMITED IN AMOUNT EVEN IF
THAT AMOUNT EXCEEDS THE OBLIGATION, (ii) INCLUDE, WITHOUT LIMITATION,
REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER COSTS AND EXPENSES OF
LITIGATION OR PREPARING FOR LITIGATION AND DAMAGES OR INJURY TO PERSONS,
PROPERTY, OR NATURAL RESOURCES ARISING UNDER ANY STATUTORY OR COMMON LAW,
PUNITIVE DAMAGES, FINES, AND OTHER PENALTIES, AND (iii) ARE NOT AFFECTED BY THE
SOURCE OR ORIGIN OF ANY HAZARDOUS SUBSTANCE, AND (iv) ARE NOT AFFECTED BY ANY
INDEMNITEE'S INVESTIGATION, ACTUAL OR CONSTRUCTIVE KNOWLEDGE, COURSE OF
DEALING, OR WAIVER.
(d) No Indemnitee is entitled to be indemnified under the Loan
Documents for its or its agents', contractors', or employees' own fraud, gross
negligence, or willful misconduct.
(e) THE PROVISIONS OF AND INDEMNIFICATION AND OTHER UNDERTAKINGS
UNDER THIS SECTION SURVIVE THE FORECLOSURE OF ANY LIEN OR ANY TRANSFER IN LIEU
OF THAT FORECLOSURE, THE SALE OR OTHER TRANSFER OF ANY COLLATERAL TO ANY
PERSON, THE SATISFACTION OF THE OBLIGATION, THE TERMINATION OF THE LOAN
DOCUMENTS, AND THE RELEASE OF ANY OR ALL LIENS.
REVOLVING CREDIT AGREEMENT 34
<PAGE> 39
6.13 RESERVES. Borrower shall, and shall each of the other Companies
to, maintain Reserves in accordance with all Legal Requirements of any
Governmental Authority.
6.14 INFORMATION RELATING TO PROPOSED ACQUISITIONS. Borrower shall
keep Agent and Lenders informed of the relevant information and status of, and
will share with Agent and Lenders and provide copies to the extent possible, of
all material due diligence information relating to any proposed Acquisition
with respect to which Borrower or any other Company enters into a letter of
intent or acquisition agreement, during the term of this Agreement.
6.15 AFTER-ACQUIRED SUBSIDIARIES. Concurrently upon the formation or
Acquisition by Borrower or any other Company of any Subsidiary after the date
hereof (pursuant to a Permitted Acquisition or otherwise) (an "AFTER-ACQUIRED
SUBSIDIARY"), Borrower shall cause the After-Acquired Subsidiary to deliver
copies of the articles of incorporation, bylaws, and resolutions (or other
corresponding constituent documents) and shall cause the appropriate Company to
execute a Pledge Agreement, as shall be required by Agent to create first
priority Liens in favor of Agent, for the benefit of Lenders, in such After-
Acquired Subsidiary's capital stock, to secure the Obligation.
6.16 ERISA. Borrower shall, and shall cause each of the other
Companies to, comply with all minimum funding requirements, and all other
material requirements, of ERISA, if applicable, so as not to give rise to any
liability thereunder.
SECTION 7 NEGATIVE COVENANTS.
So long as Lenders has any commitments to make Advances or Issuances
hereunder, and until payment in full of the Obligation, Borrower covenants
that:
7.1 LIMITATION ON INDEBTEDNESS. Borrower shall not, and shall not
permit any of the other Companies to, incur, Guarantee, or otherwise be or
become, directly or indirectly, liable in respect of any Indebtedness, except
(a) Indebtedness arising out of this Agreement, (b) Indebtedness secured by the
Permitted Liens (except for liabilities borrowed or guaranteed after the date
hereof), (c) current liabilities for taxes and assessments incurred in the
ordinary course of business, (d) Indebtedness in respect of current accounts
payable or accrued (other than for borrowed funds or purchase money
obligations) and incurred in the ordinary course of business, provided that all
such liabilities, accounts, and claims shall be promptly paid and discharged
when due or in conformity with customary trade terms, (e) purchase money
Indebtedness not to exceed $250,000.00 in any year or $500,000.00 at any time
outstanding, (f) Guaranties permitted pursuant to SECTION 7.11, (g)
Indebtedness under the Existing LC Agreements, and (h) Indebtedness payable to
the sellers in connection with the OraCare Acquisition and secured by Lcs
issued pursuant to this Agreement, which Indebtedness shall mature on of before
Janauary 15, 1997.
7.2 NEGATIVE PLEDGE. Borrower shall not, and shall not permit any of
the other Companies to, create, incur, permit, or suffer to exist any Lien upon
any of its property or assets, now owned or hereafter acquired, including,
without limitation, the capital stock of any Subsidiary, except for Permitted
Liens.
7.3 NEGATIVE PLEDGE AGREEMENTS. Borrower shall not, and shall not
permit any of the other Companies to, enter into any agreement (excluding this
Agreement or any of the other Loan Documents) prohibiting the creation or
assumption of any Lien upon any of its property, revenues, or assets, whether
now owned or hereafter acquired, or the ability of any Company to make any
payment, directly or indirectly, to Borrower or another Company by way of
Distributions, advances, repayments of loans, repayments of expenses, accruals
or otherwise.
REVOLVING CREDIT AGREEMENT 35
<PAGE> 40
7.4 RESTRICTIONS ON DISTRIBUTIONS. Borrower shall not directly or
indirectly declare or make, or incur any liability to make, any Distribution.
Borrower shall not permit any of the other Companies to directly or indirectly
declare or make, or incur any liability to make, any Distribution, except
Distributions to Borrower or a Company that is wholly-owned by Borrower.
7.5 LIMITATION ON INVESTMENTS. Borrower shall not, and shall not
permit any of the other Companies to, make or have outstanding any Investments
in any Person, except for (a) the Companies' ownership of stock of Subsidiaries
(either existing on the date hereof or formed or acquired in accordance with
SECTION 6.15), (b) Temporary Cash Investments, (c) Other Permitted Investments,
(d) other Investments (including loans or advances to providers) not to exceed
$500,000.00 in the aggregate at any time outstanding, (e) the loan to Peter
Barnett, in the maximum principal amount of $953,125.00, to finance the
Acquisition by Peter Barnett of OraCare Dental Associates, P.A., a New Jersey
practice association, and (f) such other "cash equivalent" investments as Agent
may from time-to-time approve.
7.6 CERTAIN TRANSACTIONS. Borrower shall not, and shall not permit
any of the other Companies to, enter into any transaction with, or pay any
management fees to, any Affiliate, other than another Company; provided,
however, that the Companies may enter into transactions with Affiliates upon
terms not less favorable to the Companies than would be obtainable at the time
in comparable, arms-length transactions with Persons other than Affiliates.
7.7 ISSUANCE OF SHARES. Borrower shall not, and shall not permit any
of the other Companies to, issue, sell, or otherwise dispose of any shares of
its capital stock or other securities, or rights, warrants, or options to
purchase or acquire any shares or securities, except (a) Permitted Equity
Issuances, and (b) to Borrower or another Company, so long as Borrower or
another Company simultaneously pledges such shares to Agent, for the benefit of
Lenders, to secure the Obligation.
7.8 LIMITATION ON SALE OF PROPERTIES. Borrower shall not, and shall
not permit any of the other Companies to (a) sell, assign, exchange, lease, or
otherwise dispose of any of its properties, rights, assets, or business,
whether now owned or hereafter acquired, including, without limitation, the
capital stock of any Subsidiary, except in the ordinary course of its business
and for a fair consideration, or (b) sell, assign, or discount any accounts
receivable.
7.9 LIQUIDATION, MERGERS, CONSOLIDATIONS AND DISPOSITIONS OF
SUBSTANTIAL ASSETS. Borrower shall not, and shall not permit any of the other
Companies to, dissolve or liquidate, or become a party to any merger or
consolidation, or sell, transfer, lease, or otherwise dispose of all or any
substantial part of its property or assets or business; provided, however, that
the foregoing shall not operate to prevent mergers or consolidations of any
Subsidiary into Borrower or another Subsidiary (if such transaction does not
reduce the Tangible Net Worth of the survivor) or a sale, transfer, or lease of
assets by any Subsidiary to Borrower.
7.10 LINES OF BUSINESS. Borrower shall not, and shall not permit any
of the other Companies to, directly or indirectly, engage in any business other
than those in which it is presently engaged, or discontinue any of its material
existing lines of business.
7.11 GUARANTIES. Borrower shall not, and shall not permit any of the
other Companies to, become or be liable in respect of any Guaranty, other than
Guaranties by any Company of Indebtedness of providers under Prepaid Plans so
long as such Indebtedness does not exceed $400,000.00 in the aggregate at any
time outstanding.
7.12 LEASES; SALE AND LEASEBACK. Borrower shall not, and shall not
permit any of the other Companies to, enter into any arrangement with any
Person pursuant to which Borrower or any of the
REVOLVING CREDIT AGREEMENT 36
<PAGE> 41
Subsidiaries will lease, as lessee, any property which it owned as of the date
hereof and which it sold, transferred, or otherwise disposed of to such other
Person.
7.13 PREPAYMENT OF INDEBTEDNESS. Borrower shall not, and shall not
permit any of the other Companies to, prepay any Indebtedness, except the
Obligation.
7.14 MINIMUM NET WORTH. Borrower shall not permit, as of any date,
Net Worth of the Companies, to be less than the sum of (a) $64,000,000.00 plus
(b) one hundred percent (100%) of the Net Cash Proceeds from any Permitted
Equity Issuances (other than pursuant to options issued pursuant to employee or
director stock option plans or warrants issued to employees or directors of a
Company)
7.15 FIXED CHARGE COVERAGE. Borrower shall not, as of the last day of
each fiscal quarter of Borrower during the periods set forth below, permit the
ratio of (a) the sum of (i) Consolidated Adjusted Net Income, (ii) depreciation
and amortization expense, (iii) operating lease expenses, (iv) rent expenses,
(v) Interest Expense, and (vi) income taxes deducted from Consolidated Adjusted
Net Income in accordance with GAAP, to (b) the sum of (i) Interest Expense,
(ii) Assumed Debt Service, (iii) operating lease expenses, and (iv) rent
expenses, in each case for the Companies and for the four (4) fiscal quarters
ending on the date of determination, to be less than the ratio set forth
opposite such period below:
<TABLE>
<CAPTION>
================================================================
PERIOD RATIO
================================================================
<S> <C>
Date hereof through December 31, 1996 1.10 to 1.0
----------------------------------------------------------------
January 1, 1997 through December 31, 1997 1.25 to 1.0
----------------------------------------------------------------
January 1, 1998 through December 31, 1998 1.35 to 1.0
----------------------------------------------------------------
January 1, 1999 through December 31, 1999 1.50 to 1.0
----------------------------------------------------------------
January 1, 2000 and thereafter 1.75 to 1.0
================================================================
</TABLE>
7.16 FUNDED DEBT TO EBITDA. Borrower shall not, as of any date during
the term of this Agreement, permit the Funded Debt to EBITDA Ratio to exceed
3.0 to 1.0.
7.17 FUNDED DEBT TO TOTAL CAPITALIZATION. Borrower shall not, as of
any date during the term of this Agreement, permit the ratio of Funded Debt to
Total Capitalization to exceed 0.50 to 1.00.
7.18 LIQUIDITY COVERAGE RATIO. Borrower shall not, as of any date
during the term of this Agreement, permit the ratio of (a) Liquid Assets to (b)
the sum of (i) accounts payable, (ii) accrued expenses, and (iii) Reserves, to
be less than 1.5 to 1.0.
7.19 CAPITAL EXPENDITURES. Borrower shall not permit the aggregate
amount of all Capital Expenditures made by the Companies during any fiscal year
ending after the date hereof to exceed $5,000,000.00.
REVOLVING CREDIT AGREEMENT 37
<PAGE> 42
SECTION 8 EVENTS OF DEFAULT.
8.1 EVENTS OF DEFAULT. An "Event of Default" shall exist if any one
or more of the following events (herein collectively called "EVENTS OF
DEFAULT") shall occur and be continuing:
(a) Borrower shall fail to pay when due the Obligation or any part
thereof, including, but not limited to, fees, interest, or principal, and such
failure shall continue for three (3) days after such payment becomes due; or
(b) any representation or warranty made under this Agreement, or any
of the other Loan Documents, shall prove to be untrue or inaccurate in any
material respect, as of the date on which such representation or warranty is
made or deemed to have been made; or
(c) default shall occur in the performance of any of the covenants or
agreements of any Company contained herein, or in any of the other Loan
Documents; provided, however, if the Event of Default arises solely because of
a default in the performance of a covenant contained in SECTIONS 6.2, 6.3, 6.6,
6.8, 6.9, 6.10, 6.11, 6.13 and SECTIONS 7.14 through 7.19, then Agent and
Lenders shall not be entitled to exercise any right or remedy under SECTION 8.2
until thirty (30) days after such Event of Default occurs; or
(d) default shall occur in the payment of any Indebtedness (other
than the Obligation) of any Company in excess of $500,000.00, or default shall
occur in respect of any note or credit agreement relating to any such
Indebtedness, and such default shall continue for more than the period of
grace, if any, specified therein; or
(e) any of the Loan Documents shall cease to be legal, valid, and
binding agreements enforceable against the Person executing the same in
accordance with its terms, shall be terminated, become or be declared
ineffective or inoperative, or cease to provide the respective liens, security
interests, rights, titles, interests, remedies, powers, or privileges intended
to be provided thereby; or any Company shall deny that such Person has any
further liability or obligation under any of the Loan Documents; or
(f) any Company shall (i) apply for or consent to the appointment of
a receiver, trustee, custodian, intervenor, or liquidator of itself or of all
or a substantial part of such Person's assets, (ii) file a voluntary petition
in bankruptcy, admit in writing that such Person is unable to pay such Person's
debts as they become due, or generally not pay such Person's debts as they
become due, (iii) make a general assignment for the benefit of creditors, (iv)
file a petition or answer seeking reorganization of an arrangement with
creditors or to take advantage of any bankruptcy, or insolvency laws, (v) file
an answer admitting the material allegations of, or consent to, or default in
answering, a petition filed against such Person in any bankruptcy,
reorganization, or insolvency proceeding, or (vi) take corporate action for the
purpose of effecting any of the foregoing; or
(g) an involuntary proceeding shall be commenced against any Company
seeking bankruptcy or reorganization of such Person or the appointment of a
receiver, custodian, trustee, liquidator, or other similar official of such
Person, or all or substantially all of such Person's assets, and such
proceeding shall not have been dismissed within sixty (60) days of the filing
thereof; or an order, order for relief, judgment, or decree shall be entered by
any court of competent jurisdiction or other competent authority, approving a
petition or complaint seeking reorganization of any Company or appointing a
receiver, custodian, trustee, liquidator, or other similar official of such
Person, or of all or substantially all of such Person's assets; or
REVOLVING CREDIT AGREEMENT 38
<PAGE> 43
(h) any final judgment(s) for the payment of money in excess of the
sum of $500,000.00 in the aggregate shall be rendered against any Company, and
such judgment(s) shall not be satisfied or discharged or enforcement thereof
stayed at least ten (10) days prior to the date on which any of such Person's
assets could be lawfully sold to satisfy such judgment; or
(i) a Change in Control shall occur; or
(j) any of the following events shall occur or exist with respect to
any Company or any ERISA Affiliate: (i) any Prohibited Transaction involving
any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing
under Section 4041 of ERISA of a notice of intent to terminate any Plan or the
termination of any Plan; (iv) any event or circumstance that might constitute
grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA
for the termination of, or for the appointment of a trustee to administer, any
Plan, or the institution by the PBGC of any such proceedings; or (v) complete
or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer
Plan or the reorganization, insolvency, or termination of any Multiemployer
Plan; and in each case above, such event or condition, together with all other
events or conditions, if any, have subjected or could subject any Company to
any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC,
or otherwise (or any combination thereof) which in the aggregate exceed or
could exceed $500,000.00.
8.2 REMEDIES UPON EVENT OF DEFAULT. If any Event of Default shall
occur, Agent may, at the request of the Required Lenders, without notice,
exercise any one or more of the following rights and remedies, and any other
remedies provided in any of the Loan Documents, as Agent, at the request of
Lenders, in their discretion may deem necessary or appropriate: (a) terminate
the commitment to lend hereunder, (b) declare the Obligation, or any part
thereof, to be forthwith due and payable, whereupon the same shall forthwith
become due and payable without presentment, demand, protest, notice of default,
notice of acceleration or of intention to accelerate, or other notice of any
kind, all of which Borrower hereby expressly waives, anything contained herein
or in the Notes to the contrary notwithstanding, (c) reduce any claim to
judgment, or (d) without notice of default or demand, pursue and enforce any of
Agent's or Lenders' rights and remedies under the Loan Documents, or otherwise
provided under or pursuant to any applicable law or agreement; provided,
however, that if any Event of Default specified in SECTIONS 8.1(f) or (g) shall
occur, the Obligation shall thereupon become due and payable concurrently
therewith, and Lenders' obligation to lend shall immediately terminate
hereunder, without any further action by Agent or Lenders and without
presentment, demand, protest, notice of default, notice of acceleration or of
intention to accelerate, or other notice of any kind, all of which Borrower
hereby expressly waives.
8.3 PERFORMANCE BY LENDER. Should Borrower fail to perform any
covenant, duty, or agreement contained in any of the Loan Documents, Agent may
perform or attempt to perform such covenant, duty or agreement on behalf of
Borrower. In such event, Borrower shall, at the request of Agent, promptly pay
any amount expended by Agent in such performance or attempted performance to
Agent at its principal office in Dallas, Texas, together with interest thereon
at the Maximum Rate from the date of such expenditure until paid.
Notwithstanding the foregoing, it is expressly understood that Agent shall not
assume any liability or responsibility for the performance of any duties of
Borrower hereunder or under any of the Loan Documents, and none of the
covenants or other provisions contained in this Agreement shall, or shall be
deemed to, give Agent the right or power to exercise control over the
management and affairs of Borrower.
REVOLVING CREDIT AGREEMENT 39
<PAGE> 44
SECTION 9 THE AGENT.
9.1 THE AGENT.
(a) APPOINTMENT. Each Lender appoints Agent (including, without
limitation, each successor Agent in accordance with this SECTION 9) as its
nominee and agent to act in its name and on its behalf (and Agent and each such
successor accepts that appointment): (i) to act as its nominee and on its
behalf in and under all Loan Documents; (ii) to arrange the means whereby its
funds are to be made available to Borrower under the Loan Documents; (iii) to
take any action that it properly requests under the Loan Documents (subject to
the concurrence of other Lenders as may be required under the Loan Documents);
(iv) to receive all documents and items to be furnished to it under the Loan
Documents; (v) to be the secured party, mortgagee, beneficiary, recipient, and
similar party in respect of any Collateral, for the benefit of Lenders; (vi) to
promptly distribute to it all financial statements, compliance certificates,
notices received hereunder, and other items specifically required to be
delivered to it hereunder, and, upon request, such other material information,
requests, documents, and items received under the Loan Documents; (vii) to
promptly distribute to it its ratable part of each payment or prepayment
(whether voluntary, as proceeds of collateral upon or after foreclosure, as
proceeds of insurance thereon, or otherwise) in accordance with the terms of
the Loan Documents; and (viii) to deliver to the appropriate Persons requests,
demands, approvals, and consents received from it. However, Agent may not be
required to take any action that exposes it to personal liability or that is
contrary to any Loan Document or applicable Legal Requirement.
(b) SUCCESSOR. Agent may assign all of its rights and obligations as
Agent under the Loan Documents to any of its Affiliates, which Affiliate shall
then be the successor Agent under the Loan Documents. Agent may also
voluntarily resign by notice to Borrower and Lenders, and shall resign upon the
request of the Required Lenders for cause (i.e., Agent is continuing to fail to
perform its responsibilities as Agent under the Loan Documents). If the
initial or any successor Agent ever ceases to be a party to this Agreement or
if the initial or any successor Agent ever resigns (whether voluntarily or at
the request of the Required Lenders), then the Required Lenders shall (which,
if no Potential Default or Event of Default exists, is subject to Borrower's
approval that may not be unreasonably withheld) appoint the successor Agent
from among Lenders (other than the resigning Agent). If the Required Lenders
fail to appoint a successor Agent within thirty (30) days after the resigning
Agent has given notice of resignation or the Required Lenders have removed the
resigning Agent, then the resigning Agent may, on behalf of Lenders, appoint a
successor Agent (which, if no Potential Default or Event of Default exists, is
subject to Borrower's approval that may not be unreasonably withheld), which
must be a commercial bank having a combined capital and surplus of at least
$1,000,000,000.00 (as shown on its most recently published statement of
condition) and whose debt obligations (or whose parent's debt obligations) are
rated not less than Baa1 by Moody's or BBB+ by S & P. Upon its acceptance of
appointment as successor Agent, the successor Agent succeeds to and becomes
vested with all of the rights of the prior Agent, and the prior Agent is
discharged from its duties and obligations of the Agent under the Loan
Documents, and each Lender shall execute the documents that any Lender, the
resigning or removed Agent, or the successor Agent reasonably request to
reflect the change. After any Agent's resignation or removal as Agent under
the Loan Documents, the provisions of this SECTION inure to its benefit as to
any actions taken or not taken by it while it was the Agent under the Loan
Documents.
(c) RIGHTS AS LENDER. Agent, in its capacity as a Lender, has the
same rights under the Loan Documents as any other Lender and may exercise those
rights as if it were not acting as an Agent. The term "Lender," unless the
context otherwise indicates, includes the Agent. Agent's resignation or
removal does not impair or otherwise affect any rights that it has or may have
in its capacity as an individual Lender. Each Lender and Borrower agree Agent
is not a fiduciary for Lenders or for Borrower but is simply acting in the
REVOLVING CREDIT AGREEMENT 40
<PAGE> 45
capacity described in this Agreement to alleviate administrative burdens for
Borrower and Lenders, that Agent has no duties or responsibilities to Lenders
or Borrower except those expressly set forth in the Loan Documents, and that
Agent in its capacity as a Lender has the same rights as any other Lender.
(d) OTHER ACTIVITIES. Agent or any Lender may now or in the future
be engaged in one or more loan, letter of credit, leasing, or other financing
transactions with Borrower or another Company, act as trustee or depositary for
Borrower or another Company, or otherwise be engaged in other transactions with
Borrower (collectively, the "OTHER ACTIVITIES") not the subject of the Loan
Documents. Without limiting the rights of Lenders specifically set forth in
the Loan Documents, neither Agent nor any Lender is responsible to account to
the other Lenders for those other activities, and no Lender shall have any
interest in any other Lender's activities, any present or future guaranties by
or for the account of Borrower that are not contemplated by or included in the
Loan Documents, any present or future offset exercised by Agent or any Lender
in respect of those other activities, any present or future property taken as
security for any of those other activities, or any property now or hereafter in
Agent's or any other Lender's possession or control that may be or become
security for the obligations of Borrower arising under the Loan Documents by
reason of the general description of indebtedness secured or of property
contained in any other agreements, documents, or instruments related to any of
those other activities (but, if any payments in respect of those guaranties or
that property or the proceeds thereof is applied by Agent or any Lender to
reduce the Obligation, then each Lender is entitled to share ratably in the
application as provided in the Loan Documents).
9.2 EXPENSES. Should Agent commence any proceeding or in any way
seek to enforce its rights under the Loan Documents, irrespective of whether as
a result thereof Agent shall acquire title to any Collateral, either through
foreclosure, deed in lieu of foreclosure, or otherwise, each Lender, upon
demand therefor from time-to-time, shall contribute its share (based on its Pro
Rata Part) of the reasonable costs and/or expenses of any such enforcement or
acquisition, including, but not limited to, fees of receivers or trustees,
court costs, title company charges, filing and recording fees, appraisers' fees
and fees and expenses of attorneys to the extent not otherwise reimbursed by
Borrower. Without limiting the generality of the foregoing, each Lender shall
contribute its share (based on its Pro Rata Part) of all reasonable costs and
expenses incurred by Agent (including reasonable attorneys' fees and expenses)
if Agent employs counsel for advice or other representation (whether or not any
suit has been or shall be filed) with respect to any Collateral or any part
thereof, or any of the Loan Documents, or the attempt to enforce any Lien in
any of the Collateral, or to enforce any rights of Agent or any of Borrower's
or any other Company's obligations under any of the Loan Documents, but not
with respect to any dispute between Agent and any other Lender(s). Any loss of
principal and interest resulting from any Potential Default or Event of Default
shall be shared by Lenders in accordance with their respective Pro Rata Parts.
It is understood and agreed that if Agent determines that it is necessary to
engage counsel for Lenders from and after the occurrence of a Potential Default
or Default, then said counsel shall be selected by Agent and written notice of
the same shall be delivered to Lenders.
9.3 PROPORTIONATE ABSORPTION OF LOSSES. Except as otherwise provided
in the Loan Documents, nothing in the Loan Documents gives any Lender any
advantage over any other Lender insofar as the Obligation is concerned or
relieves any Lender from ratably absorbing any losses sustained with respect to
the Obligation (except to the extent unilateral actions or inactions by any
Lender result in Borrower or any other obligor on the Obligation having any
credit, allowance, setoff, defense, or counterclaim solely with respect to all
or any part of that Lender's Pro Rata Part of the Obligation).
9.4 DELEGATION OF DUTIES; RELIANCE. Lenders may perform any of their
duties or exercise any of their rights under the Loan Documents by or through
Agent, and Lenders and Agent may perform any of their duties or exercise any of
their rights under the Loan Documents by or through their respective officers,
agents, or other representatives. Agent, Lenders, and their respective
officers, agents, or other
REVOLVING CREDIT AGREEMENT 41
<PAGE> 46
representatives (a) are entitled to rely upon (and shall be protected in
relying upon) any written or oral statement believed by it or them to be
genuine and correct and to have been signed or made by the proper Person and,
with respect to legal matters, upon opinion of counsel selected by Agent or
that Lender (but nothing in this CLAUSE (A) permits Agent to rely on (i) oral
statements if a writing is required by this Agreement or (ii) any other writing
if a specific writing is required by this Agreement), (b) are entitled to deem
and treat each Lender as the owner and holder of its portion of the Obligation
for all purposes until, written notice of the assignment or transfer is given
to and received by Agent (and any request, authorization, consent, or approval
of any Lender is conclusive and binding on each subsequent holder, assignee, or
transferee of or Participant in that Lender's portion of the Obligation until
that notice is given and received), (c) are not deemed to have notice of the
occurrence of a Potential Default or Event of Default unless a responsible
officer of Agent, who handles matters associated with the Loan Documents and
transactions thereunder, has actual knowledge or Agent has been notified by a
Lender or Borrower, and (d) are entitled to consult with legal counsel
(including counsel for Borrower), independent accountants, and other experts
selected by Agent and are not liable for any action taken or not taken in good
faith by it in accordance with the advice of counsel, accountants, or experts.
9.5 LIMITATION OF AGENT'S LIABILITY.
(a) EXCULPATION. Neither Agent nor any of its Affiliates or
officers, agents or other representatives will be liable for any action taken
or omitted to be taken by it or them under the Loan Documents in good faith and
believed by it or them to be within the discretion or power conferred upon it
or them by the Loan Documents or be responsible for the consequences of any
error of judgment (except for fraud, gross negligence, or willful misconduct),
and neither Agent nor any of its Affiliates or officers, agents, or other
representatives has a fiduciary relationship with any Lender by virtue of the
Loan Documents (but nothing in this Agreement negates the obligation of Agent
to account for funds received by it for the account of any Lender).
(b) INDEMNITY. Unless indemnified to its satisfaction against loss,
cost, liability, and expense, Agent may not be compelled to do any act under
the Loan Documents or to take any action toward the execution or enforcement of
the powers thereby created or to prosecute or defend any suit in respect of the
Loan Documents. If Agent requests instructions from Lenders, or the Required
Lenders, as the case may be, with respect to any act or action in connection
with any Loan Document, then Agent is entitled to refrain (without incurring
any liability to any Person by so refraining) from that act or action unless
and until it has received instructions. In no event, however, may Agent or any
of its officers, agents, or other representatives be required to take any
action that it or they determine could incur for it or them criminal or onerous
civil liability. Without limiting the generality of the foregoing, no Lender
has any right of action against Agent as a result of Agent's acting or
refraining from acting under this Agreement in accordance with instructions of
the Required Lenders.
(c) RELIANCE. Agent is not responsible to any Lender or any
Participant for, and each Lender represents and warrants that it has not relied
upon any Agent in respect of, (i) the creditworthiness of Borrower or any other
Company and the risks involved to that Lender, (ii) the effectiveness,
enforceability, genuineness, validity, or the due execution of any Loan
Document (except by Agent), (iii) any representation, warranty, document,
certificate, report, or statement made therein (except by Agent) or furnished
thereunder or in connection therewith, (iv) the adequacy of any Collateral now
or hereafter securing the Obligation or the existence, priority, or perfection
of any Lien now or hereafter granted or purported to be granted on the
Collateral under any Loan Document, or (v) observation of or compliance with
any of the terms, covenants, or conditions of any Loan Document on the part of
any Company. EACH LENDER AGREES TO INDEMNIFY AGENT AND ITS OFFICERS, AGENTS,
AND OTHER REPRESENTATIVES AND HOLD THEM HARMLESS FROM AND AGAINST (BUT LIMITED
TO SUCH LENDER'S PRO RATA PART) ANY AND ALL LIABILITIES, OBLIGATIONS,
REVOLVING CREDIT AGREEMENT 42
<PAGE> 47
LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE
EXPENSES, AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER THAT
MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THEM IN ANY WAY RELATING TO
OR ARISING OUT OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THEM
UNDER THE LOAN DOCUMENTS IF SUCH AGENT AND ITS OFFICERS, AGENTS OR OTHER
REPRESENTATIVES ARE NOT REIMBURSED FOR SUCH AMOUNTS BY ANY COMPANY. ALTHOUGH
AGENT AND ITS OFFICERS, AGENTS, AND OTHER REPRESENTATIVES HAVE THE RIGHT TO BE
INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN ORDINARY NEGLIGENCE,
AGENT AND ITS OFFICERS, AGENTS, AND OTHER REPRESENTATIVES DO NOT HAVE THE RIGHT
TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN FRAUD, GROSS
NEGLIGENCE, OR WILLFUL MISCONDUCT.
9.6 DEFAULT. While a Default exists, Lenders agree to promptly
confer in order that the Required Lenders or Lenders, as the case may be, may
agree upon a course of action for the enforcement of the rights of Lenders.
Agent is entitled to act or refrain from taking any action (without incurring
any liability to any Person for so acting or refraining) unless and until it
has received instructions from Required Lenders or all Lenders, as the case may
be. In actions with respect to any Company's property, Agent is acting for the
ratable benefit of each Lender.
9.7 COLLATERAL MATTERS.
(a) Each Lender authorizes and directs Agent to enter into the Loan
Documents and agrees that any action taken by Agent concerning any Collateral
(with the consent or at the request of the Required Lenders) in accordance with
any Loan Document, that Agent's exercise (with the consent or at the request of
the Required Lenders) of powers concerning the Collateral in any Loan Document,
and that all other reasonably incidental powers are authorized and binding upon
all Lenders.
(b) Agent is authorized on behalf of all Lenders, without the
necessity of any notice to or further consent from any Lender, from
time-to-time before a Potential Default or Event of Default, to take any action
with respect to any Collateral or Loan Documents related to Collateral that may
be necessary to perfect and maintain Agent's Liens in the Collateral.
(c) Except to use the same standard of care that it ordinarily uses
for collateral for its sole benefit, Agent has no obligation whatsoever to any
Lender or to any other Person to assure that the Collateral exists or is owned
by any Company or is cared for, protected, or insured or has been encumbered or
that Agent's Liens have been properly or sufficiently or lawfully created,
perfected, protected, or enforced or are entitled to any particular priority.
(d) Agent shall exercise the same care and prudent judgment with
respect to the Collateral and the Loan Documents as it normally and customarily
exercises in respect of similar collateral and security documents.
9.8 LIMITATION OF LIABILITY. No Lender or any Participant will incur
any liability to any other Lender or Participant except for acts or omissions
in bad faith, and neither Agent nor any Lender or Participant will incur any
liability to any other Person for any act or omission of any other Lender or
any Participant.
9.9 RELATIONSHIP OF LENDERS. The Loan Documents do not create a
partnership or joint venture among Agent and Lenders or among Lenders.
REVOLVING CREDIT AGREEMENT 43
<PAGE> 48
9.10 BENEFITS OF AGREEMENT. None of the provisions of this SECTION
inure to the benefit of any Company or any other Person except Agent and
Lenders. Therefore, no Company nor any other Person is responsible or liable
for, entitled to rely upon, or entitled to raise as a defense -- in any manner
whatsoever -- the failure of Agent or any Lender to comply with these
provisions.
SECTION 10 MISCELLANEOUS.
10.1 ACCOUNTING REPORTS. All financial reports or projections,
furnished by any Person to Agent and Lenders pursuant to this Agreement shall
be prepared in such form and such detail as shall be satisfactory to Agent,
shall be prepared on the same basis as those prepared by such Person in prior
years, and, where applicable, shall be the same financial reports and
projections as those furnished to such Person's officers and directors.
10.2 WAIVER. No failure to exercise, and no delay in exercising, on
the part of Agent or Lenders, any right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right. The rights of
Agent and Lenders under the Loan Documents shall be in addition to all other
rights provided by law. No modification or waiver of any provision of any Loan
Document, nor consent to departure therefrom, shall be effective unless in
writing, and no such consent or waiver shall extend beyond the particular case
and purpose involved. No notice or demand given in any case shall constitute a
waiver of the right to take other action in the same, similar or other
instances without such notice or demand.
10.3 PAYMENT OF EXPENSES. Borrower hereby agrees to pay on demand:
(a) all reasonable costs and expenses of Agent in connection with the
preparation, negotiation, syndication, execution, and delivery of this
Agreement and the other Loan Documents including, without limitation, the legal
fees and reasonable expenses of legal counsel for Agent; (b) all reasonable
costs and expenses of Agent in connection with any and all amendments,
modifications, renewals, extension, and supplements of any of the Loan
Documents; (c) all reasonable costs and expenses of Agent and Lenders in
connection with any Event of Default and the enforcement of this Agreement or
any other Loan Document, including, without limitation, the fees and expenses
of legal counsel for Agent and Lenders; (d) all transfer, stamp, documentary,
or other similar taxes, assessments, or charges levied by any Governmental
Authority in respect of this Agreement or any of the other Loan Documents; (e)
all costs, expenses, assessments, and other charges incurred in connection with
any filing, registration, recording, or perfection of any security interest or
Lien contemplated by this Agreement or any other Loan Document; and (f) all
other reasonable costs and expenses incurred by Agent in connection with this
Agreement or any other Loan Document.
10.4 NOTICES. Any communications required or permitted to be given by
any of the Loan Documents must be (a) in writing and personally delivered or
mailed by prepaid certified or registered mail, or (b) made by facsimile
transmission delivered or transmitted, to the party to whom such notice of
communication is directed, to the address of such party shown opposite its name
on the signature pages hereof. Any such communication shall be deemed to have
been given (whether actually received or not) on the day it is personally
delivered or, if transmitted by facsimile transmission, on the day that such
communication is transmitted as aforesaid subject to telephone confirmation of
receipt; provided, however, that any notice received by Agent after 12:00 Noon
Dallas, Texas time on any day from Borrower pursuant to SECTION 2.2 or 2.3
(with respect to a Notice of Borrowing or Notice of LC) shall be deemed for the
purposes of such section to have been given by Borrower on the next succeeding
day, or if mailed, on the third day after it is marked as aforesaid. Any party
may change its address for purposes of this Agreement by giving notice of such
change to the other parties pursuant to this SECTION 10.4.
REVOLVING CREDIT AGREEMENT 44
<PAGE> 49
10.5 GOVERNING LAW. This Agreement has been prepared, is being
executed and delivered, and is intended to be performed in the State of Texas,
and the substantive laws of such state and the applicable federal laws of the
United States of America shall govern the validity, construction, enforcement,
and interpretation of this Agreement and all of the other Loan Documents.
10.6 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS AND JURISDICTION.
Any suit, action, or proceeding against Borrower with respect to this
Agreement, the Notes, or any judgment entered by any court in respect thereof,
may be brought in the courts of the State of Texas, County of Dallas, or in the
United States courts located in the State of Texas, as Agent and Lender in
their sole discretion may elect and Borrower hereby irrevocably submits to the
nonexclusive jurisdiction of such courts for the purpose of any such suit,
action, or proceeding. Borrower hereby irrevocably consents to the service of
process in any suit, action, or proceeding in said court by the mailing thereof
by Agent by registered or certified mail, postage prepaid, to Borrower's
address shown opposite its name on the signature pages hereof. Nothing herein
or in any of the other Loan Documents shall affect the right of Agent to serve
process in any other manner permitted by law or shall limit the right of Agent
or Lenders to bring any action or proceeding against Borrower or with respect
to any of its property in courts in other jurisdiction. Borrower hereby
irrevocably waives any objections which it may now or hereafter have to the
laying of venue of any suit, action, or proceeding arising out of or relating
to this Agreement or any Note brought in the courts located in the State of
Texas, County of Dallas, and hereby further irrevocably waives any claim that
any such suit, action, or proceeding brought in any such court has been brought
in any inconvenient forum. Any action or proceeding by Borrower against Agent
or Lenders shall be brought only in a court located in Dallas County, Texas.
10.7 INVALID PROVISIONS. Any provision of any Loan Document held by a
court of competent jurisdiction to be illegal, invalid, or unenforceable shall
not invalidate the remaining provisions of such Loan Document, which shall
remain in full force, and the effect thereof shall be confined to the provision
held invalid or illegal.
10.8 MAXIMUM INTEREST RATE. Regardless of any provision contained in
any of the Loan Documents, neither Agent nor any Lender shall never be entitled
to receive, collect, or apply as interest on the Notes any amount in excess of
interest calculated at the Maximum Rate, and, in the event that any Agent or
any Lender ever receives, collects, or applies as interest any such excess, the
amount which would be excessive interest shall be deemed to be a partial
prepayment of principal, and treated hereunder as such; and, if the principal
amount of the Obligation is paid in full, any remaining excess shall forthwith
be paid to Borrower. In determining whether or not the interest paid or
payable under any specific contingency exceeds interest calculated at the
Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted under
applicable law, (a) characterize any nonprincipal payment as an expense, fee,
or premium, rather than as interest; (b) exclude voluntary prepayments and the
effects thereof; and (c) amortize, prorate, allocate, and spread, in equal
parts, the total amount of interest throughout the entire contemplated term of
the Note; provided that, if the Notes are paid and performed in full prior to
the end of the full contemplated term thereof, and if the interest received for
the actual period of existence thereof exceeds interest calculated at the
Maximum Rate, Agent and Lenders shall refund to Borrower the amount of such
excess, or credit the amount of such excess against the principal amount of the
Notes, and, in such event, Agent and Lenders shall not be subject to any
penalties provided by any laws for contracting for, charging, taking,
reserving, or receiving interest in excess of interest calculated at the
Maximum Rate.
10.9 NONLIABILITY OF LENDERS. The relationship between Borrower and
Lenders is, and shall at all times remain, solely that of Borrower and Lenders,
and Lenders have no fiduciary or other special relationship with Borrower.
REVOLVING CREDIT AGREEMENT 45
<PAGE> 50
10.10 ARTICLE 15.10(b). Borrower, Agent, and Lenders hereby agree
that, except for SECTION 15.10(b) thereof, the provisions of Art. 5069-15.01 et
seq. of the Revised Civil Statutes of Texas, 1925, as amended (regulating
certain revolving credit loans and revolving tri-party accounts) shall not
apply to the Loan Documents.
10.11 SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. Borrower may
not assign or transfer any of its rights or obligations hereunder without the
prior written consent of Agent and all Lenders. Any Lender may sell
participations to one or more banks or other institutions in or to all or a
portion of its rights and obligations under this Agreement and the other Loan
Documents (including, without limitation, all or a portion of its Commitments
and the Advances owing to it); provided, however, that (i) such Lender's
obligations under this Agreement and the other Loan Documents (including,
without limitation, its Commitments) shall remain unchanged, (ii) such Lender
shall remain solely responsible to Borrower for the performance of such
obligations, (iii) such Lender shall remain the holder of its Notes for all
purposes of this Agreement, (iv) Borrower shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and the other Loan Documents, and (v) such
Lender shall not sell a participation that conveys to the participant the right
to vote or give or withhold consents under this Agreement or any other Loan
Document, other than the right to vote upon or consent to (A) any increase of
such Lender's Commitments, (B) any reduction of the principal amount of, or
interest to be paid on, the Advances of such Lender, (C) any reduction of any
commitment fee or other amount payable to such Bank under any Loan Document, or
(D) any postponement of any date for the payment of any amount payable in
respect of the Advances of such Lender.
(b) Borrower and Lenders agree that any Lender (an "ASSIGNING
LENDER") may at any time assign to one or more Eligible Assignees all, or a
portion of all, of its rights and obligations under this Agreement and the
other Loan Documents (including, without limitation, its Commitment and
Advances) (each an "ASSIGNEE"); provided, however, that (i) except in the case
of an assignment of all of a Lender's rights and obligations under this
Agreement and the other Loan Documents, the amount of the Commitments of the
assigning Lender being assigned pursuant to each assignment (determined as of
the date of the Assignment and Acceptance with respect to such assignment)
shall in no event be less than $5,000,000.00, and (ii) the parties to each such
assignment shall execute and deliver to Agent for its acceptance and recording
in the Register (as defined below), an Assignment and Acceptance, together with
the Note subject to such assignment, and a processing and recordation fee of
$3,000.00. Upon such execution, delivery, acceptance, and recording, from and
after the effective date specified in each Assignment and Acceptance, which
effective date shall be at least five (5) Business Days after the execution
thereof, or, if so specified in such Assignment and Acceptance, the date of
acceptance thereof by Agent, (x) the assignee thereunder shall be a party
hereto as a "Lender" and, to the extent that rights and obligations hereunder
have been assigned to it pursuant to such Assignment and Acceptance, have the
rights and obligations of a Lender hereunder and under the Loan Documents and
(y) the Lender that is an assignor thereunder shall, to the extent that rights
and obligations hereunder have been assigned by it pursuant to such Assignment
and Acceptance, relinquish its rights and be released from its obligations
under this Agreement and the other Loan Documents (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of a Lender's
rights and obligations under the Loan Documents, such Lender shall cease to be
a party thereto).
(c) By executing and delivering an Assignment and Acceptance, the
Assigning Lender and its Assignee confirm to and agree with each other and the
other parties hereto as follows: (i) other than as provided in such Assignment
and Acceptance, such Assigning Lender makes no representation or warranty
REVOLVING CREDIT AGREEMENT 46
<PAGE> 51
and assumes no responsibility with respect to any statements, warranties, or
representations made in or in connection with the Loan Documents or the
execution, legality, validity, and enforceability, genuineness, sufficiency,
or value of the Loan Documents or any other instrument or document furnished
pursuant thereto; (ii) such Assigning Lender makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of Borrower or any Company or the performance or observance by Borrower or any
Company of its obligations under the Loan Documents; (iii) the Assignee
confirms that it has received copies of the Loan Documents, together with
copies of the financial statements referred to in SECTION 5.6 and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (iv) the
Assignee will, independently and without reliance upon Agent or such assignor
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement and the other Loan Documents; (v) the Assignee confirms
that it is an Eligible Assignee; (vi) the Assignee appoints and authorizes
Agent to take such action as Agent on its behalf and exercise such powers under
the Loan Documents as are delegated to Agent by the terms thereof, together
with such powers as are reasonably incidental thereto; and (vii) the Assignee
agrees that it will perform in accordance with their terms all of the
obligations which by the terms of the Loan Documents are required to be
performed by it as a Lender.
(d) Agent shall maintain at its Principal Office a copy of each
Assignment and Acceptance delivered to and accepted by it and a register for
the recordation of the names and addresses of Lenders and the Commitment of,
and principal amount of the Advances owing to, each Lender from time-to-time
(the "REGISTER"). The entries in the Register shall be conclusive and binding
for all purposes, absent manifest error, and Borrower, Agent, and Lenders may
treat each Person whose name is recorded in the Register as a Lender hereunder
for all purposes under the Loan Documents. The Register shall be available for
inspection by Borrower or any Lender at any reasonable time and from time-to-
time upon reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed by an
Assigning Lender and Assignee representing that it is an Eligible Assignee (or
other assignee permitted hereunder), together with any Note subject to such
assignment, Agent shall, if such Assignment and Acceptance has been completed
and is in substantially the form of EXHIBIT A, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register, and
(iii) give prompt written notice thereof to Borrower. Within five (5) Business
Days after its receipt of such notice, Borrower, at its expense, shall execute
and deliver to Agent in exchange for the surrendered Note a new Note to the
order of such Eligible Assignee (or other assignee permitted hereunder) in an
amount equal to the portion of the Commitments assumed by it pursuant to such
Assignment and Acceptance and, if the Assigning Lender has retained a portion
of the Commitments, a new Note to the order of the Assigning Lender in an
amount equal to the portion of the Commitments retained by it hereunder (each
such promissory note shall constitute a "Note" for purposes of the Loan
Documents). Such new Notes shall be in an aggregate principal amount of the
surrendered Note, shall be dated the effective date of such Assignment and
Acceptance, and shall otherwise be in substantially the form of EXHIBIT B.
(f) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this SECTION,
disclose to the Assignee or participant or proposed Assignee or participant,
any information relating to any Company furnished to such, Lender by or on
behalf of any Company, subject to the confidentiality requirements in SECTION
10.19.
(g) Notwithstanding any other term of this Agreement to the contrary,
any Lender may (without requesting the consent of either Agent or Borrower)
pledge its Note to a Federal Reserve Bank in support of borrowings made by such
Lender from such Federal Reserve Bank.
REVOLVING CREDIT AGREEMENT 47
<PAGE> 52
(h) Notwithstanding any other term of this Agreement to the contrary,
any Lender may assign all, or a portion of all, of its rights and obligations
under this Agreement and the other Loan Documents (including, without
limitation, its Commitment and Advances) to an Affiliate of such Lender or any
other Lender, provided that:
(i) such assignor Lender has obtained the written consent of
Agent (which consent shall not be unreasonably delayed or withheld) if
the effect of such assignment or delegation shall entitle such Affiliate
or other Lender to claim compensation from Borrower pursuant to SECTION
2.6 and
(ii) in every other case, such assignor Lender has furnished
notice to, but not obtained the consent of, Agent.
10.12 ENTIRETY. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS
REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO,
AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND
UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF,
AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO
ORAL AGREEMENTS AMONG THE PARTIES HERETO. THE PROVISIONS OF THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS TO WHICH BORROWER IS A PARTY MAY BE AMENDED OR WAIVED
ONLY BY AN INSTRUMENT IN WRITING, SIGNED BY THE PARTIES HERETO.
10.13 HEADINGS. Section headings are for convenience of reference
only, and shall in no way affect the interpretation of this Agreement.
10.14 SURVIVAL. All representations and warranties made by Borrower
herein shall survive delivery of the Note and the making of the Loan.
10.15 AMENDMENTS, ETC. No amendment or waiver of any provision of this
Agreement, the Notes, or any other Loan Document to which Borrower is a party,
nor any consent to any departure by Borrower therefrom, shall in any event be
effective unless the same shall be agreed or consented to by the Required
Lenders and Borrower, and each 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 of Lenders and Borrower, do any of the following: (a) increase
Commitments of Lenders or subject Lenders to any additional obligations; (b)
reduce the principal of, or interest on, the Notes or any fees or other amounts
payable to Lenders (but not Agent) hereunder; (c) postpone any date fixed for
any payment of principal of, or interest on, the Notes or any fees or other
amounts payable to Agent or Lenders hereunder; (d) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Notes or the
number of Lenders which shall be required for Lenders or any of them to take
any action under this Agreement; (e) change any provision contained in this
SECTION 10.15; or (f) release any material portion of the Collateral, except in
accordance with the relevant Loan Document. Notwithstanding anything to the
contrary contained in this SECTION, no amendment, waiver, or consent shall be
made with respect to SECTION 9 without the prior written consent of Agent.
10.16 NO THIRD PARTY BENEFICIARY. The parties do not intend the
benefits of this Agreement to inure to any third party, nor shall any Loan
Document or any course of conduct by any party hereto be construed to make or
render Agent or Lenders, or any of their officers, directors, agents, or
employees liable (i) to any materialman, supplier, contractor, subcontractor,
purchaser or lessee of any property owned by Borrower, or (ii) for debts or
claims accruing to any such Persons against Borrower.
REVOLVING CREDIT AGREEMENT 48
<PAGE> 53
10.17 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON
CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF, OR RELATING TO ANY OF THE LOAN
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN
THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.
10.18 MULTIPLE COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same agreement, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
10.19 CONFIDENTIALITY. Subject to SECTION 10.16, Agent and Lenders
shall hold all nonpublic information obtained pursuant to the requirements of
this Agreement and identified as confidential by Borrower or any other Company
in confidence in accordance with Agent's and Lenders' customary procedures for
handling confidential information of this nature, and in accordance with safe
and sound banking practices; provided, however, that Agent or Lenders may make
any disclosure thereof as is reasonably required by a bona fide potential
assignee or participant, or as required or requested by any Governmental
Authority or representative thereof, or pursuant to legal process, or as may be
necessary in order to properly enforce Agent's or Lenders' rights and remedies
following an Event of Default.
10.20 ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE
PARTIES HERETO, INCLUDING, BUT NOT LIMITED TO, THOSE ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM
BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING
ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT
APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR
THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S. D/B/A ENDISPUTE, INC.
("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY
INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION
AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS
AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO
COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES,
IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(a) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE
CITY OF BORROWER'S DOMICILE AT THE TIME OF THIS AGREEMENT'S EXECUTION,
AND ADMINISTERED BY J.A.M.S., WHO WILL APPOINT AN ARBITRATOR; IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF
CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO
AN ADDITIONAL 60 DAYS.
(b) RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE
DEEMED TO (i) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS
AGREEMENT; OR (ii) BE A WAIVER BY LENDER OF THE PROTECTION AFFORDED TO
REVOLVING CREDIT AGREEMENT 49
<PAGE> 54
IT BY 12 U.S.C. Section 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW;
OR (iii) LIMIT THE RIGHT OF LENDER HERETO (A) TO EXERCISE SELF HELP
REMEDIES SUCH AS (BUT NOT LIMITED TO) SET-OFF, OR (B) TO FORECLOSE
AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM
A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO)
INJUNCTIVE RELIEF OR THE APPOINTMENT OF A RECEIVER. LENDER MAY EXERCISE
SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH
PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING, OR AFTER THE PENDENCY
OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. AT
AGENT'S OR LENDERS' OPTION, FORECLOSURE UNDER A DEED OF TRUST OR
MORTGAGE MAY BE ACCOMPLISHED BY ANY OF THE FOLLOWING: THE EXERCISE OF A
POWER OF SALE UNDER THE DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL SALE
UNDER THE DEED OF TRUST OR MORTGAGE, OR BY JUDICIAL FORECLOSURE.
NEITHER THIS EXERCISE OF SELF HELP REMEDIES, NOR THE INSTITUTION OR
MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY
REMEDIES SHALL, CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING
THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGES TO FOLLOW]
REVOLVING CREDIT AGREEMENT 50
<PAGE> 55
SIGNATURE PAGES TO REVOLVING CREDIT AGREEMENT
DATED AS OF NOVEMBER 14, 1996, EXECUTED BY
UNITED DENTAL CARE, INC., NATIONSBANK OF TEXAS, N.A.,
AS AGENT FOR THE LENDERS DEFINED THEREIN, AND THE LENDERS
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
Address for Notice: UNITED DENTAL CARE, INC.,
a Delaware corporation, as Borrower
14755 Preston Road
Suite 300 By: /s/ Mark E. Pape
Dallas, Texas 75240 --------------------------------------
Attn: Mr. Mark Pape Name: Mark E. Pape
Telecopy No.: (972) 960-7782 ---------------------------------
Title: Senior Vice President
--------------------------------
REVOLVING CREDIT AGREEMENT
<PAGE> 56
SIGNATURE PAGES TO REVOLVING CREDIT AGREEMENT
DATED AS OF NOVEMBER 14, 1996, EXECUTED BY
UNITED DENTAL CARE, INC., NATIONSBANK OF TEXAS, N.A.,
AS AGENT FOR THE LENDERS DEFINED THEREIN, AND THE LENDERS
Address for Notice: NATIONSBANK OF TEXAS, N.A., as Agent and a
Lender
901 Main Street, 7th Floor By: /s/ Sueanna Miranda
P.O. Box 831000 --------------------------------------
Dallas, Texas 75283-1000 Name: Sueanna Miranda
Attn: Sueanna Miranda ---------------------------------
Telecopy No.: (214) 508-3140 Title: Vice President
--------------------------------
Applicable Lending Office Commitment: $35,000,000.00
for Base Rate Advances:
901 Main Street, 7th Floor
P.O. Box 831000
Dallas, Texas 75283-1000
Applicable Lending Office
for Eurodollar Advances:
901 Main Street, 7th Floor
P.O. Box 831000
Dallas, Texas 75283-1000
REVOLVING CREDIT AGREEMENT
<PAGE> 57
EXHIBITS
Exhibit A - Form of Assignment and Acceptance
Exhibit B - Form of Revolving Credit Note
Exhibit C - Form of Notice of Borrowing
Exhibit D - Notice of LC
Exhibit E - Form of Pledge Agreement
Exhibit F - Opinion of Counsel
SCHEDULES
Schedule 5.7 - Indebtedness
Schedule 5.11 - Litigation
Schedule 5.14 - Subsidiaries
Schedule 5.16-1 - Compliance Disclosures
Schedule 5.16-2 - Governmental Authorizations
REVOLVING CREDIT AGREEMENT
<PAGE> 58
EXHIBIT A
FORM OF ASSIGNMENT AND ACCEPTANCE
This Assignment and Acceptance (the "ASSIGNMENT AND ACCEPTANCE") is made
as of _________________, 199______ (the "EFFECTIVE DATE"), between ___________
("ASSIGNOR") and __________________ ("ASSIGNEE").
Reference is made to that certain Revolving Credit Agreement dated as of
November 14, 1996 (the "CREDIT AGREEMENT") among United Dental Care, Inc.
("BORROWER"), NationsBank of Texas, N.A., a national banking association, as
Agent for the Lenders defined therein (the "LENDERS"), and Lenders. This
Assignment and Acceptance is executed and delivered pursuant to, and as
contemplated in, the Credit Agreement. Capitalized terms used but not defined
herein shall have the meanings assigned thereto in the Credit Agreement.
Assignor and Assignee hereby covenant and agree as follows:
1. Assignor hereby sells and assigns to Assignee, and Assignee
hereby purchases and assumes from Assignor, $ __________________ of Assignor's
Commitment and Principal Debt, representing a Pro Rata Part of the Commitments
and Principal Debt of _____% as of the Effective Date. The foregoing interest
for all events and circumstances shall be deemed such Assignee's Pro Rata Part
(in addition to any other Pro Rata Part of Assignee, if any) in the
Commitments, the Principal Debt, the Loan Documents, and all payments made to
or received from Borrower pursuant to the Loan Documents and is subject to the
terms and conditions provided in the Loan Documents.
2. Assignor (a) hereby represents and warrants to Assignee that
Assignor is the legal and beneficial owner of the Pro Rata Part being assigned
by it hereunder and such interest is free and clear of any adverse claim, and
(b) hereby represents and warrants that as of the date hereof the Pro Rata Part
in the Commitments and the Principal Debt being assigned hereunder is _______
% without giving effect to assignments that are not yet effective.
3. Assignee hereby confirms and acknowledges that, except as
specifically set forth herein, Assignor: (a) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Loan Documents,
or the execution, legality, validity, enforceability, genuineness, sufficiency,
or value of the Loan Documents, or any other instrument or document furnished
pursuant thereto; (b) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of Borrower or any other
person or entity which is a party to any of the Loan Documents (collectively,
"OTHER PARTY"); and (c) makes no representation or warranty and assumes no
responsibility with respect to the performance or observance by Borrower or any
Other Party of any of its obligations under any of the Loan Documents or any
other instrument or document furnished pursuant thereto.
4. Assignee hereby: (a) confirms that it has received a copy of the
Loan Documents, together with such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
this Assignment and Acceptance; and (b) agrees that it will, independently and
without reliance upon Assignor or any other counterparty and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Loan
Documents.
EXHIBITS - PAGE 1
<PAGE> 59
5. Assignee hereby: (a) appoints and authorizes Agent under the
Loan Documents to take such action as agent on its behalf and to exercise such
powers under the Loan Documents as are delegated to Agent by the terms of the
Loan Documents; and (b) agrees with Assignor for the benefit of Agent and
Borrower that it will perform all of the obligations which by the terms of the
Loan Documents are required to be performed by it as a counterparty (including,
without limitation, the obligation to make payments pursuant to the Loan
Documents) and that it shall be liable directly to Assignor, Agent, Borrower
and, as provided in the Credit Agreement, to each Lender for the performance of
such obligations.
6. If Assignee is organized under the laws of a jurisdiction outside
the United States, it hereby represents and agrees that it has delivered or
will within three (3) days after the date of the execution of this Agreement
deliver to Assignor and the Administrative Agent completed and signed copies of
any forms that may be required by the United States Internal Revenue Service in
order to certify Assignee's exemption from United States withholding taxes with
respect to any payment or distributions made or to be made to Assignee with
respect to the Loan Documents.
7. As of the Effective Date, (a) Assignee shall be a party to the
Loan Documents and, to the extent provided in this Assignment and Acceptance,
have the rights and obligations of a counterparty thereunder, and (b) Assignor
shall, to the extent provided in this Assignment and Acceptance, relinquish its
rights and be released from its obligations in the Loan Documents with respect
to the Pro Rata Part being assigned hereunder.
8. Assignee hereby represents and warrants as of the Effective Date:
(a) Assignee has all necessary corporate power and authority to purchase and
own the interest being assigned to it hereunder, and has all necessary
corporate power and authority to perform all its obligations with respect to
this Assignment and Acceptance; (b) the execution and delivery of this
Assignment and Acceptance and all other instruments and documents executed in
connection herewith have been duly authorized by all requisite corporate action
of Assignee; and (c) no approval, authorization, order, license, or consent of,
or registration or filing with, any Governmental Authority or other person is
required in connection with this Assignment and Acceptance.
9. This Assignment and Acceptance shall be governed by, and
construed in accordance with, the laws of the State of Texas, without giving
effect to the conflict of laws principles thereof.
10. This Agreement may be executed in two or more counterparts each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
11. Assignee's address for notices and payments under the Agreement
and this Assignment and Acceptance are set forth in SCHEDULE 1 attached hereto
and made a part hereof. Assignee may by notice in accordance with the Credit
Agreement to Assignor, the Administrative Agent and Borrower change the
EXHIBITS - PAGE 2
<PAGE> 60
address or telex number or facsimile number at which notices, communications
and payments are to be given to it.
ASSIGNOR:
-------------------------------------
By:
---------------------------------
Title:
------------------------------
ASSIGNEE:
-------------------------------------
By:
---------------------------------
Title:
------------------------------
ACCEPTED BY AGENT
THIS _____ DAY OF ___________________
AGENT:
NATIONSBANK OF TEXAS, N.A.
By:
---------------------------------------
Name:
---------------------------------
Title:
---------------------------------
EXHIBITS - PAGE 3
<PAGE> 61
SCHEDULE 1
TO
ASSIGNMENT AND ACCEPTANCE
ADDRESS FOR NOTICES AND ACCOUNTS FOR PAYMENTS
Address:
--------------------------
--------------------------
--------------------------
Account for Payments:
Account No.:
--------------------------
Attention:
--------------------------
Reference:
--------------------------
Depositary:
--------------------------
--------------------------
--------------------------
Applicable Lending
Office - Base Rate
Advances:
--------------------------
--------------------------
--------------------------
Applicable Lending
Office - Eurodollar
Advances:
--------------------------
--------------------------
--------------------------
EXHIBITS - PAGE 4
<PAGE> 62
EXHIBIT B
FORM OF
REVOLVING CREDIT NOTE
$ Dallas, Texas As of , 1996
-------------------- ------------
1. FOR VALUE RECEIVED, UNITED DENTAL CARE, INC., a Delaware
corporation ("MAKER"), hereby unconditionally promises to pay to the order of
__ ________________________________________________________________ ("PAYEE"),
at the address of Agent (defined below) set forth in the Credit Agreement
defined below, the sum of _________________________ Dollars ($
_________________________ _____) (or, if less, so much thereof as may be
advanced), in lawful money of the United States of America. Capitalized terms
not defined herein shall have the meaning assigned to those terms in the Credit
Agreement.
2. The unpaid principal amount of, and accrued unpaid interest on,
this Note is payable in accordance with the Credit Agreement.
3. The unpaid principal balance advanced and outstanding hereunder
shall bear interest from the date of advance until maturity at the rate per
annum provided in the Credit Agreement that is selected by Maker pursuant to
the Credit Agreement. The interest rate specified in this section is subject
to adjustment under the circumstances described in the Credit Agreement.
Interest shall be computed in the manner provided in the Credit Agreement.
4. Notwithstanding any provision contained in this Note or any other
document executed or delivered in connection with this Note or in connection
with the Credit Agreement, Payee shall never be deemed to have contracted for
or be entitled to receive, collect or apply as interest on this Note, any
amount in excess of the maximum rate of interest permitted to be charged by
applicable law, and, if Payee ever receives, collects or applies as interest
any such excess, then the amount that would be excessive interest shall be
applied to reduce the unpaid principal balance of this Note, and, if the
principal balance of this Note is paid in full by that application, then any
remaining excess shall promptly be paid to Maker. In determining whether the
interest paid or payable under any specific contingency exceeds the highest
lawful rate, Maker and Payee shall, to the maximum extent permitted under
applicable law, (a) characterize any non-principal payment (other than payments
expressly designated as interest payments hereunder) as an expense or fee
rather than as interest, (b) exclude voluntary prepayments and the effect
thereof, and (c) spread the total amount of interest throughout the entire
contemplated term of this Note so that the interest rate is uniform throughout
that term.
5. This Note has been executed and delivered pursuant to a Revolving
Credit Agreement (as modified, amended, renewed or extended, the "CREDIT
AGREEMENT") dated as of November 14, 1996, executed by and between Maker,
NationsBank of Texas, N.A., as Agent (together with any successor or assigns,
the "AGENT"), Payee, and each of the Lenders defined therein, and is one of the
"Notes" referred to therein, and the holder of this Note is entitled to the
benefits provided in the Credit Agreement. Reference is hereby made to the
Credit Agreement for a statement of (a) the obligation of Payee to advance
funds hereunder, (b) the prepayment rights and obligations of Maker, and (c)
the events upon which the maturity of this Note may be accelerated.
EXHIBITS - PAGE 5
<PAGE> 63
6. If the principal of, or any installment of interest on, this Note
becomes due and payable on a day other than a Business Day, then the maturity
thereof shall be extended to the next succeeding Business Day. If this Note, or
any installment or payment due hereunder, is not paid when due, whether at
maturity or by acceleration, or if it is collected through a bankruptcy,
probate or other court, whether before or after maturity, then Maker shall pay
all costs of collection, including, but not limited to, reasonable attorneys'
fees incurred by the holder of this Note. All past due principal of, and to
the extent permitted by applicable law, interest on this Note shall bear
interest until paid at the rate provided in the Credit Agreement.
7. Except as expressly provided in the Credit Agreement, Maker and
all sureties, endorsers, guarantors and other parties ever liable for payment
of any sums payable pursuant to the terms of this Note, jointly and severally
waive demand, presentment for payment, protest, notice of protest, notice of
acceleration, notice of intent to accelerate, diligence in collection, the
bringing of any suit against any party and any notice of or defense on account
of any extensions, renewals, partial payments or changes in any manner of or in
this Note or in any of its terms, provisions and covenants, or any releases or
substitutions of any security, or any delay, indulgence or other act of any
trustee or any holder hereof, whether before or after maturity.
8. All Advances made by Payee, the respective Interest Periods
thereof (if applicable), and all repayments of the principal thereof may be
recorded by Payee and, before any transfer hereof, endorsed by Payee on the
schedule attached hereto, or on a continuation of the schedule attached to and
a part hereof, provided that the failure of Payee to record any endorsement
shall not affect the obligation of Maker hereunder or under the Credit
Agreement.
9. This Note is being executed and delivered, and is intended to be
performed in the State of Texas. Except to the extent that the laws of the
United States may apply to the terms hereof, the substantive laws of the State
of Texas shall govern the validity, construction, enforcement and
interpretation of this Note.
UNITED DENTAL CARE, INC.,
a Delaware corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
EXHIBITS - PAGE 6
<PAGE> 64
EXHIBIT C
NOTICE OF BORROWING
1. SUBMISSION PURSUANT TO CREDIT AGREEMENT. This Notice of
Borrowing is executed and delivered by United Dental Care, Inc., a Delaware
corporation ("BORROWER"), to NationsBank of Texas, N.A., as Agent (the
"AGENT"), pursuant to SECTION 2.3 of the Credit Agreement dated as of November
14, 1996, between Borrower, Agent, and each of the Lenders defined therein (the
"AGREEMENT"). Any capitalized terms used and not defined herein shall have the
meanings assigned to them in the Agreement.
2. REQUEST FOR ADVANCE. Borrower hereby requests that Lenders make
an Advance to Borrower pursuant to the Agreement as follows:
A. BASE RATE BORROWING.
(i) Amount of Base Rate Borrowing:
----------------
(minimum of $1,000,000.00, or a greater integral
multiple of $500,000.00).
[ ] Borrowing
[ ] Rollover/Conversion
(ii) Date of Borrowing or Rollover/Conversion
of Existing Borrowing:
----------------
B. EURODOLLAR BORROWING.
(i) Amount of Eurodollar Borrowing:
----------------
(minimum of $1,000,000.00, or a greater integral
multiple of $500,000.00).
[ ] Borrowing
[ ] Rollover/Conversion
(ii) Date of Borrowing or Rollover/Conversion
of Existing Borrowing:
----------------
(iii) Interest Period:
----------------
day/months (one, three, or six months).
EXHIBITS - PAGE 7
<PAGE> 65
3. REPRESENTATIONS, WARRANTIES AND CERTIFICATIONS. Borrower hereby
represents, warrants, and certifies to Agent and Lenders that, as of the date
of the Advance requested herein:
(a) there exists no Potential Default or Event of Default;
(b) the Companies have performed and complied with all
agreements and conditions contained in the Agreement that
are required to be performed or complied with by the
Companies; and
(c) the representations and warranties of a continuing nature
contained in the Agreement and each of the other Loan
Documents are true and correct in all material respects
(except to the extent that they speak to a specific date
or are based on facts which have changed by transactions
expressly contemplated or permitted by the Credit
Agreement), with the same force and effect as though made
on and as of the date of the Advance.
4. PROCEEDS OF BORROWING. Agent is authorized to deposit the
proceeds of the Advance requested hereby, other than an Advance constituting a
rollover or conversion of an existing Advance, to:____________________________
___________________________________.
5. EXECUTION AUTHORIZED. This Notice of Borrowing is executed on
___________________, 19__, by a responsible officer of Borrower. The
undersigned, in such capacity, hereby certifies each and every matter contained
herein to be true and correct.
------------------------------------
of
------------------------------------
United Dental Care, Inc., a Delaware
corporation
EXHIBITS - PAGE 8
<PAGE> 66
EXHIBIT D
NOTICE OF LC
1. SUBMISSION PURSUANT TO CREDIT AGREEMENT. This Notice of LC is
executed and delivered by United Dental Care, Inc., a Delaware corporation
("BORROWER"), to NationsBank of Texas, N.A., as Agent (the "AGENT"), pursuant
to SECTION 2.2 of the Credit Agreement dated as of November 14, 1996, between
Borrower, Agent, and each of the Lenders defined therein (the "AGREEMENT").
Any capitalized terms used and not defined herein shall have the meanings
assigned to them in the Agreement.
2. REQUEST FOR LC. Borrower hereby requests the issuance of an LC
under the LC Subfacility, and in that connection sets forth below the terms on
which such LC is requested to be issued:
A. Face amount of the LC: $
-------------
B. Date on which the LC is to be
issued (a Business Day):
--------------
C. Expiration date of the LC:
--------------
Accompanying this notice is a duly executed and properly completed LC Agreement
in the form requested by Agent, together with the payment of any LC fees due
and payable pursuant to the Credit Agreement.
3. REPRESENTATIONS, WARRANTIES AND CERTIFICATIONS. Borrower hereby
represents, warrants, and certifies to Agent and Lenders that, as of the date
of the Advance requested herein:
(a) there exists no Potential Default or Event of Default;
(b) the Companies have performed and complied with all
agreements and conditions contained in the Agreement that
are required to be performed or complied with by the
Companies; and
(c) the representations and warranties of a continuing nature
contained in the Agreement and each of the other Loan
Documents are true and correct in all material respects
(except to the extent that they speak to a specific date
or are based on facts which have changed by transactions
expressly contemplated or permitted by the Credit
Agreement), with the same force and effect as though made
on and as of the date of the Advance.
4. EXECUTION AUTHORIZED. This Notice of LC is executed on
___________________, 19___, by a responsible officer of Borrower. The
undersigned, in such capacity, hereby certifies each and every matter contained
herein to be true and correct.
---------------------------------
of
---------------------------------
United Dental Care, Inc., a Delaware
corporation
EXHIBITS - PAGE 9
<PAGE> 1
EXHIBIT 10.27
THIS WARRANT CERTIFICATE, THE WARRANTS AND THE UNDERLYING COMMON STOCK
HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, OR ANY STATE SECURITIES LAW. THE WARRANTS AND THE
UNDERLYING SHARES OF COMMON STOCK MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL, OR
OTHER EVIDENCE, REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH
LAWS.
AMENDED, RESTATED AND CORRECTED
WARRANT CERTIFICATE
VOID AFTER 5:00 P.M., DALLAS, TEXAS TIME,
JANUARY 9, 2002
UNITED DENTAL CARE, INC.
WARRANTS TO PURCHASE 40,000 SHARES OF COMMON STOCK
This Amended, Restated and Corrected Warrant Certificate (this
"Certificate") certifies that Mark E. Pape (the "Warrant Holder") is the
registered holder of Warrants (the "Warrants") to purchase Forty Thousand
(40,000) shares of the Common Stock, par value ten cents ($0.10) per share
("Common Stock"), of United Dental Care, Inc., a Delaware corporation (the
"Corporation"). Subject to and upon the terms and conditions contained in this
Certificate, each Warrant entitles the Holder to purchase from the Corporation
one fully paid and nonassessable share of Common Stock of the Corporation upon
presentation and surrender of this Warrant Certificate with the form of
Election to Purchase duly executed at the office of the Corporation and upon
proper payment of the Exercise Price (as defined below).
I.
EXERCISE PRICE, TERM, AND METHOD OF EXERCISE
SECTION 1.01. EXERCISE PRICE. Unless adjusted as otherwise provided
herein, the exercise price ("Exercise Price") for each share of Common Stock
purchased upon exercise of a Warrant evidenced hereby shall be Six Dollars
($6.00) per share. The Exercise Price shall be adjusted upon the occurrence of
certain events as set forth in Article II hereof.
SECTION 1.02. WARRANT RIGHTS AND TERM. Each Warrant shall entitle the
person in whose name the Warrant Certificate shall then be registered on the
books maintained by the Corporation (the "Warrant Holder"), upon exercise
thereof subject to the conditions
<PAGE> 2
and provisions of this Certificate, including without limitation, the
provisions hereof relating to adjustments upon occurrence of certain events as
set forth herein, to purchase from the Corporation one fully paid and
nonassessable share of Common Stock, $ .10 par value per share, of the
Corporation at the then Exercise Price at any time until the earlier of the
expiration of the Warrant at 5:00 p.m., Dallas, Texas time, on January 9, 2002
or if January 9, 2002 is not a business day then on the next succeeding
business day (the "Expiration Date").
SECTION 1.03. EXERCISABILITY. The Warrants evidenced by this
Certificate shall be exercisable in whole or in part, at any time, and from
time to time, until the Expiration Date.
SECTION 1.04. EXPIRATION. Unless earlier exercised by the Warrant
Holder or redeemed by the Corporation, each Warrant not exercised by 5:00 p.m.,
Dallas, Texas time, on or before the Expiration Date shall become void, and all
rights in respect thereof under this Certificate shall thereupon cease and
terminate.
SECTION 1.05. METHOD OF EXERCISE. Subject to the conditions and
provisions of this Certificate, the Warrant Holder may exercise his rights with
respect to all or any number of exercisable Warrants evidenced by a Warrant
Certificate. Exercise shall be effected by surrender of this Warrant
Certificate, with the form of Election to Purchase thereon duly executed and
with the signature guaranteed by a bank or trust company having an office or
correspondent in the United States or a broker or dealer which is a member of a
registered securities exchange or the National Association of Securities
Dealers, Inc., to the Corporation at its offices as designated in Section 4.04
hereof, together with the Exercise Price for each share of Common Stock to be
purchased. Payment of the Exercise Price shall be made (a) by certified check
payable in lawful money of the United States of America to the order of the
Corporation or (b) by wire transfer (same day funds) to the designated account
of the Corporation.
Upon receipt of a Warrant Certificate with the form of Election to
Purchase duly executed and accompanied by full and proper payment of the
Exercise Price for the shares of Common Stock purchased thereby, the
Corporation shall deliver to, or in accordance with the instructions of, the
Warrant Holder certificates for the total number of whole shares of Common
Stock for which the Warrants evidenced by this Certificate are being exercised
in such names and denominations as the Warrant Holder has directed; provided,
however, that if, on the date of surrender of this Certificate and payment of
the Exercise Price, the transfer books for the Common Stock shall be closed,
the certificates for the shares of Common Stock shall be issuable as of the
date on which such books shall next be open (whether before, on or after the
Expiration Date) and upon the other conditions in effect on the date of such
surrender.
-2-
<PAGE> 3
Each exercise of a Warrant shall also be accompanied by an undertaking
of the Warrant Holder to furnish or execute such documents as the Company may
in its discretion deem necessary (1) to evidence the exercise, in whole or in
part, of the Warrants evidence by this Agreement, (2) to determine whether
registration is then required under the Securities Act of 1933, as then in
effect, and (3) to comply with or satisfy the requirements of the Securities
Act of 1933, or any other law, as then in effect.
In the event that any Warrant Holder shall exercise rights with respect
to less than all of the Warrants evidenced by this Certificate surrendered upon
the exercise of Warrants, the Corporation shall cause a new Warrant Certificate
for the balance of such Warrants to be executed and delivered to, or in
accordance with the instructions of, such Warrant Holder.
II.
ADJUSTMENTS TO WARRANTS UPON CERTAIN EVENTS
SECTION 2.01. ADJUSTMENTS. The number of shares of Common Stock
purchasable upon the exercise of each Warrant (such shares being referred to in
this Article II as the "Warrant Shares") and the Exercise Price shall be
subject to adjustment as follows:
(a) in case the Corporation shall at any time after January 1, 1996
(i) pay a dividend in shares of Common Stock or make a distribution in shares
of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock or (iv) issue by reclassification of its shares of Common Stock
other securities of the Corporation (excluding any such reclassification in
connection with a consolidation or merger in which the Corporation is the
continuing corporation), the number of Warrant Shares purchasable upon exercise
of each Warrant immediately prior thereto shall be adjusted so that each
Warrant Holder shall be entitled to receive the kind and number of Warrant
Shares of other securities of the Corporation which the Warrant Holder would
have owned or have been entitled to receive after the happening of any of the
events described above, had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) In case the Corporation shall at any time after January 1, 1996
issue rights, options or warrants to all holders of its shares of Common Stock,
without any charge to such holders, entitling them (for a period expiring
within 45 days after the record date mentioned below in this paragraph (b)) to
subscribe for or purchase shares of Common Stock at a price per share which is
-3-
<PAGE> 4
lower at the record date mentioned below than the current market price per
share of Common Stock, the number of Warrant Shares thereafter purchasable upon
the exercise of each Warrant shall be determined by multiplying the number of
Warrant Shares theretofore purchasable upon exercise of each Warrant by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on such record date (calculated on a fully-diluted basis) plus the
number of shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
on such record date (calculated on a fully-diluted basis) plus the number of
shares which the aggregate offering price of the total number of shares of
Common Stock so offered would purchase at the then current market price per
share of Common Stock. Such adjustment shall be made whenever such rights,
options or warrants are issued, and shall become effective retroactively
immediately after the record date for the determination of shareholders
entitled to receive such rights, options or warrants.
On the expiration of any of such rights, options or warrants or the
termination of any such right to purchase, convert or exchange any such rights,
options or warrants, the number of shares of Common Stock then purchasable upon
the exercise of each Warrant and the Exercise Price then in effect shall be
subject to readjustment and the number of shares of Common Stock subject to the
Warrants shall forthwith be decreased and the exercise price under the Warrants
shall forthwith be increased to that which would have been in effect at the
time of such expiration or termination had such right, option or warrant, to
the extent outstanding immediately prior to such expiration or termination,
never been issued.
(c) In case the Corporation shall at any time after January 1, 1996
distribute to all holders of its shares of Common Stock, without any charge to
such holders, (i) shares of stock other than Common Stock or (ii) evidences of
its indebtedness or assets (excluding cash dividends or distributions payable
out of consolidated earnings or retained earnings and excluding dividends or
distributions referred to in paragraph (a) above) or (iii) rights, options or
warrants or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock (excluding those referred to
in paragraph (b) above) - then in each case the number of Warrant Shares
thereafter purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of Warrant Shares theretofore purchasable upon the
exercise of each Warrant, by a fraction, of which the numerator shall be the
current market price per share of Common Stock on the record date mentioned
below in this paragraph (c), and of which the denominator shall be the current
market price per share of Common Stock on such record date, less the then fair
value (as determined by the Board of Directors of the Corporation, whose
determination shall be conclusive) of the portion of the shares of
-4-
<PAGE> 5
stock, assets or evidences of indebtedness, or rights, options or warrants or
convertible or exchangeable securities so distributed applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution
is made, and shall become effective on the date of distribution retroactive to
the record date for the determination of shareholders entitled to receive such
distribution.
SECTION 2.02. ADJUSTMENT FOR DE MINIMIS CHANGES. No adjustment in the
number of Warrant Shares purchasable hereunder shall be required unless such
adjustment would require an increase or decrease of at least $.05 in the
Exercise Price under each Warrant; provided, however, that any adjustments
which by reason of this Section 2.02 are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations shall be made to the nearest cent. Anything in Section 2.01 to
the contrary notwithstanding, the Corporation shall be entitled, but shall not
be required, to make such changes in the number of Warrant Shares purchasable
upon the exercise of each Warrant, in addition to those required by such
Section, as it in its discretion shall determine to be advisable in order that
any dividend or distribution in shares of Common Stock, subdivision,
reclassification or combination of shares of Common Stock, issuance of rights,
warrants or options to purchase Common Stock, or distribution of shares of
stock other than Common Stock, evidences of indebtedness or assets (other than
distributions of cash out of retained earnings) or convertible or exchangeable
securities hereafter made by the Corporation to the holders of its Common Stock
shall not result in any tax to the holders of its Common Stock or securities
convertible into Common Stock.
SECTION 2.03. ADJUSTMENT OF EXERCISE PRICE. Whenever the number of
Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as
herein provided, the Exercise Price payable upon exercise of each Warrant shall
be adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of Warrant
Shares purchasable upon the exercise of each Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
so purchasable immediately thereafter.
SECTION 2.04. VOLUNTARY ADJUSTMENT BY THE CORPORATION. The Corporation
may at its option at any time during the term of the Warrants reduce the then
current Exercise Price to any amount deemed appropriate by the Board of
Directors of the Corporation.
SECTION 2.05. NOTICE OF ADJUSTMENT. Whenever the number of Warrant
Shares purchasable upon the exercise of each Warrant or the Exercise Price of
such Warrant Shares is adjusted, as herein provided, the Corporation shall
promptly mail to the Warrant Holder a notice of such adjustment or adjustments,
prepared and signed by the Chief Financial Officer or Secretary of the
Corporation, which
-5-
<PAGE> 6
sets forth the number of Warrant Shares purchasable upon the exercise of each
Warrant and the Exercise Price of such Warrant Shares after such adjustment, a
brief statement of the facts requiring such adjustment, and the computation by
which such adjustment was made.
SECTION 2.06. EFFECT OF SALE, MERGER, OR CONSOLIDATION. In the event
of any capital reorganization of the Corporation, or of any reclassification
(other than a change in par value) of the Common Stock or of any conversion of
the Common Stock into securities of another corporation, or the consolidation
of the Corporation with, or the merger of the Corporation with or into, any
other corporation where the Common Stock is converted into other securities or
property (including cash) or in the event of the sale of all or substantially
all of the properties and assets of the Corporation to any other corporation
(each such event thereinafter being referred to as a "Capital Change"), each
Warrant shall be exercisable after such Capital Change, upon the terms and
conditions specified in this Agreement, only for the number of shares of stock
or other securities or property (including cash), as the case may be, to which
the shares of Common Stock issuable (immediately prior to such Capital Change)
upon exercise of such Warrant would have been entitled upon such Capital
Change. In any such case, if necessary, the provisions set forth in this
Article II with respect to the rights and interests thereafter of the holders
of the Warrants shall be appropriately adjusted so as to be reasonably
applicable to any shares of stock or other securities or property thereafter
deliverable on the exercise of the Warrants.
The subdivision or combination of shares of Common Stock at any time
outstanding into a greater or lesser number of shares of Common Stock shall not
be deemed to be a reclassification of the Common Stock of the Corporation for
the purpose of this Section 2.06. The Corporation shall not effect any
consolidation, merger, or sale resulting in a Capital Change, unless prior to
or simultaneously with the consummation thereof, the Corporation or any
successor corporation or corporation purchasing such assets shall assume, by
written instrument executed and delivered for the benefit of the Purchasers,
the obligation to deliver to the holder of each Warrant such shares of stock,
securities, or property (including cash) as the Warrant Holders may be entitled
to receive upon exercise of the Warrants in accordance with the foregoing
provisions, and the other obligations of the Corporation under this Agreement.
SECTION 2.07. NOTICE OF CERTAIN EVENTS. In the event that at any time
prior to the expiration of the Warrants and prior to their exercise:
(a) the Corporation shall declare any distribution (other than a cash
dividend or a dividend payable in securities of the Corporation with respect to
the Common Stock); or
-6-
<PAGE> 7
(b) the Corporation shall offer for subscription to the holders of
the Common Stock any additional shares of stock of any class or any other
securities convertible into Common Stock or any rights to subscribe thereto; or
(c) the Corporation shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the Common
Stock, regardless of the effect of any such event on the outstanding number of
shares of Common Stock; or
(d) there shall be any Capital Change in the Corporation or any
merger of the Corporation with another corporation (other than a merger with a
subsidiary in which merger the Corporation is the continuing corporation and
which does not result in any reclassification or change of the shares of Common
Stock issuable upon exercise of the Warrants); or
(e) there shall be a voluntary or involuntary dissolution,
liquidation, or winding up of the Corporation (other than in connection with a
consolidation, merger, or sale of all or substantially all of its property,
assets and business as an entity);
(each such event hereinafter being referred to as a "Notification Event"), the
Corporation shall cause to be mailed to the Warrant Holder, not less than 10
days prior to the record date, if any, in connection with such Notification
Event (provided, however, that if there is no record date, or if 10 days prior
notice is impracticable, as soon as practicable) written notice specifying the
nature of such event and the effective date of, or the date on which the books
of the Corporation shall lose or a record shall be taken with respect to, such
event. Such notice shall also set forth facts indicating the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Exercise Price and the kind and amount of the shares of stock or other
securities or property deliverable upon exercise of the Warrants.
SECTION 2.08. EFFECT OF ADJUSTMENT ON WARRANT CERTIFICATES. The form
of Warrant Certificate need not be changed because of any change in the
Exercise Price, the number of Warrant Shares issuable upon the exercise of a
Warrant or the number of Warrants outstanding pursuant to this Article. The
Corporation may, however, at any time, in its sole discretion, make any change
in the form of Warrant Certificate that it may deem appropriate and that does
not affect the substance thereof, and any Warrant Certificates thereafter
issued or countersigned, whether in exchange or substitution for an outstanding
Warrant Certificates or otherwise, may be in the form as so changed.
-7-
<PAGE> 8
III.
RIGHTS OF WARRANT HOLDER
SECTION 3.01. NO RIGHTS AS STOCKHOLDER. The Warrant Holder, as such,
shall not be entitled to vote or to receive dividends and shall otherwise be
deemed to be the holder of shares of Common Stock for any purpose, nor shall
anything contained herein or in any Warrant Certificate be construed to confer
upon any Warrant Holder, as such, any of the rights of a stockholder of the
Corporation or any right to vote upon or give or withhold consent to any action
of the Corporation (whether upon any reorganization, issuance of securities,
reclassification or conversion of Common Stock, consolidation, merger, sale,
lease, conveyance or otherwise) receive notice of meetings or other action
affecting stockholders (except for notices expressly provided for in this
Agreement) or receive dividends or subscription rights, until such Warrant
Certificate shall have been surrendered for exercise accompanied by full and
proper payment of the Exercise Price as provided in this Certificate and shares
of Common Stock thereunder shall have become issuable and until such person
shall have been deemed to have become a holder of record of such shares. If,
at the date of surrender of such Warrant Certificate and payment of such
Exercise Price, the transfer books for the Common Stock shall be closed,
certificates for the shares of Common Stock shall be issuable on the date on
which such books shall next be open (whether before, on or after the Expiration
Date) and until such date, the Corporation shall be under no duty to deliver
any certificate for such shares of Common Stock. The Warrant Holder shall,
upon the exercise of Warrants, be entitled to any dividends if the record date
with respect to payment of such dividends shall be a date prior to the date
such shares of Common Stock became issuable upon the exercise of such Warrants.
SECTION 3.02. MAINTENANCE OF SUFFICIENT AND PROPER SHARES OF COMMON
STOCK.
(a) The Corporation shall at all times reserve and keep available a
number of authorized shares of Common Stock sufficient to permit the exercise
in full of all outstanding Warrants.
(b) If any shares of Common Stock issuable upon the exercise of the
Warrants require registration or approval of any governmental authority, or the
taking of any other action under the laws of the United States or any political
subdivision thereof or any other jurisdiction before such shares of Common
Stock may be legally and validly issued, then the Corporation shall in good
faith and with reasonable diligence endeavor to secure such registration or
approval or to take such other action as may be appropriate to allow for the
lawful issuance of shares of Common Stock upon exercise of Warrants, provided
that no shares of Common Stock shall be issued for the period during which the
Corporation
-8-
<PAGE> 9
is endeavoring to obtain such registration or approval or is taking such other
action. Warrant Holders may exercise Warrants during any such period as
provided herein and shall be entitled to the issuance of the shares of Common
Stock on such date as the shares of Common Stock may be legally and validly
issued, at the Exercise Price and upon the other conditions in effect on the
date of surrender of the Warrant Certificates accompanied by full and proper
payment for the shares of Common Stock.
SECTION 3.03. FRACTIONAL SHARES AND WARRANTS.
(a) Anything contained herein to the contrary notwithstanding, the
Corporation shall not be required to issue any fraction of a share of Common
Stock in connection with the exercise of Warrants. Warrants may not be
exercised in such number as would result (except for the provisions of this
Section) in the issuance of a fraction of a share of Common Stock unless the
Warrant Holder is presenting for exercise Warrant Certificates representing all
Warrants then owned of record by such Warrant Holder. In such event, the
Corporation shall, upon the exercise of all such Warrants, issue to such
Warrant Holder the largest aggregate whole number of shares of Common Stock
called for thereby upon receipt of the Exercise Price for all such Warrants and
pay a sum in cash equal to the remaining fraction of a share of Common Stock,
multiplied by its current market price as of the last business day preceding
the date on which the Warrants are presented for exercise. The current market
price per share of Common Stock at any date shall be the average of the daily
closing prices for 15 consecutive trading days commencing 20 trading days
before the date of such computation. The closing price for each day shall be
the last reported sale price regular way or, in case no such reported sale
takes place on such day, the average of the closing bid and asked prices
regular way for such day, in either case on the principal national securities
exchange on which the shares are listed or admitted to trading, or if they are
not listed or admitted to trading on any national securities exchange, but are
traded in the over the counter market, the average of the representative
closing bid and asked quotations for the Common Stock on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or any
comparable system, or if the Common Stock is not listed on NASDAQ or a
comparable system, the average of the closing bid and asked prices as furnished
by two members of the National Association of Securities Dealers, Inc. selected
from time to time by the Corporation for that purpose. In the event that the
Common Stock is not traded on any such exchange or in any such market, the
current market price per share of the Common Stock shall be determined by the
Board of Directors acting in good faith using customary and reasonable criteria
for determining current market value. Every Warrant Holder, by the acceptance
of the Warrant Certificate, expressly waives any right to exercise Warrants for
a fractional share of Common Stock except as provided in this subsection.
-9-
<PAGE> 10
(b) Anything herein to the contrary notwithstanding, the Corporation
shall not be required to issue fractions of Warrants on any distribution of
Warrants to the Warrant Holder or to distribute Warrant Certificates that
evidence fractional Warrants. The Corporation shall pay to any person entitled
to a fractional interest in a Warrant, a sum in cash equal to the fraction,
multiplied by its current market price as of the last business day preceding
the date of such distribution.
SECTION 3.04. TRANSFERABILITY. The Warrants and the rights under this
Certificate are fully assignable or transferable by the Warrant Holder
including by will or by the laws of descent and distribution; provided,
however, that the Warrant Holder may only assign or transfer all the then
unexercised Warrants to a single transferee and may not assign or transfer
portions of the then unexercised Warrants to more than one transferee. The
transferee of the Warranty and the rights under this Certificate including the
executor or the administrator of the estate of the Warrant Holder or the person
or persons acquiring the Warrants upon the death of the Warrant Holder shall
have the right to become the Warrant Holder and to become the Warrant Holder
and to exercise the Warrants subject to the other terms and provisions of this
Certificate.
SECTION 3.05. INVESTMENT PURPOSE. This Certificate and the Warrants
are issued on the condition that the purchase of the Warrants and the purchase
of Common Stock upon the exercise of the Warrants shall be for investment
purposes, and not with a view to resale or distribution except that, in the
event the Common Stock subject to the Warrant is registered under the
Securities Act of 1933, as amended, or in the event a resale of such stock
without such registration would otherwise be permissible, such condition shall
be inoperative if in the opinion of counsel for the Corporation such condition
is not required under the Securities Act of 1933 or any rules or regulations
thereunder. The certificates evidencing the Common Stock issued upon the
exercise of Warrants shall contain an appropriate restriction legend requiring
compliance with securities laws for transfer thereof.
IV.
GENERAL
SECTION 4.01. TAXES ON ISSUANCE OF SHARES OF COMMON STOCK. The
Corporation shall promptly pay all documentary stamp taxes, if any, that may be
imposed upon the Corporation with respect to the issuance or delivery of shares
of Common Stock upon the exercise of Warrants, but the Corporation shall not be
obligated to pay any transfer taxes with respect to the issuance or delivery of
the Warrant Certificates or shares of Common Stock in a name other than that of
the Warrant Holder.
-10-
<PAGE> 11
SECTION 4.02. DATES AND TIMES. If any date set forth in this
Certificate shall fall on a day other than a full business day in Dallas,
Texas, said date shall be deemed to be the next full business day succeeding
that date.
SECTION 4.03. BINDING AGREEMENT. All the covenants and provisions of
this Certificate by or for the benefit of the Corporation or the Warrant Holder
shall bind an inure to the benefit of their respective heirs, administrators,
successors and assigns, subject to the provisions hereof limiting
transferability by the Warrant Holder. Nothing expressed in this Certificate
and nothing that may be implied from any of the provisions hereof is intended,
or shall be construed, to confer upon or give to any person or corporation,
other than the Corporation and the Warrant Holders, any legal or equitable
right, remedy, or claim under or by reason of this Certificate or of any
covenant, condition, stipulation, promise, or agreement herein, and all
covenants, conditions, stipulations, promises, and agreements contained in this
Certificate shall be for the sole and exclusive benefit of the Corporation and
the Warrant Holder, and their respective heirs, administrators, successors and
assigns.
SECTION 4.04. NOTICES. Any communication, notice, or demand to be
given hereunder shall be duly given if in writing and delivered personally or
sent by first class mail, certified or registered, postage prepaid and
addressed as follows:
(a) If to the Corporation:
United Dental Care, Inc.
14755 Preston Road
Suite 300
Dallas, Texas 75240
Attention: President
(b) If to Warrant Holder:
Mr. Mark E. Pape
3725 MacArthur Drive
Waco, TX 76708
Either party may change the address to which any communication, notice, or
demand shall be given by giving notice of such change in conformity with the
provisions of this Section.
SECTION 4.05. GOVERNING LAW. This Certificate shall be governed by and
construed in accordance with the laws of the State of Delaware, without giving
effect to conflict of laws.
SECTION 4.06. HEADINGS. The Article and Section headings herein are
for convenience only and are not part of this Certificate and shall not affect
the interpretation thereof.
-11-
<PAGE> 12
SECTION 4.07. RESTATEMENT/ENTIRE AGREEMENT. The Amended, Restated and
Corrected Warrant Certificate amends and restates in its entirety that certain
Warranty Certificate between the Corporation and the Warrant Holder executed
and dated February 6, 1995 which is replaced by this Amended, Restated and
Corrected Warranty Certificate. This Certificate constitutes the sole and
complete agreement between the parties, and supersedes any prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. This Certificate may be amended, modified or supplemented only by a
written amendment executed by the Corporation and the Warrant Holder.
SECTION 4.08. COUNTERPARTS. This Certificate may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original; provided, however, that all such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, this Certificate has been duly executed by the
Corporation and the Warrant Holder as of the date written below.
DATED: 2/26, 1996 UNITED DENTAL CARE, INC.
-------------
By: /s/ James B. Kingston
---------------------------------------
Its: President
DATED: 2/27, 1996 WARRANT HOLDER
-------------
By: /s/ Mark E. Pape
---------------------------------------
Mark E. Pape
-12-
<PAGE> 13
FORM OF ELECTION TO PURCHASE
To United Dental Care, Inc.
The undersigned hereby irrevocably elects to exercise _____ Warrants
represented by this Warrant Certificate, and to purchase _____ shares of the
Common Stock of United Dental Care, Inc. issuable upon the exercise of such
Warrants, and requests that certificates for such shares shall be issued in the
name of
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Address)
- --------------------------------------------------------------------------------
Social Security or other Identifying Number)
and be delivered to
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Address)
and, if said number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the undersigned at the
address stated above.
Dated: ___________________, _____
Signature:
----------------------------------------------------------------------
Warrant Holder:
-------------------------------------------------------
Signature Guaranteed:
-----------------------------------------------------------
NOTE: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without any change
whatsoever, unless this Warrant has been assigned.
-13-
<PAGE> 1
EXHIBIT 10.35
EXECUTIVE INCENTIVE PLANS FOR 1997
<TABLE>
<CAPTION>
PORTION
1997 PORTION BASED ON
BONUS BASED PERSONAL
EXECUTIVE OFFICER MAXIMUM ON EPS GOALS
--------- ------- --------
<S> <C> <C> <C>
(a) (b)
William H. Wilcox, President, CEO $300,000 100% ----
Mark E. Pape, Senior Vice $110,550 85% 15%
Peter R. Barnett, Senior Vice $110,550 85% 15%
</TABLE>
NOTES:
(a) The percentage in this column reflects the portion of the maximum bonus
that may be paid upon achievement of targeted earnings per share. This
percentage may be reduced to zero if an established minimum level of
earnings per share is not achieved.
(b) The percentage in this column reflects the portion of the maximum bonus
that may be awarded upon achievement of defined personal objectives.
Such objectives are individually designed to reflect the executive s
functional responsibilities within the context of the company s strategic
and tactical objectives. This percentage may be reduced to zero if the
defined personal objectives are not achieved.
<PAGE> 1
EXHIBIT 11.1
UNITED DENTAL CARE, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR YEAR ENDED DECEMBER 31,
1994 1995 1996
------ ------ ------
<S> <C> <C> <C> <C>
I. Reported net earnings
---------------------
Net income before extraordinary charge . . . . . . . . . . . . . . $2,096 $3,731 $7,557
Extraordinary charge, net of tax . . . . . . . . . . . . . . . . . -- (142) --
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $2,096 $3,589 $7,557
====== ====== ======
II. Primary earnings per share
--------------------------
A. Shares outstanding
Weighted average number of shares outstanding during
period . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 5,051 7,256
Shares potentially issuable upon the assumed exercise
of stock options and conversion of warrants, net of
assumed repurchase using the Treasury Stock method 591 398 287
------ ------ ------
Total common shares and common equivalent shares . . . . 4,717 5,449 7,543
====== ====== ======
B. Computation of net earnings per share
Net income before extraordinary charge . . . . . . . . . . . $ 0.44 $ 0.68 $ 1.00
Extraordinary charge, net of tax . . . . . . . . . . . . . . -- (0.02) --
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.66 $ 1.00
====== ====== ======
III. Fully diluted earnings per share (see NOTE below)
-------------------------------------------------
A. Shares outstanding
Weighted average number of shares outstanding during
period . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 5,051 7,256
Shares potentially issuable upon the assumed exercise
of stock options and conversion of warrants, net
assumed repurchase using the Treasury Stock method 592 488 287
------ ------ ------
Total common shares and common equivalent shares . . . . 4,718 5,539 7,543
====== ====== ======
B. Computation of net earnings per share
Net income before extraordinary charge . . . . . . . . . . $ 0.44 $ 0.67 $ 1.00
Extraordinary charge, net of tax . . . . . . . . . . . . . -- (0.02) --
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.65 $ 1.00
====== ====== ======
</TABLE>
NOTE: The amounts of per share earnings on the fully diluted basis are
not required to be presented in the consolidated statements of operations
under the provisions of Accounting Principles board Opinion No. 15 since
there is no significant difference between primary and fully diluted
earnings per share.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
NAME OF CORPORATION
-------------------
1. United Dental Care of Texas, Inc., a Texas corporation.
2. UDC Ohio, Inc. (d/b/a United Dental Care of Ohio, Inc.), an Ohio
corporation.
3. United Dental Care of Pennsylvania, Inc., a Pennsylvania corporation.
4. United Dental Care of Missouri, Inc., a Missouri corporation.
5. UDC Services, Inc., a Delaware corporation.
6. Associated Companies, Inc., an Arizona corporation.
7. Associated Health Plans, Inc., an Arizona corporation.
8. UDC Dental California, Inc., a California corporation.
9. UDC Preferred, Inc., an Arizona corporation.
10. United Dental Care Insurance Company, an Arizona corporation.
11. United Dental Care of Arizona, Inc., an Arizona corporation.
12. United Dental Care of Colorado, Inc., a Colorado corporation.
13. United Dental Care of Indiana, Inc., an Indiana corporation.
14. United Dental Care of Nebraska, Inc., a Nebraska corporation.
15. United Dental Care of New Mexico, Inc., a New Mexico corporation.
16. United Dental Care of North Carolina, Inc., a North Carolina
corporation.
17. United Dental Care of Utah, Inc., a Utah corporation.
18. United Dental Care of Washington, Inc., a Washington corporation.
19. Independent Dental Plans, Inc., a Michigan corporation.
20. Association Dental Plan, Inc., a District of Columbia corporation.
21. OraCare Consultants, Inc., a New Jersey corporation.
22. OraCare DPO, Inc., a New Jersey corporation.
23. Kansas City Dental Care, Inc., a Missouri corporation.
24. United Dental Care, Inc., an Oklahoma corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (number 333-20043) of United Dental Care, Inc. of our
report dated February 6, 1997 appearing on page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Dallas, Texas
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 50,035
<SECURITIES> 0
<RECEIVABLES> 11,016
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97,565
<PP&E> 7,056
<DEPRECIATION> 0
<TOTAL-ASSETS> 165,672
<CURRENT-LIABILITIES> 40,177
<BONDS> 0
0
0
<COMMON> 891
<OTHER-SE> 124,604
<TOTAL-LIABILITY-AND-EQUITY> 165,672
<SALES> 0
<TOTAL-REVENUES> 113,648
<CGS> 0
<TOTAL-COSTS> 101,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> 11,995
<INCOME-TAX> 4,438
<INCOME-CONTINUING> 7,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,557
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
